Division of Securities Audit

Utah has a fraud problem, as illustrated by the recent Ponzi-scheme conviction of Val Southwick and the indictment of Rick Koerber, alleged Ponziist. Koerber stories often mention that criticism or pressure has been aimed at the Utah Division of Securities by 2 members of the Utah House of Representatives and by the AG’s office. More accurately, that criticism/pressure often is aimed at the Director of the Department of Commerce, Francine Giani. Some of the criticism is pretty heated, including a recent claim by one of the Representatives that the Division is “corrupt.” The criticism is vaguely shored up by passing reference to a legislative audit of the Division. Yet, at least as far as I’ve noticed, none of the stories actually link to the audit report. (And that’s a shame, when it is so easy to empower people with a link to source material).

Here is the audit report. (It is item #7 in the link; I linked to the main page for all 2008 audits, to give a flavor for the type of work performed by the Utah Legislative Auditor General’s office (“LAG”)). I am proud of the LAG. Our legislative auditors play a key role in making Utah a well-managed state. They are thorough, professional, and fair. Much good legislation and/or agency reform flows from the LAG’s findings and suggestions.

The Performance Audit of the Division of Securities should (and did) give pause and direction to the Division, the Department of Commerce, and the Legislature. However, the audit itself does not paint the nightmare scenario that Koerber and others attempt to paint by referencing “the audit.” Like most audits, problems were identified and course-corrections were suggested. Basically, the audit found that the Division did not have adequate policies and procedures; as a result, the Division suffered personnel problems, a confusion of roles, and it overreached in some instances. The problems identified have been corrected. And, concerning the present discussion, I fail to see how the audit could support in any way a claim that the Division acted inappropriately in investigating Koerber and in working with the United States Attorney to secure an indictment.

Successful Ponziists are charismatic, believable, and rich. Charismatic, believable, rich people are tough to investigate. Hence, investigators have to be tough. Francine Giani is tough. And she is professional, and she is fair. She has faced inappropriate obstacles in investigating and securing an indictment against Koerber. She continues to face inappropriate criticism for “the audit” (that no one seems to actually read when bumping forward broadbrush criticisms that have nothing to do with anything actually in the audit). It's not fair to her, but again it's a tough business, and fortunately Francine is not faint-hearted. Utah needs vigorous enforcement of laws against Ponziists and scammers. I am proud that Francine is on the job.

International Competitiveness

Capital goes where it is treated well. As much as planners would like to think otherwise, capital can't be forced to stay where it is not welcome.

Capital seeks 2 things: nice returns and a predictable legal environment. Many second- and third-world nations have tremendous natural resources and human capital. But, those countries effectively have forced their citizens to take a vow of poverty, by chasing away capital. They don't attract capital, because they unduly restrict profits (typically through high taxes) and/or they lack stability.

By contrast, the United States has maintained a good balance of allowing nice returns and creating a legally predictable environment. (The more predictable the legal environment, the lower the returns have to be attract capital). As a result, the United States has enjoyed an amazing inflow of financial and human capital.

The Administration has chased capital away from the automotive industry. "Non-governmental capital" I should say. And, not just away from GM and Chrysler; I can't see investors plowing lots of money into companies that will compete against the federal purse and against the people who regulate the entire industry.

If it does not take a wiser approach toward the flow of capital, the Administration could chase capital away from the entire nation. It cannot be overstated how important it is to our national prosperity (education, roads, law enforcement, national defense, welfare programs, individual opportunity, etc. etc.) that the rest of the world continue to push its money our way. Remember: half of every dollar Government currently spends was loaned to it.

Before we even get to "the rest of the world," this article describes how American-based companies (whose management and employees vote 90% Democrat, I would guess) are threatening to move resources out of the United States, if current tax proposals move forward. A quick response might be that the Government won't allow it. But, remember, as much as planners would like to think otherwise, capital can't be forced to stay where it is not welcome.

