Lucia di Lammermoor

I saw the opera Lucia di Lammermoor Wednesday evening with Cicily.

The opera was performed at the Met, in NYC, but we watched it on a live feed to a theater in West Springfield, Mass. in HD. Part of the Metropolitan Opera's attempt to make itself a global franchise.

Of course, nothing is quite so real an immediate presence as ... immediate presence. In other words, any electronic mediation is different from Being There. Still, the good folks behind this try to make up for the mediation by backstage segments between the Acts, in which the audience in places like West Springfield gets to watch the crew putting the next Act's scenery in place or listen to live interviews with the singers/actors about how they're psyching themselves up for the big aria ahead of them etc.

Lucia was excellently done. My congrats to everyone involved.

The story comes from a Walter Scott novel The Bride of Lammermoor. Scott wrote it in 1819 and set the events in the Scotland of a little more than a century before -- in the time of Queen Anne.

The plot involves two feuding families, Ravenswood and Ashton. Edgar Ravenswood is in love with an Ashton heiress, Lucy. They pledge their troth. Soon after the pledge is made, Edgar has to travel to France for pressing political reasons.

While he is away, the rest of the Ashton family press Lucy to renounce Edgar and marry the Laird of Bucklaw, who will be a powerful political ally and defender, helping the family restore its past glories. In Scott's novel, it is Lucy's mother who sets these machinations in place. In Donizetti's opera, on the other hand, Lucy is mourning her recently deceased mother when the curtain first rises: it is her brother who plays the true-love-frustrating villain.

This lets the opera tell the tale as a woman caught between two men.

In either version, though, Lucy goes ahead with the arranged marriage, goes mad, and stabs the groom when they are alone in their bedchamber. The groom survives his injuries in Scott, though they are fatal in the opera. Lucy descends further into madness and, soon enough, into death.

In either version, Edgar too dies soon thereafter, though his death is managed somewhat differently in each.

The short description of either tale, though, is that it is a transmutation of Shakespeare's story of star-crossed lovers to the Scottish moors.

Donizetti (and his librettist, Salvadore Cammarano) are faithful to the spirit of Scott's story, taking the usual liberties as I have mentioned, and of course giving all the characters the Italian variant of the name Scott had bestowed upon them.

This particular production of Lucia took a further liberty. It moved the setting forward in time, to a period more recent than the opera's composition, although only slightly so. This is a early-Victorian-era Lucia. The chorus looks a bit like they wandered in from a Sherlock Holmes movie. At one point, an early camera is set up on a tripod in order to take a wedding-day photo.

I don't know whether those changes are entirely successful, but I suppose Mary Zimmerman is entitled to her own vision.

Colonel Roosevelt and Secretary Bryan

"Colonel Roosevelt" is the title of a new book by Edmund Morris, the final installment in his series on the life of Theodore Roosevelt, focusing on TR's post-Presidential years. I admit up-front I haven't read the book. I have only read the paraphrases and quotations from it provided by some reviewers, including Henry S. Cohn, who reviewed it for the latest issue of The Federal Lawyer.

Cohn paraphrases Morris thus: "Roosevelt could abide neither Wilson nor his secretary of state, William Jennings Bryan, who viewed the war as an exclusively European affair. Roosevelt spoke out against the 'pacifist' Bryan until he was removed from the cabinet in June 1915 and, in April 1917, Wilson asked Congress to declare war." The scare quotes around the adjective "pacifist" there are appropriate.

Yes, unfortunately for clarity the term sometimes means anyone who is arguing against any particular military intervention, and Bryan was certainly doing that as a member of Wilson's cabinet. But the term is more appropriately used for a broader, principled, commitment to a laying down of arms among nations. In that sense, neither Bryan nor Wilson was ever a pacifist. Indeed, it is well to remember that Bryan seemed to be threatening the UK with war in the course of his famous "cross of gold" speech.

It was the Bank of England that, in the imagery of that speech, was threatening mankind with crucifixion to preserve the one-metal backing for money. It was imperialism, as Bryan saw it, and "the issue of 1776 over again". At least some of Bryan's 'pacifism' in the context of 1913-15 arose from his suspicion that Anglophiles like Roosevelt were on the wrong side, the side of the still regnant world-straddling Empire. His own sympathies were with the rising challengers to that empire -- in this instance, the Germans.

