From: Sam E. Antar [mailto:sam@whitecollarfraud.com]
Sent: Monday, January 28, 2008 7:22 PM
To: Patrick Byrne
Cc: israelk@sec.gov
Subject: Overstock.com Fourth Quarter Fiscal Year 2007 Earnings Call

Dear Mr. Byrne: This is in response to your email and post on the InvestorVillage Board (see below). At your third quarter fiscal year 2007 earnings conference call, you had asked if I was on the line and said that you would accept questions from me if I was on the conference call. If that statement at the last conference call was not intended to intentionally mislead your shareholders, I would expect that you would welcome my participation at Wednesday’s call on an equal footing with all other participants.It is highly irregular for a participant in a conference call to be singled out and limited to three questions posed in advance, each consisting of 25 words or less. I believe that such a condition would be at variance with the principles of free and full disclosure required by the securities laws at conference calls. You appear to be imposing conditions on me that are not imposed on other conference call participants. I will not accept special conditions that are not imposed on other participants in the conference call.Accordingly, I again request that I be permitted to participate in this conference call on an equal footing with all other participants.I await your response.Sincerly,

Sam Antar

Original email from Sam E. Antar to Patrick Byrne (CEO of Overstock.com): From: Sam E. Antar [mailto:sam@whitecollarfraud.com]
Sent: Monday, January 28, 2008 4:10 PM
To: ‘Patrick Byrne’
Cc: ‘Kevin Moon’; ‘Joseph Tabacco’; ‘Clay Corbus’
Subject: Overstock.com Earnings Call on 01/30/08Patrick Byrne:

Can I participate in Overstock.com’s earnings conference call scheduled for Wednesday, January 30, 2008 at 11:00 ET? Please let me know by tomorrow morning.

Regards,

Sam E. Antar

E-Mail: sam@whitecollarfraud.com

Web Site: www.whitecollarfraud.com

Blog: www.whitecollarfraud.blogspot.com

Patrick Byrne’s email response to Sam E. Antar

From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Monday, January 28, 2008 7:21 PM
To: Sam E. Antar
Subject: RE: Overstock.com Earnings Call on 01/30/08

Sam,

http://www1.investorvillage.com/smbd.asp?mb=3532&mn=13943&pt=msg&mid=3984919

Peace baby.

Patrick

Patrick Byrne’s InvestorVillage message board post (under the alias Hannibal) linked to in Mr. Byrne’s email response above:

Dear Sam,

Sure, you are welcome to participate: please send me your top three questions (in the interest of avoinding your endless “Do you pick your toes in Poughkeepsie” rants, please limit them to 25 words each, and know that I will treat compound questions as multiple questions).You know my email (N.B. your email address for Clay is out-of-date).

Your friend,
Patrick

The proliferation of unsettled trades in a firm’s stock disrupts the market’s ability to find the true market-clearing price for that stock. As a result, a troubled firm that comes under such an attack will be prevented from selling any stock into the capital market in order to raise capital to fund its ongoing operations. Similarly, healthy firms cannot sell additional stock to raise capital to fund their expansion. In both cases the parties engaged in this crime will shelter themselves under ideology that runs, “These are crappy companies that do not deserve to make it!” They forget that in a free market operating under the rule of law, such questions are to be answered by the market, not by the market with one side of it being ale to manipulate prices. 

Convincing the reader of this can be accomplished through intellectual argument, which I will provide in due course in this section.

For now, however, I would like to proceed by first offering links to mainstream journalism that describes how this practice can achieve its evil effects. I am arguing, I know, the economic equivalent of saying, “Martians walk among us,” and I have learned that it is easier to do so if the reader first sees that other capable, serious, mainstream publications have glimpsed the Martians too, before I try to expose their plot. So first, please consult these sources:

• This article from Bloomberg Magazine.
• This Bloomberg Special Report (nominated for an Emmy for long-form investigative journalism)
• This Wall Street Journal article from summer, 2007 .
• This article from Time Magazine, September 2008.

Next will come a series of case studies about various well-known firms that have been affected by failures-to-deliver in their stocks (”failures to deliver” being, as the reader knows by now, the residue of naked short selling).
For the last part of this chapter, I will explain why it has taken so long for the finance guys to understand this problem.
 

I mention on the front page of Deep Capture that I am writing these chapters one-by-one, section-by-section, and not in any special order (at least, not in one I will reveal here).

You are reading this because I have yet to post an opening blog for the chapter, “Corporate Governance Has Become a Hoax.” That’s OK: continue clicking down the list of chapters, as I am adding content to some of the later ones first. Check back in a few weeks for the first blog of this chapter.

Regards,
Patrick

PS If you don’t want to wait, you can get a great explanation from this Bloomberg article on the Corporate Voting Charade.

For reasons that will eventually become clear, in early 2005 I began to believe that the SEC was behaving oddly, that is, in a manner inconsistent with its duties as a regulator. By the summer of 2005 I began publicly stating two hypotheses for this behavior. The first was that the SEC had been captured; I will explain the second in Deep Capture’s Chapter 7, “Unsettled Trades and Systemic Risk“.

Shortly after I started raising the possibility of the SEC’s capture, an SEC Senior Investigator named Gary Aguirre began echoing it, first in a September, 2005 letter to SEC Chairman Christopher Cox, and then in May 2006 in asecond letter to the United States Senate. Mr. Aguirre has informed me that he wrote that first letter to Chairman Cox without knowledge of my own public statements, which preceded his by a month only.

The proximate cause of Aguirre’s complaint was that an insider trading investigation he had been conducting into the activities of Pequot Capital, a powerful Connecticut hedge fund, was derailed (he claimed) once the trail led towards John Mack, the influential boss of Morgan Stanley. Mr. Aguirre claimed that his SEC bosses had maneuvered to kill his investigation while warning Aguirre that Mr. Mack had too much “juice” to pursue.

The more general theme of Mr. Aguirre’s letter, however, was the capture of the SEC by lawbreakers to the detriment of law-followers. As former SEC Senior Investigator Aguirre wrote to the United States Senate:

“…is the SEC adequately protecting the nation’s capital markets and their participants from the risk of manipulation and fraud by the nation’s 11,500 hedge funds? The answer is no.

“And the answer is no whatever facts you consider. It is no when the SEC fails to recognize any hedge fund fraud or manipulation against other market participants for a quarter century: from 1979 to 2004. It is no when the SEC fails to protect mutual fund investors when billions of dollars are siphoned from their accounts by hedge funds. It is no when you compare what the SEC is doing and saying about hedge funds with what its counterparts in Europe are doing and saying….It is a deafening no when the SEC halts an insider trading investigation of one of the nation’s largest hedge funds because the suspected tipper has powerful political connections, as they did with the investigation assigned to me…

“I believe our capital markets face growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money – then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash…. There is growing evidence that today’s pools-hedge funds-have advanced and refined the practice of manipulating and cheating other market participants…

“Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task. Powerful interests want the SEC to stay just the way it is or, better yet, to become even weaker. Those interests are not just the hedge funds. They include the financial industries that are receiving tens of billions of dollars in revenues for helping hedge funds cheat other market participants or close their eyes to the carnage. At the top of that list are the big investment banks, e.g., Goldman Sachs, Morgan Stanley, Merrill Lynch and Bear Stearns. Those interests know how to reward friends and punish perceived enemies. Their tentacles reach far. They stopped the hedge fund investigation I was assigned to conduct. They cost me my job.”