Climate Change

If we give science a chance, it will humble us by showing us how little we do know, and it will inspire us by hinting how much there is to know. I think I’ve been pretty careful and clear to describe my frustration with the militant, close-minded attitude that has operated to smack down meaningful scientific inquiry into climate change.

One intriguing theory emerged – that human activity was causing global warming. That theory (1) manifestly fails to coordinate with centuries of observed data concerning solar activity and the Earth’s temperature and (2) stands on untested theoretical underpinnings. That theory, however, became the political flavor of the day. Walls were erected and moats were dug, to protect the theory from challenge.

And that’s when – just like many other antiscience episodes in human history – science was raped by politics. Science is combative. It is about challenging and disproving dogma. Science needs dissent. But, science-as-political-weapon requires the silencing of dissent. Science-as-political-weapon is about wielding “consensus” to bludgeon dissent, in order to achieve political goals.

As I have always been clear to say, global warming might or might not be human caused. It is an intriguing, ingenious. and troubling theory that should be studied. Now, thank heavens and helios, I see a significant sign that the antagonism toward scientific inquiry might be dissipating. NASA states:

According to the forecast, the sun should remain generally calm for at least another year. From a research point of view, that's good news because solar minimum has proven to be more interesting than anyone imagined. Low solar activity has a profound effect on Earth’s atmosphere, allowing it to cool and contract. Space junk accumulates in Earth orbit because there is less aerodynamic drag. The becalmed solar wind whips up fewer magnetic storms around Earth's poles. Cosmic rays that are normally pushed back by solar wind instead intrude on the near-Earth environment. There are other side-effects, too, that can be studied only so long as the sun remains quiet.

As silly as it seems, acknowledgement that "solar activity has a profound effect on Earth's atmosphere" is a significant step forward. The plain reality is that we haven't scratched the surface to know what that effect is. This solar minimum “has proven to be more interesting than anyone imagined,” because it is posing some challenges to the as-yet-untested theory of anthropogenic global warming. Maybe those challenges will be addressed, and the theory will hold. Maybe they won’t be addressed, and the theory won’t hold. As mostly happens in science, the theory -- if science is allowed to work -- likely will be modified, tweaked, revisited, remodified, etc., etc.

It’s a wonderful mystery and a challenge! Along with human causes, let’s please allow all the room necessary to study the effect of solar weather on the Earth’s climate.

GM Deal: Our Socialist Experiment

Here’s the box score for the GM deal:

US Govt invested $19.4 billion in GM, and will get 72.5% of the company. (19.4B = 72.5)
UAW’s trust is owed $20 billion by GM, and will get 17.5% of the company. (20B = 17.5)
Bondholders invested $27 billion in GM, and will get 10% of the company. (27B = 10)
Stockholders who invested billions will get hosed. (Billions = 0).

Government and the Union will come out good on this deal. Individuals and organizations that invested in GM or loaned the company money were made to be schlubs. They simply pitched into the pot for the benefit of Government and the Union. People with money to invest or loan typically try to avoid being schlubs. Thus, it can be expected that they won’t make that mistake again. Speaking of which, investors greeted the unveiling of Government Motors by returning its stock values to where they were in the 1930s.

Having chased away non-governmental investors and creditors, the only way that Government Motors can work is by hobbling competitors with regulations and restrictions and/or by continuing to utilize additional taxpayer money.

We’ve seen socialism attempted time and time again. Other than for the people privileged to be in positions of power, it doesn’t work. Socialism robs people of liberty, and it kills the economy (further robbing people -- especially vulnerable people -- of liberty). And, for folks who get exercised about use of the word “socialism,” 72.5% ownership of General Motors qualifies.

UPDATE: Okay, I'm not falling for this. Though the URL says NY Times, this story about a critical player in the GM/socialism experiment having no relevant experience surely is something from The Onion:

WASHINGTON — It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.

But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry.

