Maggie's Farm

I read the Los Angeles Times article we linked about how the Bush administration failed to protect New Orleans, and it just didn’t smell right.  We looked into the departmental files and found a clipping from a blog called MemeFirst, and it reminded us of the Save Our Wetlands lawsuit where a wise Federal Judge stopped the Corps from building proper dikes.

Some of you will recall that in the comments section of this post last week, I mentioned that flood planning and abatement measures take decades to build, and I wrote that I wouldn't be surprised to find out that relevant planning decisions went back to the Carter or Reagan administrations. Actually, it was the administration of Lyndon B. Johnson that set in motion the modern flood protection system for New Orleans - or at least the flood protection system that New Orleans was intended to have. After Hurricane Betsy in 1965, Congress approved and Johnson signed a law to build the Lake Pontchartrain Hurricane Barrier Project to protect New Orleans from future catastrophic hurricanes.

The centerpiece walls and gate systems mandated by the bill, however, were never built. Why?

A lawsuit begun in the mid-70s by environmentalists stalled development well into the 80s. After nearly a decade of litigation that prevented implementation of the plan, the Army Corps of Engineers finally threw in the towel and shifted to a compromise plan that had less of an "environmental impact." Some protection, after all, was better than none. Bottom line, the federal government had a plan to protect New Orleans from hurricanes like Katrina, but was unable to implement it due to interference from local environmentalists and the local judiciary.

The environmental group that brought the lawsuit - the now-ironically named "Save our Wetlands" - hasn't yet taken down the web page boasting of shutting down the Lake Pontchartrain Hurricane Barrier Project. In the document, the group claims that because its attorney broke down and wept in front of Judge Schwartz, he issued an injunction that shut down hurricane barrier construction. Here's the text:

“The Save Our Wetlands attorney goes right up to the Judge’s cigar, pointing his finger and says to the Judge Charles Schwartz, ‘it is not that I don’t like you it is that I am losing respect for you’. The Save Our Wetlands attorney then says, ‘You said you were going to issue an injunction now god damn issue it.’  At this point the Save Our Wetlands attorney breaks down and begins to cry, kicks open the chamber door, and enters the courtroom cursing profusely, to a courtroom packed with people. He then kicks open the courtroom door and goes immediately to his apartment and collapses; he had not slept in three days.

“At 8 a.m. he gets a call that he is to appear in the Judge Charles Schwartz’s courtroom at 9 a.m. The Save Our Wetlands attorney thinks that he will be held in contempt and taken into custody by U.S. Marshals. Upon arrival Judge Charles Schwartz reads the injunction. The Save Our Wetlands attorney apologized to the co-counsel for his actions the night before. He is told, by his co-counsel Doug Clifford that it is his opinion that the Save Our Wetlands attorneys actions brought a human element to the discussions in Judge Schwartz's chambers on the previous night, and that it broke U.S. Attorney’s Gerald Gallinghouse's mental and political pressure inside the judges chamber. And it was because of this, that Judge Charles Schwartz issued an injunction against the United States Army Corps of Egineer's Lake Pontchartrain and Vicinity Hurricane Barrier Project. Save Our Wetlands Inc. nominates United States District Judge Charles Schwartz as the savoir of Lake Pontchartrain and the reason the National Bayou Savage Refuge Center--the largest urban wildlife refuge in the world exists today.”

 ...And also the reason New Orleans does not exist today.

Getting-what-they-want-by-crying has been the modus operandi of the environmental movement in the U.S. for decades, figuratively speaking. In this case, environmentalist do-gooder busybodies actually cried to get what they wanted. On a lark I used Google Earth to investigate the fate of the home of the presiding judge - Charles Schwartz, Jr. - which backs up on the Metairie Country Club. It's still standing, but he'd better find himself a pair of waders, especially if he plans on playing the back nine anytime soon. Who's crying now?

The left-wing think tank, Center for Progressive Reform, takes the position that the injunction was simply a minor annoyance that would shortly have gone away, but also reveals that the left, the enviro-loonies (and the local Democrat machine) had mounted fierce opposition to the Corps.

Right-wing pundits and politicians, however, have attempted to blame the flooding on environmental litigation that temporarily halted the Corps from pursuing the first option. They argue that if the law suit had not been initiated, the Corps would have been able to complete the first option and the city would therefore have been better protected. As this report documents, these claims are wholly unfounded. It is beyond dispute that the litigation would have only temporarily delayed the Corps from pursing option one had it chosen to do so. In the process of responding to the lawsuit, however, the Corps decided to switch to the second option because it believed that one represented the better policy. This switch also responded to the widespread local public opposition to the first option. See Special Levee Report.

Let us look at the sentence that starts with “It is beyond dispute that”.  Has the dear reader previously noticed how the left loves that phrase?  The actual translation is, “I don’t want to talk about it!”  That in turn relates to the fact that the speaker actually lacks the facts, the logic, or both to dispute it.  The writer would have us believe that if the Corps had merely written a more extensive (expensive) environmental impact statement, the litigants would have happily dropped their complaint.  Anyone with even the most passing familiarity with environmental strike suits knows that complaining about the EIS is merely the opening gambit for litigation designed either to stop a project altogether or to make it too expensive for the proponents to proceed.

