Blawgletter®

Quote of the Day: Monica Goodling

Monica, Monica, Monica!

Tell us about your political philosophy.  There are different groups of conservatives, by way of example:  Social Conservative, Fiscal Conservative, Law & Order Republican.

[W]hat is it about George W. Bush that makes you want to serve him?

Aside from the president, give us an example of someone currently or recently in public service who you admire.

An Investigation of Allegations of Politicized Hiring by Monica Goodling and Other Staff in the Office of the Attorney General at 18 (July 28, 2008) (quoting questions that Ms. Goodling asked of candidates for non-political positions in the Department of Justice).

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FTC Joins Intel Antitrust Fray

FTC v. Intel.  Symbolically.

The Federal Trade Commission announced a formal investigation into possible anticompetitive conduct by Intel, which makes and sells 80-90 percent of computer brains in the U.S.  The unveiling, per the NYT, follows months of stalling by the former top FTC Commissioner, who now works as general counsel at Procter & Gamble.

The probe appears to focus on Intel's rebating and discounting practices (as competitor Advanced Micro Devices alleges in a separate lawsuit).  According to the NYT article:

A.M.D. has asserted that Intel offers rebates and discounts that, in effect, result in its chips being sold at prices below the cost of production, a practice that some courts in cases involving other companies have said can be a violation of antitrust law.

Intel denies that its discounts and rebates drive its prices below cost, or at predatory levels. Intel has said that it offered legitimate discounts based on the volume of chips that have been purchased by companies, and that consumers benefit when personal computer manufacturers — using the discounts — are able to lower the cost of making their products.

The story also notes that Intel, AMD, and several PC-makers that buy microprocessors from Intel and AMD got FTC subpoenas recently.  The Commission's website, including the Bureau of Competition's home webpage, makes no mention of the investigation as of mid-day today.

In 1998, the Commission charged Intel with antitrust violations through disciplining of customers that tried to enforce their patent and other intellectual property rights in microprocessor technology.  The FTC's 10-year-old administrative complaint said:

Intel has engaged in exclusionary conduct by cutting off and threatening to cut off valuable commercial relationships with certain of its customers as a means of coercing licenses to their patent rights in rival microprocessor and related technologies.  In each instance, Intel’s conduct had a significant adverse effect on the ability of the targeted customer to develop and bring to market in a timely manner computer systems based on Intel microprocessors, and would have posed a more significant long-term threat to the businesses of those customers if they had not agreed to license their technologies to Intel or, in the case of Intergraph, won an injunction against Intel’s conduct. Because patent rights are an important means of promoting innovation, Intel’s coercive tactics to force customers to license away such rights diminishes the incentives of any firm dependent on Intel to develop microprocessor-related technologies. Because most firms who own or are developing such technologies are vulnerable to retaliation from Intel, the natural and probable effect of Intel’s conduct is to diminish the incentives of the industry to develop new and improved microprocessor and related technologies.  Consequently, Intel’s conduct entrenches its monopoly power in the current generation of general-purpose microprocessors and reduces competition to develop new microprocessor technology and future generations of microprocessor products.

Complaint ¶ 39, In the Matter of Intel Corp., No. 9288 (F.T.C.).  The Commission and Intel reached a settlement in March 1999.

The AMD complaint, which it filed in 2005, alleges that Intel engaged in a wide range of anticompetitive conduct, including:

• forcing "major customers into exclusive or near-exclusive deals,"
• conditioning "rebates, allowances and market devvelopment funding on customers' agreement to severely limit or forego entirely purchases from AMD,"
• establishing "a system of discriminatory, retroactive, first-dollar rebates",
• threatening "retaliation against customers introducing AMD computer platforms,"
• establishing and enforcing "quotas among key retailers effectively requiring them to stock overwhelmingly, if not exclusively, Intel-powered computers",
• forcing "PC makers and technology partners to boycott AMD product launches and promotions," and
• abusing "its market power by forcing on the industry technical standards and products which have as their central purpose the handicapping of AMD in the marketplace."

Complaint ¶ 2, Advanced Micro Devices, Inc. v. Intel Corp., No. 1:05-cv-00441-JJF (D. Del. June 27, 2005) (available on PACER).

Can you say predatory pricing?  The FTC probably will have to.

The Unbearable Lightness of Crude Oil Prices

OPEC spans the globe.

With the market price of West Texas Intermediate crude oil hovering just above $125 a barrel and regular gasoline prices spiking above $4.00 a gallon, your ordinary American citizen wants to know who to blame.  Count Blawgletter as one of them.

We can speculate about causes.  Does the lack of new refineries in the U.S. explain the price inflation?  If so, can't we blame environmental extremism (and federal law) for making the cost of anti-pollution measures prohibitively expensive?  Nah.  According to the Energy Information Administration, which uses government data, domestic refineries ran at 83.2 to 88.9 percent between October 2007 and March 2008.

