It appears the epic struggle to decide who will supply the U.S. Air Force with a new aerial refueling tanker is destined to continue now that the Government Accountablility Office (GAO) has upheld Boeing’s protest [Press Release PDF] against competitor Northrop-Grumman and its European partner, EADS.  According to the GAO’s statement:

“Our review of the record led us to conclude that the Air Force had made a number of
significant errors that could have affected the outcome of what was a close
competition between Boeing and Northrop Grumman.  We therefore sustained
Boeing’s protest,” said Michael R. Golden, the GAO’s managing associate general
counsel for procurement law.  “We also denied a number of Boeing’s challenges to
the award to Northrop Grumman, because we found that the record did not provide
us with a basis to conclude that the agency had violated the legal requirements with
respect to those challenges.”

Essentially, the government watch dog found that the Air Force ignored or improperly applied a number of standards from its original solicitation for the KC-X tanker project.  The GAO has recommended that the Air Force enter into new negotiations with the two aerospace companies as a prelude to re-evaluating their respective bids.

It is somewhat heartening that this dispute seems to have been settled on the merits and within the letter of the law.  With Northrup-Grumman originally changing the rules to allow consideration of its larger design based on the Airbus A-330 and Boeing using its Washington state Congressional connections to pressure the military to change its mind after losing the bid, I find it remarkable that this entire process did not degenerate into a political grudge match with each company’s legislative allies using their influence to try to bring Pentagon pork home to their constituents.  Perhaps reason will prevail.  But then, there’s still a long path to tread and elections coming in November…

Last night on Bill Moyers’ Journal, a report about Bisphenol A (BPA) by the PBS investigative journalism outfit Exposé was aired, complete with a kickin’ eighties guitar intro that makes you feel like you’re right there chasing down the bad guys with Crockett and Tubbs. The bad guys in question aren’t peddlers of narcotics but of every day household goods made of plastic containing BPA and their products are all perfectly legal in spite of a growing number of studies suggesting links between the chemical in question and a number of endocrinological maladies.

The story on Moyer’s show recapitulated the efforts of science journalists at the Milwaukee Journal Sentinel in 2007 to sift through the research on BPA and determine where the evidence actually pointed. What they found is disturbingly familiar:

Of the 258 studies reviewed by the Journal Sentinel, 168 studies looked at low-dose effects of bisphenol A.

The vast majority – 132 studies- found health problems at low doses, including hyperactivity, diabetes and genital deformities. All but one of those studies were conducted by non-industry scientists. Nearly three-fourthsof the studies that found the chemical had no harmful effects were funded by industry.

Shockingly, the lion’s share of “scientific” inquiry concluding that bisphenol A is perfectly safe has been funded by the very industries that depend on the chemical for their products. Now, the question remains, given the significant quantity of data in hundreds of studies about it, how did the National Toxicology Program panel on BPA assess the risks of the chemical in its report that year?

The panel said it considered more than 700 studies by university scientists, government researchers and industry-funded chemists. It picked the work it felt was best and threw out the rest.

The Journal Sentinel found that panel members gave more weight to industry-funded studies and more leeway to industry-funded researchers.

• The panel rejected academic studies that found harm – citing inadequate methods. But the panel accepted industry-funded studies using the same methods that concluded the chemical does not pose risks.

• The panel missed dozens of studies publicly available that the Journal Sentinel found online using a medical research Internet search engine. The studies the panel considered were chosen, in part, by a consultant with links to firms that made bisphenol A.

• More and more university researchers and foreign governments are finding that bisphenol A can do serious damage in small doses. But the panel rejected studies mostly submitted by university and international government scientists that looked at the impact at these levels.

• The panel accepted a Korean study translated by the chemical industry’s trade group that found bisphenol A to be safe. It also accepted two studies that were not subjected to any peer review – the gold standard of scientific credibility. Both studies were funded by General Electric Co., which made bisphenol A until it sold its plastics division earlier this year.