It would be difficult to devise a more eloquent statement of regulatory capture, or one more informed by experience, than this letter from SEC Senior-Investigator-turned-whistle-blower Gary Aguirre.

In June 2006, Mr. Aguirre was asked to testify before the U.S. Senate Judiciary Committee, to which he had delivered boxes of evidence (which he apparently carried out of the SEC). The U.S. Senate Judiciary Committee began demanding answers of the SEC. The SEC stalled while threatening criminal charges against Aguirre for his whistle-blowing, prompting U.S. Senator Charles Grassley to write in August a remarkable letter lecturing the SEC on congressional oversight and the U.S. Constitution.

In September 2006, the Senate wrote two letters pressing the General Accounting Office to conduct a formal investigation into Aguirre’s allegations of regulatory capture and the overall regulatory framework of our country’s capital markets (see here and here).

In October 2006, Gretchen Morgenson and Walter Bodganich of The New York Times began to report on the serious implications of this story. Their reporting was able, and took Mr. Aguirre’s allegations seriously.

On December 5, 2006, however, New York Times reporter Floyd Norris wrote a story that was dismissive of Mr. Aguirre’s allegations and derisive towards his motives (“Get a Job, then Sue Because You Were Not Hired Earlier”). Reporter Norris included no quote from Mr. Aguirre and precisely one sentence (”He contends that the S.E.C. was unwilling to go after John Mack, now the chief executive of Morgan Stanley, because of his political clout”) that reflected Aguirre’s position. Norris made no mention of Aguirre’s deeper claims about the capture of the SEC by “Powerful interests [which] want the SEC to stay just the way it is or, better yet, to become even weaker,” nor about its failure “to recognize any hedge fund fraud or manipulation against other market participants for a quarter century,” nor about the systemic risk thereby engendered (we will see that such omissions occur with remarkable consistency in our mainstream financial press).

However, Norris did find space to give liberal coverage to the SEC’s position , including an SEC statement denying Aguirre’s claims, the SEC’s reasons for that denial, the position of SEC Enforcement Director Linda Thomsen reaffirming the SEC’s position, the same from an EEOC judge, two rhetorical questions aimed at deriding Mr. Aguirre’s actions, and a quote from an SEC lawyer attacking Aguirre. Mr. Norris closed by saying of that attack by the SEC’s own lawyer, “It certainly sounds as if that opinion was (sic) correct.”

Such was the impartial approach taken by “our newspaper of record.”

This mocking and derisive piece appeared on The New York Times on the day that Gary Aguirre testified at a US Senate hearing. The U.S. Senate Judiciary Committee took Mr. Aguirre’s testimony (see parts 1 and 2). Several SEC officials appeared to refute Mr. Aguirre’s claims (click here). Giving testimony that drew sharp replies from the U.S. Senate Judiciary Committee members, these SEC officials contradicted each other and their own email records. The Inspector General of the SEC refused to answer questions on the advice, he said, of the U.S. Department of Justice.

Read that again: our capital markets are regulated by the SEC, and the Inspector General of the SEC, in effect, its “Internal Affairs” department, invoked the 5th Amendment’s protection against self-incrimination.

Is that bad?

When The Wall Street Journal played its normal and customary role of downplaying these events on the behalf of Wall Street, it drew a public letter from Senator Grassley rebuking them for outright misdirection.

In January 2007, the Senate released a preliminary report. Marcy Gordon of AP News summarized it:

“an official review raises serious questions about the Securities and Exchange Commission’s handling of an insider-trading investigation and the possibility of a cover-up amid allegations of political interference….After taking testimony and reviewing thousands of documents, many of them provided by the SEC, the judiciary panel’s preliminary findings show ‘extraordinarily lax enforcement by the SEC and … may even indicate a cover-up by the SEC,’ [Senator Arlen] Specter said. The SEC’s handling of the matter, including a review of the attorney’s allegations by the agency’s inspector general, ‘has all of the earmarks of the obstruction of justice’, he said.”

Again, when a United States senator, highly respected by both parties, suggests that the regulator of the capital markets has taken part in a cover-up and the obstruction of justice, is that bad?

In March 2007, Mr. Aguirre’s allegations were covered sympathetically in a PBS news story which was later nominated for an Emmy for investigative journalism.

In August 2007, the final report was released under the imprimatur of the Committee on Finance of the U. S. Senate. A good summary of the report can be found in this Reuters story.

The Senate’s report stated the following conclusions (emphases in the original):

“Staff Attorney Gary Aguirre said that his supervisor warned him that it would be difficult to obtain approval for a subpoena of John Mack due to his ‘very powerful political connections.’ Aguirre’s claim is corroborated by internal SEC emails, including one from his supervisor, Robert Hanson. Hanson also told Aguirre that Mack’s counsel would have ‘juice,’ meaning they could directly contact the Director or an Associate Director of Enforcement.

“SEC management delayed Mack’s testimony for over a year, until days after the statute of limitations expired. After Aguirre complained about his supervisor’s reference to Mack’s ‘political clout,’ SEC management offered conflicting and shifting explanations.

“The SEC fired Gary Aguirre after he reported his supervisor’s comments about Mack’s ‘political connections,’ despite positive performance reviews and a merit pay raise.

“After being contacted by a friend in early September 2005, Associate Director Paul Berger authorized the friend to mention his interest in a job with Debevoise & Plimpton. Although that was the same firm that contacted the SEC for information about John Mack’s exposure in the Pequot investigation, Berger did not immediately recuse himself from the Pequot probe. Berger ultimately left the SEC to join Debevoise & Plimpton. When initially questioned, Berger’s answers concerning his employment search were less than forthcoming.

“The SEC’s Office of Inspector General failed to conduct a serious, credible investigation of Aguirre’s claims.”

The conclusion of the Senate report (page 104) expands on this point regarding the Office of the Inspector General, that part of the SEC tasked with preventing precisely the regulatory capture implicated in these events:

“The OIG investigation into Aguirre’s allegations was flawed from the beginning and hindered by missteps during the entire process. Every step seems to have been based on a desire to go through the motions and close the case. How the OIG could assess Aguirre’s credibility without ever speaking to him remains a mystery. One of the major problems with the OIG seems to be the perception within the SEC regarding the independence of the office and whether or not employees who approach the OIG are treated fairly. We interviewed a number of current and former SEC employees who indicated that the OIG is not well respected and that there is a general reluctance to approach the OIG with concerns. Aguirre was no exception…. Based on our review, the OIG at the SEC seems to have failed in its mission. Other SEC employees perceive it as a tool of management, used for retaliatory investigations against disfavored staff.”