Corporate Accountability

Some thoughts toward what will eventually become chapter 8 of my book, Corporations and Accountability.

Sometimes the iffy accounting isn't the result of inflation, honest confusion, or simple self- deception.

Sometimes it is the consequence of blatant fraud -- a corporate management that in cold blood sets out to cheat investors by lying to them about the corporation's prospects.

Enron's use of "special purpose entities" that effectively turned their own stock into a company asset is an example of the blatant lying.

The fundamental equation of accounting is this: assets - liabilities = equity. That is also, not surprisingly, the format for a balance sheet.

What a company is worth to its stockholders consists of everything the company owns, minus everything it owes.

For a company to treat its own stock as one of its assets is in effect a matter of blatant double-counting. Suppose a company owns only a lot of furniture -- $7 million of furniture. Suppose it owes $6 million to various parties. Its equity is, then, $1 million. If it has one million owners with shares of equal value then one would expect the value of each share to be ... $1. Simple enough, right?

Actually, that's far too simple for a lot of reasons, and the shares if publicly traded will be worth whatever buyers agree to pay and sellers agree to receive. But in the very simple case described above, one would expect the market prices to cycle around $1.

To get to the point, though: suppose the company starts treating that $1 million equity as an asset. Aha! so it has now discovered that has assets of $8 million (because this accounting trickery doesn't affect the vaue of the furniture). Subtract $6 million from $8 million and you get ... $2 million. The effect (and most likely the point) is to trick the shareholders into thinking their shares are more valuable than they are.

Likewise, a company cannot use an increase in the value of its own equity to spruce up its income statement, wiuthout producing the same sort of nonsensical circularity.

But Enron found a way around this simple-seeming prohibition. It created special purpose entities (SPE), and supplied these off-book entities with Enron stock. Then it dealt with those entities in ways that spruced up both the balance sheet and the income statement.

The SPE's could be kept off-book, under accounting rules, so long as 3% of theiir equity belongs to someone who was neither Enron nor an Enron "related entity." The 3 percent figure may seem modest under the circumstances. But the point of it was that someone else has to be willing to put that their own investment at risk. (Recall that a defining feature of equity is that it is the residual bearer of risk.)

The ways in which Enron satisfied that 3% requirement were risible. A homosexual relationship with an executive doesn't make one a "related party" because Texas laws don't recognize such relationships, they reasoned.

Beyond such minor points, Enron sometimes entered into explicit side agreement with the parties contributing thaty 3% assuring them it would make good on any losses. So it wasn't really equity at all, and the circle is closed. [Eichenwald pp. 596-97 gives a dramatic scenario of Enron execs redicovering the crucial document, and realizing that they are 'toast'.] Early 2001, Carl Bass, a member of Artrhur Andersen's Professional Standards Group, objected to such practices by Enron and his superiors at AA removed him from that account.

When Skilling testified before Congress, in 2002, he tried to justify such trickery by saying in effect that it is no worse than what you, the Congress, have allowed and in fact encouraged as to the non-expensing of stock options.

Implicit in this, "because you have allowed us to deceive ourselves, now we are entitled to deceive others."

Accounting issues

Some thoughts toward what will eventually become chapter 7 of my book, the chapter on Accounting and Valuation.

... The problem is not simply that the wrong accounting choices fool the tax authorities. The problem is not even that they fool investors. For our purposes in this book, the gravest difficulty is that the wrong accounting choice can prove a means by which management fools itself about the value of its company, its reserves of cash and other assets, and its strategic options. ["Big Oil's Accounting Methods" etc. 2006.]

Consider to understand this an accounting issue less obviously tied to inflation than the LIFO/FIFO imbroglio. Consider the question of the expensing of stock options.

In the dotcom-a-go-go years of the 1990s, neither the law nor accepted accounting principles required employers to recognize that in issuing stock options to their employees they had in effect expended enterprise wealth, i.e. stock options were not expensed.

Stock options were a critical part of the compensation package for many of the high-tech start-ups that give those years their distinctive flavor. The practices of not expensing such options allowed start-ups to show a profit sooner than otherwise would have been the case, and this in turn helped keep the original investors happy, while allowing start-ups to bring in new investors.

