PUC Staff Urged to Use Leverage to Enforce the Law

Today Ted Sickinger of the Oregonian printed an excellent story, summarized at end of this post, noting that the public utility commission is "negotiating" to allow institutional investors in PGE to circumvent the law, as indicated by PUC analyst Bryan Conway. This is surprising and perhaps also a sign that the commission is still compromised by Neil Goldschmidt inspired utility interests, further compounded by Warren Buffett and his new considerable political clout via his ownership of Pacific Power. It was Buffett's lieutenant David Sokol who led the effort to repeal the Public Utility Holding Company Act (PUCHA) that previously prevented such ownership positions without adequate disclosure to the SEC.

What the PUC needs to understand is that ownership by hedge funds is very dangerous to PGE's long term stability given that it is not known what other investments they own and how they interact with PGE. For example, have they created derivatives based upon their shares, will they collapse due to subprime or other speculations and cause the stock to plummet, etc.? Or will they exercise board level authority via proxy and force a takeover by a related party.

The PUC has numerous tools, including the ability to punish PGE by pushing through a substantial utility rate reduction, in the event these institutional investors do not comply.

With Neil Goldschmidt back in town, one has to also wonder who is influencing these public utility commissioners, given that he and his former partner, Tom Imeson, anointed them. It is unlikely Goldschmidt is spending his days on the golf course.

Wednesday, September 12, 2007

TED SICKINGER

The Oregonian Staff

Oregon regulators say they're close to settling a dispute with a hedge fund that owns 7.4 percent of Portland General Electric Co. but has refused to comply with a state law requiring the partnership to seek regulatory approval of the investment.

Meanwhile, three more institutional investors have acquired stakes in Oregon's largest utility exceeding the 5 percent threshold that triggers a possible Oregon Public Utility Commission review. Collectively, those four investors own about 30 percent of PGE's stock.

Putin Sets Stage for Energy Sales in Russian Rubles

Russia now conducts most of its energy sales in US dollars and this has greatly benefited Europe in the form of lower energy costs as the dollar has depreciated. The declining dollar may also explain why Europe and other big purchasers of energy have not pushed to have more energy sales in Euros, which would clearly bolster the Euro's status as a global reserve currency.

As indicated in today's WSJ today, Putin has made it clear that he will anoint the next leader in Russia as he is term limited by Russia's constitution in 2008. Yesterday he dismissed the prime minister and cabinet in preparation for next year's election and, while he is harshly criticized here in the US, his approval ratings at home exceed 70 percent. Having made two trips to Russia in the last year, I can confirm first hand that he is quite popular, not because Russians love him but rather they are grateful for the increased stability his government has generated. Even Russian Alexander Solzhenitsyn, was one of the harshest critics of the former Soviet system, has publicly stated he strongly supports Putin.

Already an energy exchange is being set up in Saint Petersburg, Putin's home town, and clearly a key aspect will be the sale of energy in Russian Rubles, bypassing the Euro altogether, with the goal of making the Ruble one of the world's top reserve currencies. This is nothing short of astonishing given where Russia was in 2000 and from a theoretical standpoint, the Ruble could indeed be the key reserve currency within 5 years, even surpassing the dollar.

The reason is simple and that is that the Ruble is backed by hard assets including energy, minerals and other basic materials. The Chinese Yuan is backed by manufacturing with little hard assets and the Euro has benefited from greatly expanding the Euro zone economy every couple of years, a trend that has long term limits. The dollar is meanwhile being systematically debased by gross financial corruption and incompetence here at home.

What this likely means is that Putin will control interest rates here in the United States and in Europe based upon how quickly he devalues the dollar, i.e. sells energy in rubles.

A big beneficiary of Russia's new economic might could indeed be Germany as Russia rebuilds infrastructure using German talent, including the extensive base of Russian language skills from the former East Germany. Already former German President Helmut Schroeder is an official employee of Gazprom, the Russian state energy monopoly. Moving across to lead Gazprom would seem a natural for Putin.

Meanwhile here in the US Congress is debating the safety of Chinese toys, with lobbyists lined up on both sides. These likely include President Bush's brother, Neil Bush, who has been a paid lobbyist for China according to a disclosure in a divorce filing.

Perhaps the good news is that everything could change quickly here in the US with a new set of leaders. The one powerful advantage we do have is the regulatory system, including the SEC and Federal Reserve, that has historically bred confidence and trust in our financial system, and with that investment in dollars.

For the time being however, at least the next 18 months, the downward pressure on the dollar will likely continue and it is Putin's economic game to lose. Who could have possibly imagined that 6 years ago?