[...]

Panel chairman Robert Chapin, a toxicologist who works for Pfizer Inc., the pharmaceutical giant, defended his group’s work.

“We didn’t flippin’ care who does the study,” said Chapin, who worked as a government scientist for 18 years before joining Pfizer.

If the studies followed good laboratory practices and were backed with strong data, they were accepted, Chapin said.

Of course, pressure has mounted since then and NTP has revised its conclusions in a report published last month, as Americanus has previously reported. Still, the industrial-regulatory nexus of faux enforcement and revolving doors is growing quite tiresome, especially in a case where people’s health and perhaps even lives are at stake.

There is a fascinating commentary in today’s edition of the Wall Street Journal advocating the use of the Strategic Petroleum Reserve as a counter-cyclical tool to negate the pricing policies of the Organization of Petroleum Exporting Countries, OPEC.  Lincoln Anderson, an economist with a Boston-based finance firm, argues that the 701 million barrels of oil stocked up in the SPR are excessive and could be better used by adding supply to the U.S. market.  The goal would be to shave a little off the roughly $120 price tag for a barrel of crude.  Should OPEC increase production in the face falling demand, as it has done periodically, the SPR could purchase excess oil and work as a price support for the market.

The idea is that this sort of policy could lead to a little more stability in U.S. energy markets, easing the pain in times of high prices while ensuring that large price drops don’t distort the market and shift demand away from nascent sources of alternative energy.  Anderson believes a minimal reserve of no less than 120 million barrels of oil could be kept in the SPR at all times, an amount he states is greater than any one time drawn down in the SPR’s history.

This argument strikes me as an interesting one…one worth thinking about, given severity of the present energy mess we find ourselves in.  At the same time, I remain skeptical of the price-setting power he attributes to OPEC.  His own article cites the fact that OPEC’s control of oil production has declined from 52% in 1973 to only 40% today.  More importantly, he doesn’t take into consideration the ever-growing demand for energy in China and India, which may have more to do with today’s high prices than the cartel’s production policies.  Thoughts, anyone?

In 1968, long-time American Airlines CEO C.R. Smith retired with this statement: “These days no one can make money on the goddamn airline business. The economics represent sheer hell.”

Forty years on, it would be difficult to find an airline executive who disagrees with him. There are a lot of things that separate the airline business from nearly every other; it has the all the union-grinding labor disputes common in large manufacturing firms, with the added panache of providing services that are as despised for their inadequacy as they are a crucial component of national infrastructure. And by the way, planes also make excellent missiles.

When Delta and Northwest took the monumental but unsurprising move two months ago to merge, their $10.5 billion in combined 1^st quarter earnings losses seemed to seal the deal. Most of this absurd loss is due to writedowns on the companies’ respective valuations; however, it still begs the question: what could they possibly have to gain from one another?

Airline bigwigs cite economies of scale, for one. Not only by pooling together their meager resources of peanuts, biscuits, and four ounce sodas – but ultimately saving on fuel costs, the most relevant cost issue for the airliners. Opinion seems to be divided between laissez-faire capitalists who reckon that the merger is crucial to prevent a collapse of either company, and populist ideologues who foresee a chain reaction of airline mergers and universally high priced airline tickets.

But there are other costs, too. Atlanta-based Delta already has plans to consolidate the combined companies’ headquarters in the more spacious Atlanta-Hartsfield Hub, an annoyance to both Minneapolis-based Northwest as well as Minnesota’s political elite, who are worried about the pending loss of jobs from the state.

CQ Politics points out here that while the advocacy groups on both sides are getting busy consolidating their efforts, the failed 2001 bid of United Airlines and US Air remains fresh in the minds of many. John Ashcroft, while not exactly the poster-child for the anti-corporate agenda, called the planned merger uncompetitive.

What can we expect from a Delta-Northwest merger? Not much. The combined companies, even if able to hold onto the coveted ‘Largest Airliner’ status, will not become profitable overnight; nor, for that matter, will competition be hampered significantly in major consumer markets.