What about Big Oil?  In the fourth quarter of 2007 and the first three months of 2008, Exxon Mobil alone raked in net income of $22.6 billion.  Do you think it earned all that strictly through hard work and clever management?  Probably not all.  Suspect no. 1.

Restrictions on drilling offshore and in places like the Arctic National Wildlife Refuge in Alaska may also have contributed to an imbalance between supply and demand.  Skeptics point out that the fat profits of oil companies give them plenty of resources to explore for new reserves.  Not to mention government subsidies.  Plus the fact that ANWR would supply U.S. needs for less than 2.25 years under the best of circumstances.  And yet that sounds like more than a drop in the barrel to us.  Suspect no. 2.

What have we missed?  Oh, yes.  OPEC.  The Organization of Petroleum Exporting Countries, which consists of 12 sovereign nations, including Hugo Chavez's Venezuela and Ayatollah Khameini's Iran.

Congress hasn't forgotten about the most famous price-fixing, quota-setting, and consumer-gouging cartel on Earth.  Earlier this month, the House of Representatives passed a bill, by a veto-proof margin (again), that would call OPEC to account for its antitrusty ways.

H.R. 6074 would amend section 1 of the Sherman Act so that it explicitly applies to restraints of trade in petroleum, natural gas, and other petroleum products.  It would condemn price and supply manipulation and the like by "any foreign state, or any instrumentality or agent of any foreign state," when it acts "collectively or in combination with any other foreign state, any instrumentality or agent of any other foreign state, or any other person, whether by cartel or any other association or form of cooperation or joint action".  The bill also would bar an "act of state doctrine" defense as well as one asserting foreign sovereign immunity.  And it authorizes the Attorney General of the U.S. to bring an action under the new provisions and requires a task force to study stuff like price-gouging and other bad conduct in the energy industry.

H.R. 6074 does not address possibly the most important issue -- the political question doctrine.  As the Fifth Circuit reminded us on May 28, in a case involving death and injury to contract employees in Iraq, that doctrine prohibits judicial action that second-guesses the conduct of the political branches -- the executive and Congress.  Lane v. Halliburton, No. 06-28074 (5th Cir. May 28, 2008) (reversing dismissal of tort claims and remanding cases for further development of record).  We expect that any action under the NOPEC statute would likely implicate all manner of policies -- including the invasion and administration of Iraq, the President's recent request that Saudi Arabia increase production, and the State Department's stances towards OPEC and its individual members.

Which signifies to us that NOPEC will go nowhere even if it does pass the Senate and gets past a veto.  It apparently doesn't allow private litigants to sue OPEC; only the Attorney General has such authority.  And even if the new President in January 2009 instructs the new Attorney General to sue under NOPEC, the political question doctrine may doom any challenge to violations that happened previous administrations.  And probably post-swearing in ones too.  What court can sort all that junk out?

Political theater.  Don't you just love it?

Actually, our feed doesn't like it that much.

Subprime Deja Vu

Who can understand what happened to produce what looks like a U.S. recession?  Blawgletter hears that, at the simplest level, lenders believed borrowers' promises of intention and ability to repay far beyond honest limits.  They "credited" obvious lies.  Shame on the liars -- but also on the believers.

Who deserves the greater blame?  We don't know for sure and expect that it varies from case to case, but some overall responsibility must go to the policy makers who lived through the last bunch of dumb loans and the awfulness that followed.  People like Alan Greenspan and Ben Bernanke. 

If you remember the S&L crisis in the late 1980s and early 1990s, you know what we mean.  In that debacle, savings and loan associations and banks all but threw money at speculators, especially those of the real estate variety.  Developers of grandiose projects knew, if only for a little while, that their genius would make their reckless gambles pay off.  And lenders and borrowers grossly inflated valuations in order to support the lending decisions that enriched them.

Well, it has happened again.  This time, an S&L owner didn't arrange for an appraisal to overstate a property's value or get a straw man to buy a property at a ridiculously high price.  No.  This time firms like Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America, and others (Bear Stearns R.I.P.) dodged regulatory oversight both by securing changes to applicable law and, largely as a result of their new freedom, by creating financial instruments that nobody ever heard of before.  They thus created a "shadow" banking industry, one that the Federal Reserve and state regulators couldn't (or at least didn't) reach.

"Shadow" sounds ominous, so let us explain.  The Fed and the U.S. Comptroller of the Currency respectively oversee bank holding companies and national banks, and state agencies do likewise with state institutions.  But the distinction between commercial banks -- which take deposits and use them to make loans -- and investment banks -- which as far as we can tell do whatever they want to -- has all but vanished. 

After the Great Crash in October 1929, Congress required strict separation between commercial banks and companies that underwrote offerings of stocks and bonds.  The goal was to prevent banks from taking excessive risks, as they had done before the crash and ensuing Great Depression.  Repeal of the Glass-Steagall Act in the 1980s and 1990s freed Wall Street to charge higher interest rates and to mix commercial banking operations with the arms that floated securities, provided brokerage services, and even invested for their own account -- all far riskier endeavors.