The following is the lead paragraph in the WSJ story. Most interesting that he is advancing a little known financial regulator. A smart move to further bolster the ruble would be to create an SEC like investor and consumer protection bureau as part of an overall reform effort.

By GREGORY L. WHITE AND ANDREW OSBORN
September 12, 2007 12:06 p.m.

MOSCOW -- Russian President Vladimir Putin unexpectedly replaced his long-serving prime minister with a little-known financial regulator, fueling intrigue as the Kremlin gears up to ensure triumph in the coming parliamentary and presidential elections.

New Independent Party Emerges in Oregon

It is great to see a new political party in Oregon, The Independent Party, that will allow independent voters more choice. It's motto is not left, not right, just common sense. This party will be able to field a candidate in all the statewide elections, the most high profile of which will likely be a moderate Republican, John Frohnmayer, in the race for US Senate.

Union Chief Under Fire for Wrong Reasons

Today the Oregonian ran a story by reporter Jeff Mapes about SEIU President Joe DiNicola, Mapes noted that:

"The largest union for state employees in Oregon is embroiled in a messy political and legal struggle over a claim from its elected president for nearly $110,000 in back overtime pay. Outraged members of Local 503 of the Services Employees International Union, including several board members, launched a recall campaign against the president, Joe DiNicola. In turn, DiNicola is seeking a court order charging that union and government resources are being used to aid the recall, which SEIU denies. He also has filed a civil rights complaint charging he has been discriminated against for making his wage claim."

Rather than engage in a conflict my advice would be for SEIU to cut the check for $110,000 with the stipulation that DiNicola advance two initiatives.

The first would be a natural for him, a tax auditor, and that would be to raise a discussion regarding the most abusive corporate tax loophole in 25 years, one that has both decimated union ranks through non sensical mergers and also short changed investors alike. Steve Duin referred to this tax loophole in an opinion piece and I also wrote about it in an article titled the "Amazing Carry and Tax Loophole Inside PERS" or Brainstorm NW magazine. If DiNicola is successful in closing this loophole the union could theoretically justify writing him a check for every dime it has and kissing his feet in gratitude because the net impact would be the preservation of millions of good jobs, a disproportionate share being union jobs.

The second recommendation to SEIU would be to encourage DiNicola to be more aggressive in representing issues key to domestic job growth at meetings of the Oregon Investment Council. This was not mentioned in the article by Mapes yet perhaps DiNicola's most important activity of all is attending the monthly OIC meetings on behalf of SEIU, where the $70 billion of PERS investments gets awarded to various managers.

TPG's Attempt to Purchase PGE - Extensive News and Commentary Archive

The following 142 page report chronicles news stories and related commentary surrounding the Texas Pacific Group's bid to acquire Portland General Electric. The purpose of this archive, with dates ranging from August 26, 1998 to October 25, 2005, was to provide material to various parties involved in defeating the proposal. It is especially useful using key word browser searches, for example searching using the term, David Bonderman, CEO of TPG.

Included in the report is extensive commentary regarding Neil Goldschmidt's business practices because Goldschmidt was the point person for TPG. This includes his involvement in Renaissance Capital, a credit card company, for which he was paid $6 million as a board member. During this period interest rate ceilings were lifted in Oregon due to a succesful lobbying effort and what resulted was explosive growth in predatory lending.

Vicky Walker - Utility Tax Reform Leader Runs for Secretary of State

State Senator Vicky Walker wrote an outstanding piece of legislation that closed a much abused loophole that had allowed electric utilities to bill ratepayers for taxes yet not remit those taxes to the respective federal, state and local taxing authorities. For her good work, Warren Buffett and other utility executives contributed heavily to unseat her in the last election yet she narrowly won. Walker is now running for Secretary of State.

As a strong advocate of a transparent free market based economic system, it continually astounds me why so many consumers, for purely partisan political reasons, do not support public power. Businesses, churches, schools - they all use power and the benefits of structurally reducing this cost via a not for profit structure makes complete sense. Warren Buffet could not buy his local utility because it is Omaha Public Power. Is that not the definition of irony.

Frankly, I was disappointed that Intel., Oregon Steel and other industrial users did not step up to lead the formation of a private cooperative given the public's concern over the City of Portland operating PGE.

PGE's largest shareholders are now a Caymen Island based hedge fund. One would thing that after the Enron debacle, PGE was Enron's largest subsidiary, that the community could step up. Of course what made this difficult was Neil Goldschmidt leading the effort to defeat public power prior to his being proposed to be CEO of the new PGE in the proposed buyout by the Texas Pacific Group and later resigning form everything due to a personal scandal.