The New York Times summarized all of this in a story with the tepid headline, “S. E. C. Erred on Pequot.” Indeed, if derailing investigations into wealthy elites with “juice” while negotiating high-flying jobs with their white shoe law firms as an Inspector General conducts a half-hearted investigation before whitewashing the cover-up-firing of an investigator too recalcitrant to go along for the ride all count as “erring”, then yes, The New York Times is correct, the SEC “erred” here.

In late July, 2007, SEC Chief Economist Chester Spatt resigned suddenly.

The U.S. Senate report was released on August 3, 2007. That afternoon, Walter Stachnik, Inspector General of the SEC, also resigned (according to this Forbes story, he had held that position since its creation in 1989).

The following Thursday, August 9, 2007, SEC Commission Roel Campos resigned as well.

That same day news leaked of the impending resignation of a second commissioner, Annette Nazareth (who, as we shall see later, is via marriage directly linked to the issue whose exposure is the ultimate purpose of this blog: unsettled trades in our settlement system).

The SEC is overseen by seven people: a Chief Economist, an Inspector General, and five commissioners. Of them, the Chief Economist, the Inspector General, and two of the five commissioners resigned within a three week period surrounding the August 3, 2007 publication of a report by the Senate Judiciary Committee of its investigation into the political capture of the SEC. I do not know the degree to which that constellation of facts is meaningful, nor do I wish to disparage any individual’s record of public service. Yet I trust that at this point my statement, “The SEC, regulator of our nation’s capital markets, has been at least partially captured by financial elites,” is a claim the merit of which the reader will now consider.

Because Mr. Aguirre was thoroughly vindicated by an investigation of the United States Senate, I thought it would be interesting to know how Floyd Norris of The New York Times felt about the hatchet job he had written on Mr. Aguirre. Given that by blowing the whistle on his former employer Aguirre had risked fortune, reputation, and perhaps even his freedom, surely a thoughtful, fair-minded journalist at “our newspaper of record” would welcome the opportunity to reflect on his mocking and derisive attack on Aguirre. So I wrote Mr. Norris a short note that contained a link to his December 5, 2006 story, and the simple question, “How do you feel about this piece now?”

The response I received from Mr. Norris was instructive:

“I have read our story on the Senate report, but not the report itself, and that does not change my opinion on Mr. Aguirre. I did not conclude in the blog that he was or was not fired for illegitimate reasons. The Senate thinks he was, judging by the article. The blog item remains accurate, to the best of my knowledge.”

Another New York Times reader emailed Mr. Norris a similar question, and forwarded to me the short response Mr. Norris sent him:

“And what, precisely did I write about Aguirre that was wrong?”

That is, concerning his own piece lambasting a tiny section of Mr. Aguirre’s position while ignoring all of its crucial elements, and which confined itself to parroting criticisms of him by the SEC, its director of enforcement, and its lawyer, and asking derisive rhetorical questions about Aguirre, and which then ended with Mr. Norris opining that, “It certainly sounds as if [such criticism] was correct,” now, in the face of a Senate report vindicating Aguirre and triggering the disintegration of the highest echelon of the SEC, New York Times senior reporter Floyd Norris can bring himself to express neither remorse nor contrition. Please stick another pin in this as an expression of the standards of journalism evinced by our financial media in general and “our newspaper of record” in particular, for it is a topic to which I shall have cause to return.

In any case, if I may assume that the reader judges my claim regarding the regulatory capture of the SEC to be worthy of at least modest consideration, then I may in good conscience turn to another aspect of that alarm raised to the United States Senate by erstwhile SEC Senior Investigator Aguirre:

“I believe our capital markets face growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money – then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash…. There is growing evidence that today’s pools-hedge funds-have advanced and refined the practice of manipulating and cheating other market participants …”

In the late 19th century the work of governing the United States began its partial shift from legislatures to regulators. In 1887 the U.S. Interstate Commerce Commission was founded, and has served as a cautionary tale ever since. The ICC was established to regulate the railroads but was quickly subverted by the industry it was supposed to oversee. That happened because its staff learned that if they “regulated” the railroad industry (and later, the trucking industry) by fixing prices artificially high and restricting new entrants, so that the industries they regulated made super-profits, then cushy jobs and directorships would await them upon their retirement.

Of this process Milton Friedman wrote:

“It took about a decade to get the commission in full operation. By that time the reformers had moved on to their next crusade. The railroads were only one of their concerns…. For the railroad men the situation was entirely different. The railroads were their business, their overriding concern… And who else had the staff and expertise to run the ICC? They soon learned how to use the commission to their own advantage.

“The first commissioner was Thomas Cooley, a lawyer who had represented the railroads for many years. He and his associates sought greater regulatory power from Congress, and that power was granted. As President Cleveland’s Attorney General, Richard J. Olney, put it in a letter to railroad tycoon Charles E. Perkins… only a half-dozen years after the establishment of the ICC:

“‘The Commission, as its functions have now been limited by the courts, is, or can be made, of great use to the railroads. It satisfies the popular clamor for a Government supervision of the railroads, at the same time that the supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things. It thus becomes a sort of barrier between the railroad corporations and the people and a sort of protection against hasty and crude legislation hostile to railroad interests… the part of wisdom is not to destroy the Commission, but to utilize it.’” (Free to Choose, pages 196-197)

This idea, that a body that was set up to protect society from certain agents could be captured by those agents and turned against society, is the essence of the concept of “capture” (when it concerns regulators specifically, it is referred to as “regulatory capture”). Its pedigree spans the political spectrum from Montesquieu and the Founding Fathers to Karl Marx, and from economists such as Stigler and Friedman (who are generally – if somewhat inaccurately – associated with the Right), to Harvard Law School’s Jon Hanson. I will review the evolution of this idea before turning to recent events involving the Securities & Exchange Commission, the regulatory body overseeing the US capital markets.

The Federalist was a series of 85 essays written by James Madison, Alexander Hamilton, and John Jay (all sharing the nom de plume, “Publius”) published over the second half of 1787 in an effort to convince New Yorkers to ratify the recently drafted US Constitution (click here for all references to The Federalist). The most famous of these essays is Federalist #10, written by James Madison, which took up the subject of special interests, or what he called “factions”:

“By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.”