That was the argument -- when arguments came to be necessary -- for continuing to use stock options without calling them an expense. Yet it was also the argument for calling them an expense. For the obvious problem with the use of stock options was that they diluted the value of the company's equity. At some point some number of the options will be exercised and this increases the amount of stock outstanding -- there is a larger supply of that stock, then, capable of satisfying whatever the market demand may be.

For internal managerial purposes, too, it is important to know what is happening and what is likely to happen to the value of equity. It has a great impact on the company's ability to raise money quickly, on its ability to purchase other firms or to maintain its independence against those who would purchase it, and so forth.

Indeed, one could make an argument that the Financial Accounting Standards Board's politically motivated retreat from an expensing mandate was a signal -- something akin to a starter's pistol -- for the dotcom boom. In 1993 the FASB recommended a rule that would have installed expensing as part of the generally accepted accounting principles (GAAP) in the United States.

[My readers will want to know a bit about what the FASB is, if I have not already provided that info.]

Joe Lieberman (D-Conn.) a Senator from the state where the FASB has its headquarters, sponsored a Senate resolution declaring that the new proposed accounting standard would have "grave consequences" for entrepreneurs.

Indeed, on March 25, 1994, roughly 3,000 gathered at the San Jose Convention Center, in San Jose, California, protesting the threat posed by those distant Connecticut accountants to their beloved stock options. Kathleen Brown, the state treasurer, daughter of the once-and-future Governor Jerry Brown, addressed the crowd.

According to an account in FORTUNE, she shouted, "Give stock a chance," and the crowd loved it.

Lieberman and like-minded folks did manage to kick up enough of a fuss so that the FASB backed down, and continued to allow Silicon Valley and its favorite accountants to pretend that they were giving out something costless.

In face of political pressure, the FASB retreated. It said that in the main body of their books, companies could continue to pretend that options were, in effect, free. The retreat was not complete, though, because the FASB still required disclosure in footnotes.

This seemed like an awkward compromise to everyone, and unsurprisingly debate continued. By 1197 two analysts, Micahel L. Goldstein and Jonathan Freedman, had estimatef that the profits that corporations were showing about 5% the artifact of this rule and increased use of oiptions it encouraged.

The debates were kicked up several notches in intensity after the dotcom collapse. Heck, the debate was on The Simpsons. In an episode that aired in April 2002, ["I Am Furious (Yellow)"], Bart and Lisa were briefly employees of a dotcom company, paid in options. The company goes broke, and the siblings discover that their options are worth $0. But they have one million of them!

Bart to Lisa, "What's one million times zero?" then in a low growl he continues, "and don't tell me zero!"

Betting on Foreign Exchange

In the previous chapter (see full table of contents), we listed "metals" as one type of commodity. Yet the precious metals have a special historical significance -- for most of the history of civilization they weren't something bought with money. They were money.

That situation, their commodification: change came slowly, in many steps. In this chapter, I'd like to trace those steps, because they are critical to understanding the crisis that is our central topic. We have come back again and again to the idea of "hard money" versus "soft." How did money get so chronically soft? For simplicity's sake, this will be a US-centric account of what is in fact a multinational story.

1. Bimetallism and the Wizard(s) of oz

2. No-Metallism

3. Gold Returns: Bretton Woods system, 1944-1971.

4. US Hegemony Wanes

5. Johnson to Nixon. The end of the gold window.

6. A “Tobin tax” and other dubious notions arise.

7. Back to Chicago: Leo Melamed, and how the Merc outflanked the CBOT

8. Everything floats against everything. What could go wrong?

9. British pound in 1992, East Asian currencies later in the decade.

10. Staggering proliferation and complexity of financial derivatives.

11. Does the FX market constrain central banks? How well or poorly?

12. Another angle on the CME/CBOT merger

Commodities and Their Derivatives

You'll remember that my March 12 blog entry consisted of a discussion of what is to become the fourth chapter of my proposed book as represented in the table of contents I provided in this blog on December 10, 2010. Now I move to the fifth chapter, about commodities and their derivatives.

This will make five points.