Enter subprime mortgage lenders like Ameriquest and Countrywide.  They originated (or, often, bought) residential real estate loans to people whose credit profiles didn't support a bank loan.  Wall Street, including formerly stodgy commercial banks, furnished the money so that the mortgage lenders could fund the subprime loans.  The Wall Streeters also bought back the loans, combining hundreds of them in what they called "securitizations" -- debt instruments whose value depended on the creditworthiness of subprime borrowers and the value of the underlying real estate.  Then the same Wall Street firms sold the "mortgage-backed securities" to pension funds and other customers.  They reaped profits on the loans and profits on the securitizations.  Boo-yah!

Sounds simple, right?  Elementary, my dear Watson?  Very well.  Because now the story starts getting weird.

Wall Street firms found yet more ways to make money, this time by creating financial instruments that they called "collateralized debt obligations", "interest rate swaps", and other "derivatives".  We don't pretend to understand what those things involve, who in his or her right mind would buy them, or how they might differ from flipping a piece of Texas land three times in one day.  But we do believe that the lack of legal and regulatory restraint encouraged the bold to do what they do best -- to go way beyond reason in the hope that the party would last just a little while longer.

Well, the party has crashed and burned.  The, um, optimistic borrower now owns a house worth less than the loan, and the, er, overconfident lender can't get its money back.  Recession city, baby.

Will the grown-ups who ought to have seen this day coming get their comeuppance?  Hide and watch, we say.  Hide and watch.

In other words, probably not.

Reddy Ice Gets Grand Jury Subpoenas

Remember The Iceman Price Fixeth?  The post that reported a raid of Reddy Ice's Dallas headquarters by federal antitrust enforcer types? 

The raid now looks like the tip of a solid water object that floats and bobs in liquid water near the polar regions. 

The Annual Report on Form 10-K of Reddy Ice Holdings Inc. came out yesterday, March 14, 2008.  On page 24, the report includes this interesting paragraph:

  In March 2008, we and certain of our employees, including members of our management, received grand jury subpoenas issued from the U.S. District Court for the Eastern District of Michigan seeking information in connection with an investigation by the Antitrust Division of the United States Department of Justice ("DOJ") into possible antitrust violations in the packaged ice industry.  In addition, on March 5, 2008, federal officials executed a search warrant at our corporate office in Dallas, Texas.  We expect to make available documents and other requested information to the DOJ's Antitrust Division in connection with the investigation.  The subpoenas we and our employees received are part of a broader industry inquiry; at least one other packaged ice manufacturer has also received such a subpoena.  Senior management is not award that the Company has engaged in anticompetitive behavior, or other activities, which would violate the antitrust laws.  On March 6, 2008, our Board of Directors formed a special committee of independent directors to conduct an internal investigation of these matters.  The special committee's investigation is ongoing and the outcome of the investigation is unknown.  The special committee has hired special counsel to assist in its investigation.

Customers of Reddy Ice and its biggest rival, Arctic Glacier out of Winnipeg, have started filing class action lawsuits for price fixing -- three by our count so far in Minneapolis alone. 

Blawgletter expects to see one or more similar filings in Dallas federal court soon.

Our feed can seldom resist commodity puns.

The Iceman Price Fixeth?

Last week, federal antitrust authorities raided the Dallas headquarters of Reddy Ice Holdings Inc., the biggest maker, packager, and distributor of ice in the United States.  The other gargantuan ice vendor in North America, Arctic Glacier Inc., with main offices in Winnipeg, Manitoba, also reported a brush with the antitrust probe.

See the Reddy Ice press release here and the Arctic Glacier one here.

Blawgletter just had a chilling thought.  Never mind.

Brain freeze.

Texas Supremes, Taking Heat

Y'all will recall back in December 1987 when the CBS show "60 Minutes" went hammer and tong after the Supreme Court of Texas.  Something about justice for sale.  Justices deciding cases in direct proportion to the campaign contributions of the winners.  Bad stuff.

Blawgletter wonders whether history has started to repeat itself.  A local television station in Dallas, WFAA, last night broadcast a segment on how long Their Honors take to render their opinions.  A few months earlier, the Dallas daily newspaper, The Dallas Morning News, published an investigative article on how often the Court's rulings favor big business.  Plus three justices have drawn attention for using campaign funds -- possibly illegally -- to pay for tons of travel.  And Texas Watch fairly sprays saliva in its earnest enthusiasm to tell one and all how slow, anti-plaintiff, pro-defendant, and downright arrogant the justices have become in the post-Ann Richards era of Republican political domination.

We've pondered whether the Court hates class actions.  Also why it now issues so many per curiam opinions and summary rulings without hearing oral argument.  Any thoughts, y'all?

Y'all means "you all".  It's never singular.