Madison recognized that in a free society special interests are unavoidable (”Liberty is to faction what air is to fire, an aliment without which it instantly expires.”) Interestingly, he located the source of factions in the competition among rich and poor, landed, manufacturing, merchant, and financial classes:

“But the most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation…”

Madison foresaw that these factions represented the greatest threat to the democratic experiment:

“The friend of popular governments never finds himself so much alarmed for their character and fate, as when he contemplates their propensity to this dangerous vice… The instability, injustice, and confusion introduced into the public councils have… been the mortal diseases under which popular governments have everywhere perished.”

So much weight did Madison assign to the problem of special interests that he held the greatest virtue of the proposed Constitution its ability to check them (”Among the numerous advantages promised by a well constructed Union, none deserves to be more accurately developed than its tendency to break and control the violence of faction.”) It was Madison’s hope that the proposed Constitution would accomplish this by creating a republic so large and containing such a multiplicity of special interests that they would cancel each other out (”…the society itself will be broken into so many parts, interests, and classes of citizens, that the rights of individuals, or of the minority, will be in little danger from interested combinations of the majority.”)

Yet Madison’s argument in Federalist #10, that in the republic for which he was advocating special interests would be checked by their mere number, is strikingly half-hearted. Madison himself seems to have guessed that on the subject of controlling “the violence of faction” he was writing a check that might not cash:

“The valuable improvements made by the American constitutions on the popular models, both ancient and modern, cannot certainly be too much admired; but it would be an unwarrantable partiality, to contend that they have as effectually obviated the danger on this side, as was wished and expected.”

We shall see that Madison was correct, to a depth he could not have fathomed.

Next, I ask the reader to consider Karl Marx. That may seem an odd request, but it should not be. As the highly-regarded conservative economist Thomas Sowell has written, “…[Marx's] intellectual legacy, especially his insights concerning history, are now part of the general intellectual equipment of modern man” (Marxism, page 187). A significant part of that legacy was Marx’s view that what we experience as law, culture, and civil society are actually cloaks for powerful economic interests wrestling to determine social outcomes. Thus the Marxian sense of “capture” runs deeper than mere influence with politicians or regulators. For Marx, civil society was the public face of an occupation by a hostile ruling class. As Marx & Engels put it in The German Ideology (1846):

“The ideas of the ruling class are in every epoch the ruling ideas.”

This Marxian tradition lives on, somewhat notoriously, at our universities, in courses and departments using the word “critical” in their name. For example, a generation ago the Critical Legal Studies tide came in at Harvard Law School. Its main figure, Roberto Mangabeira Unger, explored law as a discourse shielding from public view the reality of power politics, that reality being White, male, wealthy “elites” cloaking their control of society in the rule of law’s false neutrality.

The CLS tide went out by the 1990’s. However, the recent work of Harvard Law Professor Jon Hanson (a self-defined “Critical Realist,”) moves past legal analysis to postulate a fuller concept of “deep capture” that resembles Marx’s original critique of civil society. Hanson has raised the possibility that powerful economic interests have captured not only regulators and legislatures but journalism, universities, and popular culture (see “The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture”). By way of example, Hanson argues with respect to a certain school of legal thought (”Law and Economics”) that over the course of the last generation has come to dominate American jurisprudence, that its triumph has been engineered by powerful groups with an interest in its success. If Hanson is right, the success of the Law & Economics movement in US law schools is less a function of its theoretical strength than it is a function of the fact that it favors elites, a number of whom have funded conferences, journals, professorships, and even law school buildings, in order to allow a shoddy theory to emerge as though it were the winner in a neutral marketplace of ideas.

“But neither considers that such profound effects might well have been the precise ambition of powerful individuals, entities, and groups in our society with the means to influence those important institutions through the situation…
“As we have been arguing, the situation is often as significant as it is invisible. Where Posner, Ulen, and most legal scholars tend to see a marketplace of ideas in which supply-side participants determine the winners, we see a marketplace of ideas in which demand-side actors are wielding an immense, unseen influence over the playing field and, in turn, the winners.”

I believe Hanson pushes on this idea too hard: that is, I believe that Law & Economics is a consistent, satisfying theory which produces good results for society, and its success cannot be dismissed as having been bought-and-paid-for. However, our disagreement on that point is not relevant here. I bring up Hanson because I think it worth considering the manner in which Hanson asks us to imagine our social world. Could it be possible for some agents to capture not only regulators and politicians but the institutions of our civil society, such as the universities, the press, and the intellectual class? Could the capture run so deep that it would become nearly impossible to reason one’s way out of it? In other words, could it be possible that our social world resembles the world depicted in the movie The Matrix, dominated by a machine that taps us for its energy while deluding us about our situation, until we heed rare glimpses of evidence that might wake us to our fate?

Please put a pin in this notion of “deep capture.” I will return to it in due course.

The reader who wishes to explore the concept of “capture” should see George Stigler’s seminal 1971 paper, “The Theory of Economic Regulation” (one of the works for which he won his Bank of Sweden Prize in Memory of Alfred Nobel), and Laffont & Tirole’s 1991 paper, “The Politics of Government Decision Making: A Theory of Regulatory Capture.” For information on regulatory capture in developing countries, see Columbian researcher Frédéric Boehm’s “Regulatory Capture Revisited – Lessons from Economics of Corruption”, along with World Bank economist Anwar Shah’s “Corruption and Decentralized Public Governance”. Please note that throughout this literature there exists a theme of staff moving back and forth between a regulator and the industry it oversees, and the pathological incentives thus created.

For our purposes, however, we need go no further. I wished only that the reader would come to see “capture” not as a fringe idea of paranoids. Capture threatens governments in every country. It was a primary concern for our republic’s founders, and it is a current concern of World Bank “institution building” programs. It happens in market and socialist economies. In this country it happens under Democrats and Republicans. It happens to regulators often enough that economists created a term (”captured regulator”) to describe it.

So when I claim that our financial regulator (the SEC) has been captured by the industry it regulates (Wall Street), I do so not from a desire to abuse or insult fine people engaged in public service. I wish merely to raise in a clinical and dispassionate way the possibility that what Madison saw as “the mortal disease[] under which popular governments have everywhere perished,” and what economists spanning the spectrum from Marx to Stigler to Friedman saw as a normal tendency of government, is also a possibility with regard to our own situation, and in particular, our own financial regulator. In fact, given that anybody trying to regulate Wall Street is trying to regulate some of the deepest pools of money in the world, would it not be extraordinary if it were not the target of regulatory capture?

All of which leads us to the curious case of Mr. Gary Aguirre, formerly of the SEC.

The second time I heard the joke I was standing on a hilltop in the middle of the night overlooking Kabul, Afghanistan in February, 2004. I finally got the joke that second time I heard it, but only because I had just had the same gag pulled on me while appearing on CNBC’s Kudlow & Cramer show a few weeks earlier. I’ll start there.