1. definition of terms

A commodity in the sense significant for this book is a physical (and usually a fungible) item of commerce. It is distinct from intangible goods such as patent rights, or a share of equity in a company. It is also usually distinct from any complicated manufactured item, such as a custom-built hot rod. Foods, metals, and natural fibers are all commodities.


2. Brief history of the derivatives exchanges

Commodity futures are the paradigmatic "derivatives." Birth of the Chicago Board of Trade. The CME and a cross-time rivalry. Imitators and developments.

3. Federal regulation up to 1974

Federal regulation of futures contracts began with the Futures Trading Act of 1921. Declared unconstitutional by SCOTUS later that year. How this decision was circumvented and the regulatory system established. Why it took another 50 years for the system to crystallize into the CFTC.

4. the OTC derivatives market and its challenge to the exchanges

One distinction between OTC and exchange trading involves the margin requirements of the latter: performance bonds that market participants must post, in amounts that vary in a way based on the risk and volatility of the product. In the OTC market there have long been no rules, so the parties negotiate their own collateral arrangements. Dodd-Frank. What happens next?

5. It is time now to deal with the spectre of speculation.

Speculation is not gambling. Why not? Because gambling creates its own risk for the sake of the game. A gambler puts money on how a pair of dice will land. Nobody would even bother rolling those dice unless somebody was putting money on them.

What about sports gambling? The game exists independent of the risk. We might suppose that basketball games will continue to take place even in a (hypothetical) world in which gambling on basketball comes to a quick and complete end. But the game itself is not a risk for the folks in Vegas putting their money on the line. It becomes a risk when they decide to accept that risk, both for the chance of profit and for the thrill.

How is that different from financial and commodity speculation? Consider orange juice futures, the subject of a memorable Eddie Murphy and Dan Ackroyd collaboration. These risks are not optional. Anyone investing in an orange grove, in the expectation of selling the fruit of his labors to the OJ market is taking enormous risks. The “dice” are meteorology on the one hand and fickle breakfasting-consumer preferences on the other. The producers can only hedge these risks to the extent that speculators are willing to take it from them.

6. Our first look at the CBOT/CME merger of 2007. We'll come back to this.

Space Opera

In my post March 18 I linked you to a graphic that presents the history of science fiction. Some of you may have noticed the prominence of the expression "Space Opera" in that graphic.

What does that mean? As you might have inferred already, the expression came about on the analogy with "soap opera," and it refers to the more melodramatic sorts of sci-fi. It also refers to the large scale on which a plot works -- a space opera might portray a war between two galaxies, or a multi-generational saga spanning millennia, or both.

The following will give you a feel. This is the opening paragraph of A DEEPNESS IN THE SKY (1999).

"The manhunt extended across more than one hundred light-years and eight centuries. It had always been a secret search, unacknowledged even among some of the participants. In the early years, it had simply been encrypted queries hidden in radio braodcasts. Decades and centuries passed. There were clues, interviews with The Man's fellow-travelers, pointers in a half-dozen contradictory directions: The Man was alone now and heading still farther away; The Man had died before the search ever began; The Man had a war fleet and was coming back upon them."

One hundred light years and eight centuries -- a mere niche in space, a flicker in time, on the scale of space operas. Further, the object of this manhunt is a single man, which tells us something about longevity in the distant future when this is set. Indeed, routinely long lives are a common feature of space operas, not necessarily for any reason more complicated than this: it allows a single protagonist to experience several long-lasting flights hither and yon.

From the above paragraph, reading between the lines just a bit, we can begin to grasp some points about the world to which we've been introduced. There was a war or revolution in the past, and "The Man" was on the losing side, which is why he went into hiding. He continues to be sufficiently dangerous that his sympathizers can with some plausibility claim he has raised a new war fleet. At any rate, the established powers -- his successors -- are looking for him.

We immediately have questions. Should our sympathies be with him or with his pursuers? Is he more like Eichmann in Argentina, or Jean Valjean, condemned over a stolen loaf of bread? Related: what do they plan to do when they find him? Assume he has no warfleet -- assume he is a man living an unremarkable life in an unremarkable place when they find him. What then? Summary execution? A trip "home" (wherever that is) for trial? Something else?

I won't spoil it. If your interest is piqued, the book is here.

That is the meaning of the term "space opera."