Nor, for that matter, had he given much thought to what ailed an industry that had been in decline ever since he was born. A bit laconic and looking every bit the just-out-of-graduate-school student adjusting to life in the West Wing — “he’s got this beard that appears and disappears,” says Steven Rattner, one of the leaders of President Obama’s automotive task force — Mr. Deese was thrown into the auto industry’s maelstrom as soon the election-night parties ended.

“There was a time between Nov. 4 and mid-February when I was the only full-time member of the auto task force,” Mr. Deese, a special assistant to the president for economic policy, acknowledged recently as he hurried between his desk at the White House and the Treasury building next door. “It was a little scary.”

But now, according to those who joined him in the middle of his crash course about the automakers’ downward spiral, he has emerged as one of the most influential voices in what may become President Obama’s biggest experiment yet in federal economic intervention.

Lt. Governor David Clark

That does have a nice ring to it. The speculation continues regarding the next Lt. Governor. Here is a snippet on House Speaker David Clark.

Speaker Clark would be an outstanding choice (as would be President Waddoups, Sen. Bell and SL County Council Member Michael Jensen, who also were mentioned in the article). The key is to get someone who is proven. Rather than base the decision on superficial concerns about the 2010 election, I am rooting for (soon-to-be) Gov. Gary Herbert to pick someone who has proven himself/herself to be superlative at governing or something that immediately translates to governing. The economy and issues we face in the next 18 months are far more important than political positioning for a 2010 campaign. Let’s get a proven hand.

Speaking of 2010 concerns, though, (sorry, I am a politician) an added value of having Dave Clark on the ticket is that Dave stands at the head of the pack of likely 2010 challengers. Anyone paying attention to State government is taking note of Speaker Clark’s rare combination of intelligence, toughness, savvy, and steadiness. No doubt, (soon-to-be) Gov. Herbert and his people have taken note.

And, by the way, thank you, voters, for giving us the opportunity to vote on our Governor at the next opportunity. 2010 will be Gary’s to lose, but it is only appropriate that voters have the opportunity to decide.

An interesting historical note: I originally was going to draft the Gubernatorial Succession amendment to the Utah Constitution so that the victor of the (2010) mid-term election would then serve 4 years. (Soon-to-be) Governor Herbert was extremely supportive of the amendment to let voters decide, and it was Gary who wanted the term to only be 2 years, so that we’d stay on the 4-year cycle we’re currently on (e.g., 2000, 2004, 2008, (2010), 2012, 2016). I asked him if he understood that he potentially was the person most disadvantaged by that decision. He laughed, acknowledged that the thought had occurred to him, but said that staying on cycle was best for the State.

California, Initiatives, and Referenda

Responding to my post about California, State Bailouts and Term Limits, "just me" opines that California's woes relate to the State's initiative and referendum system. He writes:

I don't think it's the specific issue of term limits so much as the general abuse of the initiative system that has made the legislature ineffective. California voters over the last 30 years have passed referenda that basically locked in a governing plan based on limited taxes, unlimited spending, and a balanced budget. At this point, I don't think it even matters who is in the legislature or the governor's chair, which party they belong to, or how much experience they have. These three things the voters want are not possible simultaneously. It's possible to be low tax/low spend/balanced budget (Utah) or high tax/high spend/balanced budget. (Massachusetts) It's also possible to do what DC does and cut taxes on 95% of the population, increase spending to obsene levels and not care about the budget being in balance. But you can't have all 3 things.

Now it may be that the voters of the other 49 states would also prove themselves to be idiots if given the chance. But most of the other states have some constraints on the initiative process to make it somewhat idiot proof--constraints that don't exist in California.

Here are some of my thoughts on Utah's referendum process. In short, initiatives and referenda on policy questions are good and necessary tools in our democracy toolbox. Believing in our representative form of government, however, I think the initiative and referenda process needs more rigor than California has. And I think that initiatives and referenda on budgetary issues probably are a bad idea, since budgets are a composite; in isolation, just about every funding choice looks like a winner.