Ding ding, here comes Northwelta.

In the 1946 Christmas Saga It’s a Wonderful Life, George Bailey famously refuses a buyout and job offer by Mr. Potter’s rival Bank with a sparkle and kick of American idealist oratory. Now if only today’s banking institutions could afford to be so magnanimous.

Capital reserves at most banks have been retreating over the last few months – so much so, that many banks are finding themselves in desperate need of capital to shore up their balance sheet and meet regulatory requirements. The tricky part in today’s market is that mergers, buyouts, and large-scale stock acquisitions, the once reliable three-car emergency capital train, has been all but derailed by the past year’s subprime mortgage debacle and the ensuing credit crunch.

And to make matters worse, it’s 1^st quarter earnings week in banking country. To combat a $171 million quarterly loss, National City Bank (America’s 10^th largest bank) reported today that it will raise $7 billion in additional capital by issuing 126.2 million shares of common stock and nearly 64,000 preferred shares at $100,000 each. It would have been more convenient for the bank to find a buyer (few Banks are large and hungry enough to swallow NationalCity, even in a good market), and no doubt its shareholders might be wincing at the dilution of their already volatile shares, which have declined in value from $38 to $6 in the past year.

Bank of America, while still in the black, reported a 77% decline in net income from last year. Citigroup, the largest American bank, reported a $5.1 billion loss this quarter after a $15 billion dollar write-down of similar sub-prime losses. The bank is expected to maintain a satisfactory capital position despite the losses, having raised $30 billion in recent months from a diverse cadre of foreign investors, including a $7.5 billion cash injection (taken with much hullabaloo) from Abu Dhabi. Domestic capital (while preferable) was simply not forthcoming, investors having fled the market like President Mugabe from democratic responsibility.

What does this mean for the credit market as a whole? With less capital to spare, Banks will become more finicky to whom they lend to – this has already occurred in the real estate market, and a continued credit tightening should be expected well through this year. Today’s Wall Street Journal reported a front-page article on Sovereign Bank, a large regional thrift that was hit particularly hard by a poor investment push into nationwide automotive lending (more on that later).

Smaller banks will also find it increasingly hard to maintain a strong capital base in the current market. Given the circumstances, it seems that cushy job working for Mr. Potter doesn’t look so bad right now.

]]> http://americanus.wordpress.com/2008/04/21/please-step-into-my-office-mr-potter/feed/ 1 rufuscoltraine http://americanus.wordpress.com/2008/04/18/revolving-door-at-the-faa/ http://americanus.wordpress.com/2008/04/18/revolving-door-at-the-faa/#comments Fri, 18 Apr 2008 21:05:00 +0000 Shaun http://americanus.wordpress.com/?p=55 ]]>

It seems that in the Federal Aviation Administration, as with other federal regulatory agencies, we’ve left the fox to guard hen house.  The Associated Press has a great story on the revolving door policies that see upper-echelon FAA management serve their time in government before taking lucrative jobs with the airlines they once regulated.

Might this have something to do with the thousands of flights that were canceled in recent weeks after revelations that basic safety inspections weren’t carried out as normal?  The story cites past examples of federal legislators, including all three major presidential candidates, leaning on regulators to cut airlines from their states a break.  No industry, it seems, is without its man or woman in Washington.

Now, in the interests of full disclosure, I should add that my father works for the FAA and, yes, came to the job from an influential spot in the private sector (aircraft mechanic for a regional airline).  Having always been under the impression that airline safety regulations were sacrosanct, I was shocked when he confirmed that it is not uncommon for airlines to use political connections in Congress and with top level FAA management to get around government regulations they consider overly expensive or onerous. The inspectors on the ground aren’t too happy about it (even less so when the public’s aspersion is cast on the whole agency rather than political hacks at the top), but there’s little they can do since their jobs are on the line (though there are exceptions).