Overstock had gone public in May 2002 and, by the end of 2003, in the eyes of some, it was doing well. In 2003, its fourth year of business, Overstock’s revenue was just shy of $300 million. Many competitors had come and gone, amassing losses of half-a-billion or more, before shutting their doors. Amazon, the 800-pound gorilla in our industry, had burned $3 billion in its start-up cycle before having a profitable quarter. By comparison, Overstock had lost $68 million but had already had one GAAP-profitable quarter (“GAAP” = “Generally Accepted Accounting Principles,” the strictest accounting measure of profitability). In addition, Overstock had had two EBITDA-positive quarters (”EBITDA” = “Earnings Before Interest, taxes, Depreciation, and Amortization,” a somewhat looser standard that some on Wall Street apply to companies on the grounds that it better approximates the “true” economics of a firm). Moreover, in 2002 Overstock had a full year (2002) of positive operating cash-flow (cash-generating ability is another way, and to some the people, the most important way, of measuring a firm’s real economics). In addition, Overstock had ended 2003 with a bang-up quarter, growing 94% and generating $21.9 million in operating cash flow for Q4. All this occurred while we were jockeying around capital and infrastructure that were miniscule in comparison with the hundreds of millions, or even billions, that “Wall Street’s darlings” had been employing.

As was becoming my custom, at the end of the quarter I wrote a lengthy shareholder letter explaining what was going on in the business, where my colleagues were doing well, where I was screwing up, and projects the company needed to accomplish in the future. In that letter I mentioned, “Gross profit,” a term about as common in the discussion of financial statements as, I’d estimate, the term “wide receiver” is in discussions of football (in the case of my letter, 2.5% of the letter concerned gross profit).

The day our earnings press release appeared (with my letter embedded in it), Larry Kudlow & Jim Cramer of CNBC invited me to appear on their TV show. I had been on Kudlow & Cramer once or twice by then and they seemed like smart, decent fellows, so I agreed, and drove to the studio in Salt Lake City from whence one does remote interviews. This interview was different from our prior ones, however, in that they attacked me aggresively. The basis of their attack was my use of the mysterious phrase, “Gross profit,” in my discussion of Overstock’s financials. Cramer in particular berated me as if he had caught me in some heinous incantation. They gave me a brief moment to respond, then quickly signed off.

As I drove away from the studio feeling somewhat mystified, my cell phone rang. The caller was a man from deep within Wall Street “smart money” circles, someone known widely within the hedge fund community, who has been friendly to me, and even has looked out for me when he could. He speaks in charming if profane emphatics.

He said, “You know what just happened, don’t you?”

“What do you mean?” I asked.

“You want to know what just happened? I’ll f—ing tell you what just happened. Here’s how it works. Those two guys are part of the short-seller community. Cramer especially is part of this ring of hard-charging short-sellers on Wall Street. I’ll bet you anything that one of his buddies is short your company. Whoever it is saw your earnings release, saw you blew your numbers away, got on the phone to Cramer and said, ‘Don’t you dare let this thing start moving. Don’t you f—ing dare let this move!’ So Cramer goes on TV and screams that nonsense at you. I bet my last f—ing dollar that’s what happened. It’s been like this all my career, but it’s never been like this.”

Later that week, a fund manager who had seen the interview told me, “That was the most unprofessional interview I have ever seen in my life.” In time, others would mention it to me, so that months and even a year later, I’d meet people who said, “I saw you on with Cramer one time. That was the craziest interview I ever saw.”

That was the first time I heard the joke, but I did not get it until I heard it the second time, a few weeks later, in February, 2004, while I was in Kabul (because it is a natural next question: I was in Afghanistan searching for artisans to become suppliers for Worldstock). Our PR Director at the time, a calm, mellow Californian named “Scott,” had sent an urgent message saying that a BusinessWeek reporter, Tim Mullaney, was going to write a story attacking the price comparisons listed on Overstock’s website. Mullaney was asking about a set of products which were precisely the same products that another two reporters had called asking about that same week. Since Overstock had about 12,000 products at the time, the coincidence was odd. In addition Scott said, Mullaney was acting as though he wanted us to know he planned on writing a hatchet job.

Scott wanted me to contact Mullaney at BusinessWeek. I had a rented satellite phone in my luggage, so I charged it and walked up a hill overlooking my hotel on the outskirts of Kabul, and called Tim Mullaney at BusinessWeek’s offices in New York.

As background, here is the lowdown on price comparisons. Price comparisons are imperfect because price data is imperfect. Overstock does the best it can to give real price comparisons, updating data as we learn it (electronic products are the most troublesome because prices can drop suddenly when new models are introduced). Above all, Overstock is clear about its price comparison methods. Every month Overstock sells a million items, and a few dozen times a customer informs us that a price comparison is wrong, at which point we update our system with the new data, if we have not already caught it ourselves. This always seemed like a pretty fair system (but recently Overstock adopted Amazon’s price comparison methods).

So in February 2004 I was standing in the wind on a hilltop outside Kabul in the middle of the night trying to explain this to a BusinessWeek reporter through the static of a satellite phone. As I spoke he started saying, “Uh-huh, uh-huh, uh-huh.” I paused, thinking he was indicating he understood and had another question to which he wished to move on, but none came. “I’m sorry, were you asking me something?” I asked.

“No, no, go ahead, I’m with you,” Mullaney answered, adding “Uh-huh, uh-huh uh-huh” as soon as I started to speak.

Mullaney asked me about a few electronic products, and I explained to him the issue with electronics: that when a manufacturer introduces a new product the comparison price on the older product drops, and can catch Overstock off-guard until we catch the change ourselves or a consumer notifies us. He had an example of a competitor selling a television for a price that was $20 below Overstock’s: he had not factored in the fact that they were charging $100 shipping, and Overstock charged $2.95 shipping, so in reality their real price was $77 higher than Overstock’s. I began to explain this to him. “Uh-huh uh-huh uh-huh,” he said, cutting me off.

I signed off, perplexed.

The next day I got a message from that same man within Wall Street’s “smart money” set, the one who had called me after the bizarre Kudlow & Cramer interview. His message to me in Kabul was that the word was out around Wall Street that negative stories on Overstock were about to appear in BusinessWeek and The New York Post. He even predicted the days they would appear and the lines of attack.

The stories did subsequently appear on the days he predicted they would, and they said just what he had told me they were going to say.

That was odd, because hedge funds are not supposed to know the timing and content of articles coming out in the press before the general public does. I’m not sure, but I think I read that somewhere.

That’s when I got the joke. It was the second time I’d heard it (Kudlow & Cramer was the first) but I’ve always been a bit slow on the uptake.

Since that time there have been many strange moments and I’ve learned a lot. I will not try to convince you of anything, but for the rest of this chapter I am going to tell you that same joke, in numerous ways. Most of the things I write here you will be able to check, but some you will not, in which case you’ll have to decide for yourself if I am telling the truth.