Longview Fibre Agrees to Sell

Longview Fibre was a great company with good management and I was squarely against this merger, blocking the first attempt by a Portland based private equity firm, Obsidian Capital. This attempt was blocked by involving the SEC and a proxy rule that prevents special shareholder meetings that do not disclose all material facts surrounding its purpose. This would include the source of financing by Obsidian and it was clear they were unwilling to disclose this. Obsidian had attempted to force the meeting using a Washington State law that requires a meeting if 10 percent of shareholders call for one.

The good news is that the later takeover by a Canadian firm was at roughly a 30 percent higher price for the stock. This article, Fibre agrees to sell, is the last of several in the Longview Daily News that featured my comments regarding this situation.

OIC Hosts NW Natural CEO Mark Dodson

In June the Oregon Investment Council held its annual planning session and included a special presentaiton from NW Natural CEO Mark Dodson on Carbon limits and other energy topics. This is the same Mark Dodson whose firm NW Natural tried to acquire PGE with funding from the Texas Pacific Group. In addition, the law firm at which Dodson was managing partner prior to joining NW Natural, Atre Wynne, shared office space with Neil Goldschmidt and his partner Tom Imeson and did most of the legal work in Texas Pacific's separate later attempt to acquire PGE a second time.

The June 27, 2007 meeting minutes also note that a key topic was "socially responsible investment" and "sustainability" issues.

It was not disclosed whether OIC Chairman Solomon, a practicing CPA, does tax work for Dodson or any other executives at NW Natural. What is known is that NW Natural and Warren Buffett's Pacific Power have expended considerably time and energy in trying to upend a law that prevents utilities from charging ratepayers for taxes that they do not ultimately remit to the various taxing authorities. In addition, Dodson and Buffett tried to unseat Senator Vicky Walker form Eugene even though the legislation she sponsored was widely praised as an outstanding reform to the system.

Oregon Investment Council (PERS): Private Equity Investments

Here is a link to the history of private equity investments by Oregon PERS going back to 1981. The listing shows that more than $5 billion in new committments have been made to the private equity area in the last 18 months. KKR alone has received more than $2.5 billion in the last 3 years.

Although the historical returns looks good, it is hard to tell the real actual returns since the summary does not account for the time value of money given that some of the returns occurred 25 years ago, etc. In addition, private equity firms value the companies they own themselves since they are not publicly traded. Previously the OIC showed the total current outstanding balance of private equity on its quarterly spreadsheet yet this amount is now part of the overall OPERF total and not broken out separately. See quarterly excel spreadsheet summarizing portfolio.

One thing is clear and that is that a significant increase in private equity investments has occurred recently. In May of 2006 I wrote the following article titled PERS-The Amazing Carry Fee and Tax Loophole for Brainstorm NW summarizing the growth and related fees associated with these investments.

Oregon Investment Council: Structure, Members and Board Minutes

Today Oregon PERS is one of the nations largest public pension funds, with more than $70 billion in assets. In Oregon the administation of PERS is handled by the PERS administrative board yet the investments are managed by a separate board, the Oregon Investment Council (OIC). This link shows the members on the OIC in addition to minutes from recent OIC meetings. The council has 5 voting members, four appointed by the Governor, and the State Treasurer by position. The SEC has no oversight of public pensions, even though they are now 8 of the nations 10 largest investments pools, CalPERS alone having more than $150 billion.

It is noteworthy that the current OIC Chairman, Dick Solomon, has no biographical background information listed. Solomon is a practicing Certified Public Accountant serving many local top executives, including the previous OIC Chair Gerard Drummond, a former Pacific Power executive,for whom he had prepared tax returns for many years. Traditionally, this was considered an unacceptable conflict of interest between accounting and investing activities. Only when CPA's goes on to receive appropriate credentials in the investment industry is it considered appropriate yet Solomon has no such credentials or experience.

Prior to serving on the OIC, Solomon served on the Oregon College Savings Plan board. During his tenure on this board he and State Treasurer Randall Edwards, when faced with choosing a new key vendor due to the dismissal of Strong, they chose Oppenheimer over Vanguard. This was very unfortunate because the choice of Oppenheimer set up a system in which most participants are fleeced by investment advisors earning large commissions. A key selling point of the Oppenheimer program was its offer to provide $300,000 in free television ads, those would be the ads State Treasurer Randall Edwards appears in.

Today most credible advisors in Oregon recommend the Nebraska, Iowa or Nevada college savings plan, forgoing the small tax benefit to Oregon residents of the Oregon Plan. While Solomon and Edwards may argue that Vanguard choices do exist, one need only look at where the dollars have gone overall to see the influence of Oppenheimer's high fee program.