To an extent, there must be some overlap between federal regulators and the industries they watch, since firsthand experience is critical to applying the rules wisely.  But we may want to think about tougher ethical standards like mandating a greater amount of time between working in government and working in the sector one used to oversee; or perhaps limiting access private sector jobs where one has to work closely with one’s old government office.

I may be a cynic, but I’ll never make the bet that duty and concern for the public good will overcome greed in every case.

This February, the United States’ Air Force picked a winner in the bid to supply a new line of aerial refueling tankers. After fierce competition, a collaboration between Northrop-Grumman and the European Aeronautic Defence and Space (EADS) Company beat out hometown favorite Boeing for the $40 billion contract

Northrop’s KC-45 tanker

Boeing, not one to take defeat lying down, is pulling out all the stops to halt the deal before it can get off the ground (sorry…couldn’t resist). It started a pernicious whisper campaign that the Air Force’s evaluation of its airplane, the KC-767, was unfair and that the Boeing platform is actually more survivable in a combat situation. Of course, this glosses over the fact that tanker aircraft operate in well protected rear-echelon roles where attacks are extremely unlikely, but objectivity isn’t the point here.

Boeing has also amassed a coalition of Washington State’s Congressional representation and labor leaders to decry the “outsourcing” of America’s defense to Europe. Washington representative Norm Dicks (D) has decided that if his state’s corporate megalith can’t have the contract, no one can…he plans to try to eliminate funding for the tanker program when it comes before the House Appropriations Subcommittee.

Northrop is hitting back in the propaganda war with a special web page exclusively devoted to extolling the commercial benefits of its aircraft for individual American states. This battle may be long and costly. When there is $40 billion on the table (with the potential for tens of billions more down the road) no one is going to give in easily.

What I think is most interesting about this case, however, is what it tells us about the process of defense acquisitions. In all of the squabbling for cash, any commitment to delivering the best product for what the military needs at the best price is thrown out the window. In lieu of merit-based competition, what has emerged is a duopoly of powerful corporations battling for political support through lobbyists and public relations specialists. Their Congressional patrons have a stake protecting jobs within their districts and sources of campaign donations. Everyone, it seems, gets something; except for the American taxpayer, whose money is funneled into a needlessly bloated defense budget. Why didn’t we listen to Ike?

UPDATE: John Young, the undersecretary of defense for acquisition, technology, and logistics publicly warned Congress not meddle in the Pentagon’s plans to purchase the KC-45.  He argued such interference would create a “slippery slope” to  situation in which contracts were not awarded based on their merits…as if they usually are.

A new report by the National Toxicology Program has raised concerns about a chemical called bisphenol A (BPA) that is ubiquitous in plastic products. (You can download the full report here.)  According to the report, the chemical poses risks to neural and behavioral development of very young children, both pre- and post-natal.  There is also a potential link to breast cancer and prostate cancer in humans, a correlation that has long been demonstrated in laboratory animals.

The Washington Post explains the significance of this by noting that this is first time the federal government has raised concerns about BPA, which can be detected in the urine of 93% of Americans over 6 years of age.  The NTB will host a conference on the issue in May and seek peer review for its preliminary findings.

Even if some risk is confirmed, don’t look for any action to restrict the use of BPA on the government’s part.  U.S. regulatory agencies usually have a single response when it comes to questions of possible health risks of consumer products: “prove it.”  And, since it is notoriously difficult to prove a causal relationship between suspected toxicants and the illnesses with which they are associated, they mostly flow freely through the environment…and our urinary tracts.

In fact, another type of suspected developmental toxicants found in many children’s toys, phthalates, have been banned in both the state of California and the European Union, but remain unrestricted by the federal government.  This despite the risks entailed and the knowledge that cost-effective alternatives to the chemical exist.  This leads to an interesting situation where Chinese manufacturers have dual assembly lines for the same product: one making a phthalate free version for export to the E.U. and another making products for lax U.S. regulatory market.  (Think about that the next time you want to rage against Chinese “toxic toys.”)