Even if you never heard of or cared about Overstock.com, you should know this: if you invest in the US stockmarkets, then whether or not you get this joke, it gets you.

An Overview of Deep Capture

My argument has been widely misreported since I began making it in 2005. Therefore I am stating it here as nine straightforward claims that will be difficult to misunderstand or misconstrue. I have grouped them into those describing the setting, the crime, and the cover-up.

Chapters 1-3: The Setting

Chapter 1 – The Players

Over the last twenty years Wall Street has come to be dominated by a group of players who first pushed the laws to their limits, then openly flouted them until they became blurred beyond the possibility of enforcement.

Chapter 2 – The Journalists Tried to Be Players But Became Pawns

Over the last fifteen years the standards of professional journalism have been eroded by a group of reporters who have tried to appear as players, but have become pawns. A significant fraction of the financial journalists on the hedge fund beat have become shills of a handful of hedge funds.

Chapter 3 – Our Captured Federal Regulator The SEC

The Securities & Exchange Commission, regulator of our nation’s capital markets, has been captured by financial elites to the point that it favors Wall Street over Main Street.

Chapters 4-7: The Crime

Chapter 4 – The Crime: “Naked Short Selling” and Other Insincere IOUs. A crime is routinely occurring in our capital markets. Small loopholes created to provide “fault tolerance” in our nation’s stock settlement system are being exploited by Wall Street brokerages and their hedge fund clients to steal billions of dollars.

Chapter 5 – How Corporate Democracy Became a Hoax. One side effect of this crime is that corporate governance in America has been shattered.

Chapter 6 – Ruined Firms & Looted Pensions Another side effect of this crime is that many companies (often innovative tech and biotech companies) have been damaged or destroyed, while the Americans who invested in them were robbed, generally with no awareness on their part beyond the loss of their savings in the stockmarket.

Chapter 7 – Unsettled Trades & Systemic Risk. A third side effect of this crime is that it has created in our country’s financial system a crack so deep it could trigger a systemic collapse.

Chapters 8 and 9: The Cover-Up

Chapter 8 – The Deep Capture Campaign. The financial media are incapable of bringing a critical mindset to this issue because of their too-cozy relationship with Wall Street (several financial journalists actually seem to be engaged in blue-smoke-and-mirror attempts to obfuscate issues on behalf of the financial elites who turn up wherever this crime is occurring). As a result, the crack in our financial system appears to be reaching catastrophic proportions.

Chapter 9. Within “social media” (blogs, message boards, and wikis) evidence for the preceding points has been pieced together, but there is a campaign to hijack the social media discourse, organized by the same people who are profiting from the crime.

To many, the preceding will appear a bald and unconvincing tale, too fantastic for even the loopiest Hollywood thriller. When I first began discussing these claims, the New York Post ran a photo-shopped picture of me with a flying saucer coming out of my head. For two years the profession of financial journalism has demonstrated that in its view there are, in fact, two subjects beyond critical examination: Wall Street, and the profession of financial journalism.

In the chapters of Deep Capture that follow I will examine evidence that has emerged over the last two years and the degree to which it confirms or falsifies these claims.

I thank you for the courtesy of your visit and the gift of your attention.

Respectfully,

Patrick M. Byrne, Ph.D.

When you or I travel to another country, the first thing we do when we land is change some US dollars into the local currency. Perhaps you change enough to get a cab to the hotel, go out and buy a meal, etc. For the duration of your stay you keep changing your dollars into the local currency to get around. Then when you are ready to leave, you take whatever you have left and you convert it back into dollars, or spend it, or give it away, and board the plane back to the United States.

Yet imagine that there are some travelers to whom special privilege is granted. When they go to a foreign country, they are allowed to take a small machine that prints out the local currency. If they are in Paris, it prints out Euros. If they are in London, it spits out British Pounds. When in Mexico City, it prints pesos. And so on and so forth. On every trip, however, this special “currency machine” keeps track of how many Euros, pounds, or pesos it has spit out. When its owner goes to the airport to leave the country, a government official reads the machine’s printout and makes the traveler settle his account. For example, if the traveler visits Paris, then as he stands in the airport ready to depart, the official reads his machine and says, “Monsieur, you printed out €1,000 (one thousand euros) while you were here. At today’s exchange rate that is equal to $1,500 US.” The traveler hands over US $1,500 in cash, then boards his plane for the US.

Why are such boxes allowed? Because the people to whom this privilege is granted are wealthy hedge fund managers and Wall Street brokers. It is more convenient for them to carry these currency machines, and print what is in effect “temporary” local currency, than to do what the rest of us do, changing currency every morning at our hotel’s front desk. Besides, they’re rich. Everyone knows they are good for it: in fact, when one of them arrives in a new country, before he gets to use his curency machine he has to prove that he is wealthy, so that no matter how much local currency he prints and spends, he’ll have the dollars to buy them all back at the end of his trip, at current exchange rates. That way, when he is ready to leave the country and at the airport his machine is read to find out how much of the temporary local currency he printed on his visit, and that number is converted into US dollars, he can simply reach into his valise and pull out the requisite cash, even if it is thousands, or millions, of US dollars.

Imagine now that between the two Caribbean nations of St. Bart’s and St. Maarten’s there is a small island nation, St. Smallcap. It may be poor in comparison with the United States, but it has a working, even vibrant, economy. Its currency trades at parity with the US dollar (that is, one of the first converts to one of the other, and vice-versa). No one knows what the future holds for St. Smallcap. Perhaps it will stay as it is for generations. Perhaps it will develop into a prosperous island nation like Bermuda. Maybe it will become a destitute, impoverished nation like many other small island nations. Perhaps it will become an economic powerhouse, like Hong Kong or Singapore. There is no way to tell.

One day, as if on cue, a dozen hedge fund managers and Wall Street bankers show up in St. Smallcap. No one thinks much of it as these fellows start driving around Smallcap with their special machines. They print off the local currency with great abandon, using that currency to buy drinks and dinners on the town, pay for taxis, and gamble at the casino. In time, they begin buying the island’s houses, cars, yachts, and cargo ships. They even buy Smallcap National Airline’s sole 727 jet. They buy anything that is not nailed down, paying for it all along with the local currency, which they print off their special currency machines as they need it.

After a few weeks something funny begins to happen. There is so much extra currency floating around, it begins to affect the economy. As everyone realizes that there is a lot of extra currency sloshing around the island, prices for goods rise in anticipation that Smallcap’s currency will become less valuable. It may even happen that prices soar, as they did in Weimar Republic Germany after WWI, in a bout of hyper-inflation. Of course, as this happens, the rate at which Smallcap’s currency can be exchanged against other currencies, including the dollar, collapses.