The Corps chose to drop its fight and comply with the community’s expressed wishes, for which they are entirely unwilling to accept the consequences.  In fact the city sued the Corps for $77 BILLION in damages for its actions, but in an article February 1 entitled “In Court Ruling on Floods, More Pain for New Orleans”, the Times sniffs, “There is disappointment but little surprise in New Orleans after a federal judge grudgingly absolved the Army Corps of Engineers of liability in the flooding of the city after Hurricane Katrina.”

The leftyloonies at the Times (and the federal judge) appear to actually believe that the Corps of Engineers should be held liable for damages to New Orleans for conceding that it had lost a lawsuit

What is Constitutional and What is Unconstitutional in Eminent Domain?

FindLaw, a web-based subscriber source of legal materials, gives us some details on the use of eminent domain for redevelopment purposes: “The Supreme Court has approved generally the widespread use of the power of eminent domain by federal and state governments in conjunction with private companies to facilitate urban renewal, destruction of slums, erection of low-cost housing in place of deteriorated housing, and the promotion of aesthetic values as well as economic ones.”  

The principles applied by The Supreme Court in Kelo go back as far as 1810 when in Custiss v. Georgetown and Alexandria Turnpike Co, the Court stopped a district court from interfering with the taking of private land for a private turnpike.  Similar cases are Clark v. Nash, 198 U.S. 361 (1905) (a water ditch), and Mt. Vernon-Woodberry Cotton Duck Co. v. Alabama Interstate Power, 240 U.S. 30 (1916) (power company).

 In Berman v. Parker, 348 U.S. 26 (1954) the Supreme Court states, “The District of Columbia Redevelopment Act of 1945 is constitutional, as applied to the taking of appellants' building and land (used solely for commercial purposes) under the power of eminent domain, pursuant to a comprehensive plan prepared by an administrative agency for the redevelopment of a large area of the District of Columbia so as to eliminate and prevent slum and substandard housing conditions - even though such property may later be sold or leased to other private interests subject to conditions designed to accomplish these purposes.”

All these cases, however, are united by a principal of the courts deferring to the decisions of the legislatures as to what constitutes public use, or “public convenience and necessity”, the criteria for eminent domain.  Elsewhere in Connecticut, a vast swathe of central Stamford was taken by eminent domain for urban redevelopment purposes by the Frank Rich Company, and Stamford was transformed in terms of economic growth, employment and culture.  It hosts the US headquarters of UBS (with the largest trading floor in the world) and UBS is about to be joined by the Royal Bank of Canada’s headquarters, and there are so many jobs that people commute 90 minutes or more to work there.  It was tough on the homeowners in central Stamford, but a great boon to the public at large.

 Justice O’Connor’s dissent in Kelo distinguishes Berman by its slum removal goal; public use in her view was not just building something to create an economic resurrection of an area of Washington, it also got rid of some nasty ugly old buildings. 

However, note that Kelo really makes no change in judging the Constitutionality of a taking; it will continue to be determined by someone’s definition of “public use”.  The SCOTUS majority chose to defer to the local representatives of the public in this case.  This is a step back from the Court’s recent activist role, and I think it is healthy.  When an issue before a court revolves around interpretation by individual decision makers of whether a proposed use of land is or is not public enough, I favor deferring to the “boots on the ground”, the local authorities.

 Arch-liberal Edward Lazarus actually makes my point:

“Conservatives have managed successfully to equate the term ‘activism’ with all controversial or unpopular judicial decisions.  Indeed, they have even managed to take uncontrovertibly non-activist decisions and label them activist.  A prime example is the Court's controversial decision in Kelo v. New London, in which the Court refused to strike down New London's decision to use the power of eminent domain to take private property and give it over to a private developer.  Now, many reasonable criticisms have been leveled against the Kelo decision (though it is also powerfully defended).  But one thing is certain: the decision is the very opposite of activist.  Kelo is a decision refusing to impose a judicial check on the judgment of New London's elected officials.  If anything, the decision is excessively passive.  None of this, however, stops conservatives from tarring the decision with the activist label.”

 

First, the United States has a long history of allowing private land to be taken and turned over or sold to for-profit corporations.  If this could not have been done, there could never have been any railroads in the country that were not public agencies. Can the dear reader even imagine an economic development of the US interior by Conrail and Amtrak?

Second, and more important, is that the US Supreme Court in its Kelo decision merely decided to defer to state law.  How many times do we conservatives complain when the Court overturns yet another state law for a newly discovered but unwritten federal “right”?  If we in Connecticut do not like our eminent domain law which was passed by a majority of our state legislators and signed by our governor, we have a legislative solution and should not be rushing to Federal courts to ask that our legislature be overruled!  

Just think about the number of times we have been furious that the Anointed Nine in Washington have overturned yet another long-standing state law for transgressing yet another unwritten right, and shout, write or (now) blog the words of the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”

We have to confront a serious question:  is our concern for states’ rights limited to state actions of which we approve?  If so, we must then accept our hypocrisy and join the liberals in acknowledging that having an end result we like is more important than the legal niceties of getting there, and watch as the Age of the Rule of Law comes to an end.