California, State Bailouts, and Term Limits

The federal government should not bail out California. In the long-run, a bailout would be very harmful.

States have always balanced their budgets. When they have dug holes for themselves, they have been forced to pull themselves out. If California now is bailed out of a bad situation, that practice will end. Because states legally are on an equal footing with each other, a bailout for California would have to mean a bailout for each state when it foolishly overspends and lacks the will/talent to cut.

The time for sound fiscal planning in case of downturns is before the downturn hits. States get themselves in trouble during the good times, by funding everything, as if economic downturns have been outlawed. Foolishness should not be rewarded. (But, past being prologue, I’m not about to bet it won’t be; lots of electoral votes at stake).

Each state is a laboratory, largely free to pass laws and budgets as it sees fit. By analyzing the results of each experiment, other States and the federal government can determine what works best. California ran a big-government experiment, with lots of entitlement programs and with high taxes and debt loads to pay for those programs. (That, by the way, is the model the federal government is utilizing; that course clearly predates the Obama Administration, but the pedal is now to the floor). The fiscal effectiveness of that plan is illustrated by California’s current situation.

During the good times, California extravagantly funded everything and over-utilized debt, while it neglected basic (unsexy) maintenance programs. It was the M.C. Hammer of states. A simple drive along its deteriorating, once-great highways quickly showed that California was poorly positioned to face the next downturn. California made its bed; now it should sleep in it. It’s their experiment. It’s their problem.

California can dig out, (1) if it chooses and (2) if it knows how. Issue one – willpower – is not unique to California. Issue two – lack of political ability – is unique, or at least new, to California. Bluntly, California’s elected officials lack the experience and skill necessary to avoid/address an economic crisis.

Gov. Schwarzenegger brought to office a wealth of experience in body building and film making. And the legislative branch is even worse off. Since 1990, Assembly members have been term-limited after 6 years; Senate members after 8 years.

Those short limits mean that members of Assembly leadership are elected with only 0- to 4-years experience. Senate leadership members would have 0- to 6-years experience (and, likely, some years in the Assembly). That’s not enough time to gain the knowledge and experience necessary to run the show. (See Malcolm Gladwell’s Outliers, positing that people who are great at something aren’t freaks of nature but, instead, have put in 10,000 hours doing that thing). As a result, the elected officials don’t run the show in California. Rather, the knowledge and experience necessary to govern are held by staff and special interests.

Legislative bodies are tremendous problem-solving groups. By design, we toss society’s most complex issues into legislative bodies, and, usually, workable solutions emerge. However, that process is being frustrated in California, since the requisite knowledge base and the decision makers aren’t actually in the Legislature but, rather, are behind the veil.

Even without term limits, Utah’s legislators have short legislative life spans (averaging just over 4 years for House members and 6 years for Senate members). Thank heavens, though, we have members of leadership who have been around long enough to gain valuable experience and weather an economic cycle or two. All 7 members of House majority leadership have been serving for more than 6 years. Senate majority leadership averages well-over a decade of legislative experience. (Sen. Dayton has 2 years in the Senate and a prior decade in the House; Sen. Killpack and Sen. Bell each have 6-years of Senate experience; Sen. Jenkins has 8-years in the Senate; Sen. Knudson and President Waddoups blister my fingers, as I work the abacus to figure out how long they’ve been serving; and Sen. Hillyard, I believe, was first appointed by Brigham Young).

Newer members can add to leadership teams. I think of now-Speaker Clark serving as House appropriations vice-chair, and now-Senate Majority Leader Killpack serving as Senate Assistant Whip, both after only 4 years. Those roles, however, were supporting positions on experienced leadership teams. By their participation, younger classes were more directly involved. But, as I’m sure Dave and Sheldon would quickly agree, they likely weren’t ready to run the show after such a short time.