There is an even more insidious effect, however, that one can understand by thinking about the nature of prices. There are many ways to think about prices. Often we see them simply as obstacles preventing us from getting what we want (”Jim wants a new Mercedes but on his teacher’s salary he cannot pay the price.”) Another way to think of prices, however (a way many economists think of them), is to see prices as little bits of information passing back-and-forth around the economy, permitting millions of strangers to coordinate their economic activities. Prices for corn are going up and prices for wheat are dropping? That is a signal to farmers that they should cut back on wheat production and plant corn instead. Rents soar in a city while prices for office space stagnate? That is a signal that someone should convert some office space to apartments and condominiums. A city is washed out because of a hurricane, and prices for flashlights are soaring? That is a signal to surivivors within the city to share the scarce resource of flashlights, and a signal to outsiders to start trucking in flashlights for resale (i.e., “profiteering,” which to economists means, “responding quickly to price signals without regard for ethical concerns such as loyalty”).

Like any other normal economy, in order to function St. Smallcap’s economy relies on prices to pass information around the economy. The hedge fund managers and their special currency machines, however, print out so much of their “temporary” currency that Smallcap’s economy becomes awash in it. Imagine listening to a radio playing across the room while someone plays white noise in speakers set up next to your ears: you would not be able to hear what was being said. Similarly, this flood of “temporary” currency washes out the signals that prices normally carry within St. Smallcap’s economy. No one knows whether to grow wheat or corn, and since seed prices are rising but no one knows what income can be generated from any crop, fewer farmers plant anything. Savings drop: it makes less and less sense to save, because what is the point of delaying consumption today in return for a future benefit that cannot be estimated? Since less money is being saved, banks have less capital to loan to businesses to expand, or even maintain, current production. As a result, manufacturing on the island also collapses.

One can imagine a situation where, if Smallcap’s economy were small enough, and the Wall Street bankers and hedge funds swept down on Smallcap with enough currency-printing machines, that they could flood Smallcap with so much of its own currency that the price signals of the local economy would be mostly lost. The white noise of massive amounts of this “temporary” currency would disrupt real economic activity, like farming and manufacturing, until the economy of Smallcap cracked. Hyper-inflation, starvation, and mass unemployment might set in. People would begin trading anything they have in return for a ticket to flee the island.

Throughout it all, the Wall Street bankers and hedge fund managers continue using their machines to print local currency with which they can buy, buy, buy.

After six months, when nothing of value is left on the island that they do not already own, the bankers and hedge fund managers take everything they bought and load it onto their new cargo ships and yachts. They gather at the airport to board their new jet.

A government official arrives and sets about to find out how much of the local currency they printed while visiting the island. The official reads the print-out from each of their machines, sums it up and exclaims, “100 million!”

One hedge fund managers speaks for the rest: “Yes, but that is not 100 million US dollars. It is 100 million in your local currency. And while we have been visiting your country your local currency seems to have collapsed. That is hardly surprising, given that your farms are vacant and your factories are boarded up. It seems that on the international markets your currency is worth 1/10,000th of what it was worth when we arrived six months ago. Thus, in US currency, we owe you precisely… $10,000.” He flashes his thick wallet and counts out the sum. Laughing, his hedge fund colleagues and banker friends board their jet and take off, banking to watch their new cargo ships sail out of the harbor loaded with the wealth of the country, for which, in the end, they paid $10,000.

Imagine also that surprisingly few reporters seem interested in these events, or notice the pattern of it happening to one small island nation after another. Those who do notice it take it for granted that small island nations are supposed to be the way they are: destitute and impoverished. Only rarely does a reporter challenge the bankers and fund managers on their actions, but the financiers respond in unison so perfect it appears rehearsed, “Are you kidding? Don’t you know what a dump that island is? The last time I saw St. Smallcap its farms were barren, its businesses were boarded up, and everyone was fleeing. I tell you, the place is just a disaster.”

If you can understand the story above, then you can understand the crime that is occurring in our financial markets (the metaphor is a sound one, if I say so myself). The point of subsequent posts in this category will be to convert the story you just read into Wall Street lingo, one step at a time. You will see how the preceding story precisely expresses behavior that is occurring on Wall Street, routinely, today.

In reality, of course, the “special machines” that bankers and hedge fund managers are using are not actual physical machines, and what they are destroying are not “small island nations,” and what they are printing is not “currency.” In reality, the “special machines” are loopholes in our legal system, what the bankers and hedge funds are destroying are small companies, and the “currency” they are printing off to do so are shares of stock in those small companies.

I will explain to you a financial crime that is occurring on Wall Street. It will not be difficult to understand. In fact, the crime’s simplicity will probably amaze you.

From three years of experience explaining this crime to many people, however, I know that there are two hurdles people face in understanding it. The first seems big but is, in fact, easy to surmount. The second is small, but is the one that trips people up. I have an easy way to get you over both hurdles, but to do so, I will ask you, esteemed reader, to make two promises to me. If you keep these promises you will overcome both hurdles.

Hurdle #1: Because it is a financial crime, people who are not too conversant with financial issues may shrink from technical-sounding jargon.  The way over that hurdle is this:

1) I will start by giving a super-simplified explanation that any high school kid could follow. It will be accurate, but only metaphorically accurate.

2) Then I will give an explanation that is literally accurate, but is still somewhat simplified, and uses just a little jargon.

3) Next I will give an explanation that is literally accurate, and includes technical jargon.

4) Last, I will provide links to numerous articles, news reports, interviews, and explanations that have appeared in academic papers and the financial media, for those who want to bury themselves in the technical details. 

In sum, I will start with simplified explanation, then move through the explanation again and again, getting more accurate with each pass, but also, more technical.    

Promise #1: Please make the first promise to yourself that you will not plough through this material until it defeats you. Instead, start by reading the first, metaphorical explanation and, if you understand to your own satisfaction, stop. If you are not sure you understand or remain unconvinced, read through the second, literal-but-simple explanation. If you get it then, stop. If you still are not sure you get it or remain unconvinced, read on through the fuller literal explanation, etc. etc. That is, promise that you will not wade through this material until it leaves you defeated and unconvinced. Instead, just read as far as you need to before you feel you get it, then feel free to bail out.

Hurdle #2: I have discovered that, given the right explanation, anyone can understand this crime. The second hurdle, however, is that when people start to understand it, their minds react as follows: “No way. No way. There’s no way that could be happening in our country. No way.”

Promise #2: Please make a second promise to yourself. That is, when you reach the point where your mind is reacting this way, you’ll go back and read Promise #1.    

The Salt Lake Tribune again provides example of the harm being done to society by shoddy, agenda-ridden journalism.

In November, 2007 The Salt Lake Tribune published two articles by Lisa Schencker and Rebecca Walsh regarding education. Their work  (especially Ms. Walsh’s) displayed such astonishing intellectual dishonesty that I, assuming the customary right to respond granted to those who figure prominently in such coverage, wrote a response. With characteristic integrity, The Salt Lake Tribune refused to publish it. Today, however, they published another article by Lisa Schenker which could have been titled, “Oops! We were wrong about everything we were fighting Byrne about.”