 Photo: Our recently-new Maggie's Farm contributor Kondratiev. We are fortunate to have such an eminent fellow on board. He meets our criteria, which are that he can shoot, write grammatically most of the time, and plow a straight furrow on our CT tobacco farm, with two cranky mules.

It all started with Enron.  The company was just too clever and set aside moral scruples in a feverish drive to maximize reported (as opposed to real economic) earnings. 

The next step was auditors, who traditionally were employed by companies’ boards to check the math in the financial statements and ensure that balance sheets balanced. 

Occasionally, under suspicious circumstances, they were instructed to conduct what were termed “fraud audits”, where they really took a close look at things like cash, receipts and bank accounts to see if someone was cheating or embezzling.

When Enron’s frauds came out, there was a frantic drive to find someone with significant economic resources - other than Enron’s crooked officers - who could be blamed.  Enron’s auditors, Arthur Anderson, long reputed to be the toughest firm in the country, took the hit for not identifying the frauds they were not paid to investigate.  Lawyers and frantically grandstanding officials declared Anderson to be guilty, and applied a pre-trial death penalty for the entire firm for the conduct of the partner on the Enron account.  Not only was this in gross violation of the U.S. Constitutional requirement of a fair trial, it was enforcement of a notion of collective guilt previously unseen in Western democracies, and it put thousands of Anderson’s innocent employees out of work.  As the gentle reader might recall, Anderson received a post-mortem judgment of “not guilty”.

Well, the accounting profession was not pleased, and began to look for a way to strike back.Next, the Securities and Exchange Commission got involved. The SEC had been established to ensure that securities offering documents and corporate reports to shareholders contained full disclosure.  Accused by the press and Congress of lax enforcement, the SEC sought to find a way to co-opt the private sector as enforcers of Federal securities laws, and found lawyers and accountants an easy choice, declaring them responsible for finding and reporting any corporate hanky-panky that might be occurring, making corporate advisors into government snitches, and vastly increasing their risk of doing business. 

Again, the accounting profession was not pleased, and its counter-attack came when accounting standards boards around the world invented (over corporate objections) a new system they thought was more theoretically pure, called “fair value accounting” with particular aim taken at the recent innovations in financial derivatives.  These rules require assets to be valued at whatever someone will pay for them at any given moment. 

As an example of the impact of Fair Value rules, if the Kondratiev family were a public company and - like a lot of people - not able to sell our house right now, we would have to write its value way down and take an “accounting loss” for that entire amount, making us technically bankrupt even though we know the house will indeed sell this year or next.  Fortunately as a family, we don’t have to follow those moronic rules, and can wait and live in our home until the housing market recovers.

What’s worse, if a public company owns some sophisticated assets like esoteric options that don’t trade often, the rules require that they value them in accordance with a black-box mathematical model – and isn’t that the greatest opportunity for fraud yet invented?  Then, if it later happens that there are few buyers of those options, accountants will require around 55% write-off in their value, even if the underlying assets have not diminished in value.  Remember when some banks were required to write down assets fully secured by US Treasuries?

Nevertheless, our ivory-tower CPAs hold that regardless of a notion of long-term real value, if you cannot sell something today it has little – or no – value.  Just look at the ultimate market proof that that notion is intrinsically false – private equity funds are snapping up these securities by the armload as soon as the banks write them down, and Kondratiev confidently predicts that some Great Fortunes will be made by those funds over the next three years.  Business Week will predictably have a cover feature on the brilliant investors who gambled on purchasing deeply-discounted, scorned securities and against all odds won big.  Ja.  Remember where you read it.

To make a long story short, between SEC rules and new accounting standards, company financial statements are now unreadable by almost everybody except a tiny group of trained professionals, and companies are now having to add annexes to their financial statements that say things like "our audited statements are presented in accordance with Generally Accepted Accounting Principles, but as such they are not useful in managing our business, so the following figures are the (unaudited) numbers we actually use to manage our business.”

Furthermore, and more importantly, the accounting deck has now been so stacked that every possible financial negative is emphasized and every possible financial positive is deferred.  The result for us analysts and investors is that current financial statements are for most part presented in a way that grossly understate the real worth of companies. 

“But,” you may well ask, “how did Bear Stearns so overvalue its assets?”  Answer: it didn’t.  Bear Stearns owned pools of residential mortgages, yours and mine, that might have a default rate of 5% in hard times, 15% in a depression, and was forced to write them down to nothing simply because, like our house, nobody was buying that day.  As we wrote earlier this week, Bloomberg and everybody else (except the accounting rulers) knows that the foreclosure rate is expected to be 1.99%, which means that JPMorgan as purchaser of Bear will probably collect over 99% of the face amount of these mortgages, even if the foreclosed properties sell for half the loan balance.  Only an accountant could insist that those mortgage pools had an accounting value of 40-45%. 

Thousands of innocent people will be thrown out of work due to an intellectual ivory-tower artificiality perpetrated by the Financial Accounting Standards Board and the SEC.

The accountants’ revenge is complete.