It will be interesting to watch the ultimate fate of term limits. I doubt that enough people will see the inside-politics of legislatures, to understand the danger of term limits that are too short. And, given the obvious failings of California’s legislature, it is extremely counterintuitive that the people would rise up and say, “These guys simply need more time to work their magic.”

We Have Met the Speculators . . .

. . . and they are us. As this article describes, when the Administration ignored the rule of law in the Chrysler takeover, to show favoritism to the United Auto Workers over secured creditors -- who were derided as "speculators" -- the people who got the shaft are normal people. Police and teacher pension funds paid a premium to be secured creditors, with superior payment rights in bankruptcy proceedings, only to be pushed to the back of the bus by the Administration.

Regarding the Indiana Treasurer, the article says: We've worried that the Chrysler sandbagging would discourage bond investment. And, sure enough, Mr. Mourdock says that from now on no funds under his control will invest in the secured debt of "General Motors, other manufacturing companies, or those insurance companies who have or will be receiving bailout funds." Given the recent actions by the feds, he adds, "the risk is too great for any prudent investor to accept."

No matter the personal popularity or charisma of the person doing it or the urgency that is (always) cited as the cause, we ignore the rule of law at our own peril.

Rule of Law: Good Thing

In my last post, I mentioned good things about America that shouldn't be destroyed. I'll add the Rule of Law to that list (meaning that we are governed by laws -- not trends, opinions, dictates, etc.).

Here is a very well-written article that fleshes out my point number 3 (capitalism) from that previous post. The article highlights the beating that the rule of law is taking in the auto bailouts.

Bill Frezza asks, "Has it dawned on you what the consequences will be if the President gets his way and consideration is given to creditors not according to contracts, rules, and established legal precedents but according to which group is most politically favored?" According to Frezza, the consequences are:

troubled companies will be unable to raise capital;
everyone will pay higher interest rates;
heavily-unionized companies might not attract outside capital;
TARP-backed companies might not attract outside capital;
Foreign capital could dry up; and
Private credit markets will go sideways.

The federal government, of course, can do many things to promote its automakers and hobble competitors -- in America. But, those protectionist measures likely would make the government automakers less competitive abroad.

America always is a running experiment. I think the thing being experimented now is capitalism v. governmentalism. The future of the automakers will be a good test to see how governmentalism works.

Every American has benefited tremendously from the rest of the world investing ("speculating") in our companies. If we upset the legal certainty that has accompanied those investments, and the world invests elsewhere, we will be hurt. It's good political sport to beat up on faceless investors, but it's not very wise to send the signal that once-stable rules now will be replaced by . . . whatever sounds bold, populist and decisive in the moment.

Fortunately, a few secured creditors had the mettle to force the Chrysler issue into a court of law -- where it should have gone in the first place. (I'm reading a fine biography of John Marshall (by Jean Edward Smith), who cemented the independence of the judiciary. Go, Third Branch! Preserve the rule of law.).

UPDATE: Megan McArdle weighs in: "The administration is beating up the creditors because a) it wants to give the UAW a much better deal than they'd get in liquidation and b) they'd like someone else to pay for it. I recognize that the law is always kind of messy, but as far as I know, this kind of blatant political intervention between debt claims is unprecedented, and worse, it's a dress rehearsal for doing the same thing at GM. I don't think this is good for the rule of law, I'm pretty sure it will be bad for capital markets, and I'm nearly positive it's going to make it hard for any heavily unionized company to get substantial capital for the next decade."

Governing Ain't Easy

It looks like President Obama is considering reversing course on Guantanamo. Representative Don Ipson and I were together when we heard President Obama announce that he was closing Gitmo. We wondered whether he had an alternative. The answer seems to be “no.”

I actually am greatly encouraged by the fact that President Obama is willing to take a deeper look at the issues, and, if necessary, change course. He has little governing experience, and, no doubt, he will discover that many things are more complex than originally thought. Republicans will skewer him for any change – because that’s what happens in the tribal warfare we call politics; but I hope Democrats will give him some room to learn and adapt.