Solmon's candidacy to be on the OIC and later appointment as Chairman was aggressively championed by one of Oregon's most powerful Lobbyists, Len Bergstein. Berstain is a regular election day contributor, on the Democratic side, to the State's leading media outlets, including KGW TV and the Oregonian newspaper.

Bergstein also launched Neil Goldschmidt's campaign for Governor in the 1980's while leading his public relations company, NW Strategies. Another major contributor was the local office of Arthur Andersen, where I worked at the time. The managing partner of the office was Harry Demorest who was added to the Oregon investment council after Neil Goldschmidt's wife Diana and his best friend, Gerry Bidwell, were forced to resign over conflict of interest issues.

Bergstein has also done work for local utilities and supported acquisitions, including Warren Buffett in his takeover of Pacific Corp. While Buffett is served by Omaha public power and enjoys electricity rates considerably below market averages back home in Omaha, he is enjoying high profits off Oregon ratepayers and using these funds to finance several new coal plants in Utah, Pacific Power's second largest region behind Oregon.

There is currently no requirement in Oregon that investment firms who go before the OIC for contracts to manage funds, at times exceeding $1 billion, disclose who their lobbyists are.

PR Newswire and Business Wire - Soviet Style Journalism?

Opposed to the sale of the Dow Jones Corporation, which owns the Wall Street Journal and Barrons, to Rupert Murdoch, I issued the following press release on PR Newswire, Parish Opposes Dow Jones Sale.

Much to my surprise, PR Newswire did not post the press release in the manner expected because, according to its own policy, the company which is being written about must sign off on the release. For example, if I choose to include Microsoft's ticker symbol in a release, which is key to gaining an adequate distribution, Microsoft has to sign off on the release. PR Newswire will not exercise its own editorial judgement because they do not want to offend its corporate clients.

One need only read the release I did to see that it squarely fits PR Newswire's own description of news worthiness. They supressed it because the Dow Jones Corporation and Rupert Murdoch would not approve it.

Attention on line users of PR Newswire and Business Wire content, readers beware.

Ben S. Bernanke - An Unused and EffectiveTool

Ben Bernanke could indeed be one of the great fed chairman if he implements a few simple programs and takes a tough lesson from George Bush Senior.

The problem is that he will have to take on his predecessor, Alan Greenspan. Greenspan, at 81, is now collecting large fees working for speculative hedge funds in addition to Germany's largest bank, Deutsche Bank. Frankly, I find that most surprising, that one of your nations most influential public servants would go to work for a foreign bank, whose interests clearly compete with those of our own nation.

In any event, Ben Bernanke should forget about interest rates and instead focus on one accounting rule that was put forth by Bush Sr., FASB 115, and apply it to hedge and private equity funds. This rule is simple in that it requires financial companies to mark the value of their portfolios to market on a quarterly basis and disclose the related impact on their capital ratios. This disclosure should be made to the SEC.

Requiring this disclosure should be easy given that the largest source of hedge fund and private equity assets is non profit foundations, endowments and public pensions. The IRS could propose a rule that requires such disclosure to maintain tax exempt status.

This rule was bitterly contested by the financial industry yet it turned out to be a key catalyst to sustained growth for years as confidence in banking was restored and the economy began a long period of expansion.

Microsoft - An Update

The following report regarding Microsoft's financial practices is the most widely read report on my website since 1999. Numerous major news stories have appeared based upon the report titled Microsoft Financial Pyramid Summary.

In late 2002 Barrons requested a 1,200 word article about Microsoft and I chose the topic of why Microsoft should pay a dividend. It was to be a point counterpoint piece. Subsequent to reviewing the draft, Microsoft declared its first ever dividend. I then changed the topic to a discussion regarding its over issuance of stock options. Today even Bill Gates has publicly noted they issued far too many options, essentially dilluting the value of the stock. The month after this article appeared in Barrons titled Taking a Closer Look at Microsoft. Microsoft terminated its stock option program and instead began issuing restricted stock with a vesting schedule.

Many ask, Bill, why don't you write about Microsoft anymore? The reason is that it seems rather sad, how an organization with so much promise fell so far, blinded by short term greed. Regarding technology and innovation, Microsoft is simply no longer relevant. Sadly, Microsoft's legacy may indeed be its crushing of so many promising young companies here in the US, only to force such growth to instead occur in other nations.

Introductory Comment

Hello everyone. My sincere hope is that you this blog helpful.

In addition to comments made in English, there will also be selected translations in Spanish, French, Italian and Russian for foreign readers.