I will first provide easily verifiable data regarding Utah’s test scores by which we may substitute facts for their bromides and impressions. Then I will use this data to address Ms. Schencker’s misrepresentation of a recent education study (which was itself dubious). I will then turn to Ms. Walsh, who, when it comes to sheer intellectual duplicity, never lets us down. Last, I will return to today’s story, which thoroughly vitiates their earlier point of view.

First, the data. The United States and 29 other nations make up the 30 developed countries of the OECD, the set of countries that represent our competition in the global economy. How does the USA within the OECD? The Digest of Education Statistics, Table 399 , gives the answer: when tested in reading, math, science, and problem-solving skills, and where rank #1 = “the best,” our nation’s 15 year-olds rank #15, #24, #19, and #24, respectively, out of 30 countries. With an average rank of 20.5, the USA ranks in the bottom 1/3 of the 30 OECD countires.

How does Utah rank within the United States? The National Assessment of Education Progress (known as “The Nation’s Report Card” http://nces.ed.gov/nationsreportcard/nde/statecomp/ ) provides the tool by which one may judge. Here are Utah’s most recent test results in reading, writing, and math, ranked versus other states: #30, #34, and #31 (only in science do we show above-average #19). However, for historical and socio-economic reasons there are disparities in educational achievement by ethnicity, and one must control for that otherwise one ends up measuring ethnic composition more than achievement. When one does so, Utah slips substantially. For example, Utah’s white students rank 38th in math, 39th in writing and 41st in reading when compared with their peers in other states. That is, Utah’s white kids rank around the lowest 1/5 of their peers in this country, which is in the bottom 1/3 of the OECD. Unfortunately, Utah’s Latino and African-American children fare even worse: according to Utah State Office of Education, 42% drop-out without finishing a basic education.

With such data at hand, let us turn to the Tribune’s work.

Lisa Schencker’s November 18 piece (“Utah in Top 10 in Math and Science”) explored a then-recent American Institutes for Research study comparing the educational achievement of states within the US with the achievement of other countries. The study is flawed in that the set of countries to which it compares the United States omits 17 of 30 OECD countries, all of which score higher than we do. (Arguably it is also flawed in that it looks only to math and science scores, the latter of which is Utah’s one above-average score, but omits reading and writing, subjects in which Utah fares worse, and does nothing to control for ethnicity when ranking US state results.) What is shockingly disingenuous, however, is the Tribune’s claim that Utah is “top 10 in math and science”: it is only top 10 on a list of 46 countries which includes such educational luminaries as Saudi Arabia, Botswana, Tunisia, and Serbia, but which omits essentially all of our true international competition.

That is, yes, Utah is in the top #10, if we don’t count 17 out of 20 OECD countries and don’t count 40 out of 50 states and don’t consider subjects in which Utah has low scores. Ms. Schencker blithely buys this Procrustean Bed, but by this logic, I could claim to be a top 10 skier, as long as I am allowed to eliminate from consideration the tens of millions of people who ski better than I do, and eliminate the events in which I ski slowest.

When it comes to just not getting the joke, however, all honors are due Ms. Rebecca Walsh. She writes: “If Byrne had really put his money where his mouth was – with low-income and minority families frustrated with public schools – he could have paid for thousands of private school scholarships.” If Ms. Walsh were capable of performing that modicum of research one would expect of a sophomore journalism student she would learn that I do, in fact, support precisely such causes, paying for hundreds of scholarships for minority children in Utah as well as building 19 schools educating about 6,000 kids in Africa and Asia (and funded the DC voucher movement, which is now serving thousands of children). Why it is wrong to seek to provide choices for, not hundreds, but hundreds of thousands, Ms. Walsh leaves unaddressed.

Ms. Walsh notes the demands for apology that were spawned by a deceptively-edited statement of mine that appeared on You Tube: she neglects to mention that the demands for apology disappeared as soon as the complete statement was posted. In fact, I received numerous apologies from some who had previously demanded them, again, a fact Ms. Walsh could have discovered had she tried “research.”

Ms. Walsh notes that I feel so let down by our governor that I said I would back an opponent of Huntsman (“even a communist”) while neglecting to note that I also said, “That’s not going to happen. There is not going to be anybody who seriously threatens him… I like the guy, he’s a decent, he’s a lovely intelligent guy, I like him” but I could not support him again myself, given his abdication of what he led me to believe was a core principle.

http://www.kutv.com/content/news/politics/default.aspx?articleID=30196

Most significantly, Ms. Walsh apparently misunderstood my Tribune editorial asserting that Referendum #1 was not an IQ test but a sanity test (following Einstein’s dictum that insanity is doing the same thing over and over while expecting different results, which is what Utah committed itself to do by rejecting Referendum #1). It was not a retraction, it was an escalation. So that Ms. Walsh not waste any more ink on poorly aimed rejoinders, I’ll state it with total clarity: I wish neither to disrespect nor scold my adopted state, but I believe that Utah’s elimination of choice for low-income and minority kids was an utterly shameful act. Utahns who voted against Referendum #1 can save their breath criticisng my bluntness: I think they are the ones who should be ashamed of themselves. In fairness to Ms. Walsh, however, she may have been misled here by the Tribune’s decision to headline my editorial, “What I mistakenly called a statewide IQ test was actually an insanity test”: the insertion of the word “mistake” was a fabrication on the part of the Tribune, one that seems to have confused Ms. Walsh regarding the tone of my piece.

Curiously, Ms. Walsh made no discernible attempt to grapple with my arguments. Her one nod in that direction is her statement that I “gussied up [my] argument with statistics comparing Utah students’ test scores to those in other states, minority graduation rates and surging enrollment (sic).” Beyond its grammatical infelicities, it is hard to know what to make of this complaint. If including data in argument bothers Ms. Walsh perhaps she should have suggested an approach which avoids the minimal commitments to rational discourse and intellectual integrity she and the Salt Lake Tribune clearly find distasteful.

That was the set-up. Here is the punchline. Today, January 9, 2008, The Salt Lake Tribune ran a story whose headline read, Utah’s overall school quality grades put it near bottom nationally. The story accurately describes precisely what Ms. Schenker could have herself ascertained months ago.

What damage is done to society by journalists so supercilious they can rationalize distorting the news as heavily as these folks did in November? Do they simply think that they they can obfuscate the public discourse to steer the polity to decisions about which they, the anointed, know best? What damage did it do when they misled a state that “ranks among the bottom eight states in the nation when it comes to education” (in a nation that ranks near the bottom of industrial countries) into thinking that it was “Top 10 in Math and Science”?

I am given to understand that many Utah got angry at me for my comments about “a statewide IQ/insanity test.” I am indifferent to it, but I do think their anger is misplaced.