I have no idea what the answer is to Gitmo, but I agree with the President that it is complex.

I’ve mentioned before some of the instruction I received 9 years ago at legislative orientation. Representative Kevin Garn also said in that orientation, “The easy stuff already has been figured out.” He meant that the act of governing is complex – knowing that each of us came loaded with silver bullets that we thought would solve everything.

Americans have a tremendous zeal to change things. We are hungry. That plays a big part in making us innovative and productive. I can’t help but think back, though, to my first big landscaping project.

Fifteen years ago, Sara and I bought a new house, and, wanting a different look, I ripped up EVERYTHING in the yard. After a few weeks, I was bogged down. My neighbor, Leon Johnson, an experienced farmer/school administrator/former mayor of Mantua, had been watching the ordeal with some amusement. Finally, I asked, “Leon, where did I go wrong?” He said, “You tore up everything – the good and the bad. You first have to identify what’s good, and then build around that.”

America is a great nation. As polls indicated, though, most people wanted to move away from President Bush for one reason or another. So, let’s move. But, let’s first identify the things we don’t want to change. I’ll share my quick list of 4 good things we should build around.

1. Free speech. Though it’s pop culture, I find the Perez Hilton / Miss California kerfuffle broadly revealing. (Disagreement now equals “dumb bitch” or some other pejorative). We do not tolerate competing ideas well. This dumbed-down dialogue has allowed our political class to run free.

2. Capitalism. I spend time contemplating why America is so great. I’ve come to the boring conclusion that much of it is simply access to capital. We’re rapidly learning that people everywhere have great ideas. Americans have had an advantage attracting capital to make ideas come to life. This has to do with markets that are made stable by reasoned regulation and legal predictability – which is why it is so troubling that secured creditors are being hectored for not jumping on board the auto-maker train wrecks in the making. Treat capital poorly, and it will go elsewhere. It has many options. By bullying the choir (the ones who actually had ponied up money for the automakers) the administration has chased away future investors and guaranteed the ultimate demise or total socialization of the automakers.

3. Small government. Government gets its power from the people. Beyond a certain point, big government means small people.

4. American greatness is important. There always have been and always will be forces that abhor liberty. While the scope of our involvement always should be debatable, our willingness and ability to stand against such forces should be certain. This requires production and wealth.

Online Legal Notices

Regarding SB 208 (legal notices), I received the following letter today from Jim Wall – Publisher Deseret News, Randy Wright – Editor Provo Daily Herald, Brent Low – President MediaOne Utah (Newspaper Agency Corporation):

On the issue of publishing legal notices, newspapers have been remiss in not communicating sufficiently with the Legislature on prospective solutions that would provide notice to a wider range of Utahns in light of new and emerging technologies for the dissemination of information.

After conversations with Sen. Urquhart, Rep. Dougall, and Lincoln Shurtz from the Utah League of Cities and Towns, we believe that the most effective solution that works in the best interest of the public would be dual publication encompassing both print and online until the time set by the Legislature for the sunset of print requirements in counties of the first and second class. Publication of legal notices would remain in the private sector, and allow links from government Web sites.

We are requesting amendments to SB208 that recognize the following commitments – to be implemented at our cost – with respect to Utah newspapers in counties of the first and second class:

1. Provide a fully functional Web site (UtahLegals.com) that includes but is not limited to input, archiving, site maintenance, links from newspaper Web sites and others, and allowing links from government Web sites.

2. Provide for dual publication of legal notices in both printed newspapers and on the UtahLegals.com Web site beginning January 1, 2010.

3. Provide an option for legal notices to be published in print or solely on the newspapers’ UtahLegals.com web site beginning January 1, 2012.

Thank you for your consideration. Going forward, we are committed to ongoing communication on technology solutions that will improve public notification and help to reduce costs to customers.

This is a good-faith proposition that could lead to something wonderful for Utah citizens, providing far broader reach to legal notices at a fraction of the current cost.