So it seems we have a choice.  Either we can take precautionary steps to restrict such chemicals now and pay a marginally higher price for some products or we can wait until all the evidence is in, which may take forty years of long-term study with millions of consumers exposed to toxins all the while.  I don’t know about you, but I’d pay an extra couple of bucks for a non-carcinogenic compact disc…

The annals of the Bush Department of Justice run rife with shocking legal abuses far graver than ineffectual enforcement of corporate laws and regulations.  (Remember John Yoo’s torture memo?)  Still, today’s New York Times report about the use of so-called “deferred prosecution agreements” in lieu trials for corporate law breakers leaves me somewhat indignant, especially given the number of potential cases on the horizon stemming from the subprime mortgage debacle.

It seems that since at least 2005, the DOJ has been fining corporate offenders and mandating unspecified internal reforms supervised by government officials rather than dragging a company’s good name through mud by bringing their case to trial.  Hence, deferred prosecution.  The fines quoted in the story are in the range of a million to a few tens of millions of dollars; chump change for companies like American Express or Merrill Lynch…ok, well, maybe not this year for Merrill Lynch.  All this is meant to avoid potentially disastrous criminal litigation that has wrecked companies in the past.

But isn’t that what it’s supposed to do?  The point of having any type of criminal law with an attendant punishment for violators is to create a substantial enough risk to deter companies or individuals from breaking the law in the first place.  Ideally, eviscerating one wayward corporate giant in a courtroom battle will make others think twice before repeating the mistake and prompt industry to police itself (remember Jeff Skilling?).  Garnishing their allowance and putting them in time out will not.  It seems to me this a pretty clear case of the DOJ creating a moral hazard for breaking the law.

But of course, the partisan hacks at the apex of Justice already know this.  After all, they have to keep the campaign donations flowing to political masters.

Since April 2007, the Zimbabwean Dollar has had the dubious epithet of “Least valuable currency unit in the World”, which it secured by outpacing the venerable Vietnamese Dong. Rampant hyperinflation (now estimated to exceed 100,000%) has decreased the value of the currency to $70 Million ZWD to $1 US Dollar.

While it’s reassuring to note that at least one country on Earth has outpaced the decline of the US Dollar in recent months, Zimbabweans are not amused at having to shell out a few billion for black market Winger albums. It’s rare to see inflation this bad; examples that come to mind are 1923 Germany (when inflation was 3,250,000% per month) and 1946 Hungary (when inflation on the Pengő was 4.19 × 10¹⁶ percent per month, and prices doubled every 15 hours).

In addition to throwing the basic macroeconomic policy out the window, (Former?) President Mugabe’s administration has sealed its own fate by causing this catastrophe. In today’s Telegraph, David Blair spells out how the seizure of white-owned farms, the decline in tourism, and the nationalization of the mining industry have effectively reduced the country’s tax base. As a result, the Zimbabwe Government is able to generate virtually no revenue, and has resorted to ‘printing money’ to merely remain operational. While it’s nice to print out a few hundred million dollars so President Mugabe can run downstairs and grab a coke out of the vending machine, the net effect is astronomical inflation (and the expensive costs of converting the new machine to accept billion-dollar notes).

Indeed, it must have cost the government even more than a Michigan primary do-over to run the recent election. As Mugabe steps down, the new administration must first perform a few economically critical acts: namely, printing of currency must cease, and government operations must be funded by an outside source (enter: a good use for the IMF). Significant reversals in recent economic policy must occur to restore faith in both the currency and the economy, which (by the way) also suffers from an 80% unemployment rate.

The top occupations of the other 20%?

1. Miscellaneous Mugabe Henchman
2. Peddler of AIDS Orphans
3. Refugee
4. President Mugabe (himself)*
5. Peddler of Refugees

*Currently Unemployed