Josh Marshall

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Articles by Josh

Talking Points Memo lacks the resources to break big stories like the ridiculous collapse of WorldCom. But here's an interesting morsel.

Edison Schools is a rather small company as publicly-traded companies go -- actually getting smaller every day, if you go by market capitalization. But if the company is relatively small in size it's extremely politically wired. Edison, you see, is in the rather innovative business of running -- or trying to run -- public schools on a for-profit basis. They also dabble in the charter school game. So as you can imagine the company's work is highly politicized.

The Board also has some marquee names on it: Benno Schmidt, the former president of Yale, Floyd Flake, pastor, former congressman, all-around charter school maven, and even Bill Weld, who served as Governor of Massachusetts, before fate decreed that that post would be held only by sad-sacks. Schmidt is the Chairman of the Board and Flake is President of Edison Charter Schools.

But I digress.

Edison is the brainchild of Chris Whittle, the current President and CEO of the company. According to the company's September 2001 proxy statement, the company lent Whittle $6.6 million on November 15, 1999 and $1.2 million on April 13, 2000 to exercise options to purchase stock in the company. In other words, the company was loaning him money to purchase stock in itself -- not an uncommon practice. By September 30th, 2001 the combined principal and interest on those two loans totalled $9.2 million.

So far so good.

Now what's interesting is the collateral Whittle put up for these two loans. It turns out it was the shares themselves, the shares he was buying with the loans. As the proxy statement says "The loans are collateralized only by the shares ..."

Now the problem is, like the Chicago Bulls and ten year old beer, that stock ain't what it used to be. In fact, as you can see from this handy diagram, Edison's stock is now virtually worthless. A year ago shares in Edison went for about $23 a pop. Today the stock closed at 85 cents, its lowest close all year.

What all of this means of course is that there now isn't any collateral for those loans. That stock is now worth only a fraction of what it was back in the day. In the real world, Whittle would now be facing the dreaded margin call. The company would at least demand some other collateral to secure the loan.

But are they? That's not clear.

Remember, $10 million may not seem like a lot when WorldCom is tossing around billions. But as of today that's equal to about 20% of Edison's market capitalization. Given the company's wobbly state, I'd imagine the Board would have a pretty clear fiduciary responsibility to its shareholders to try to recoup that debt.

Today I chatted with a stock analyst who covers Edison and he told me that the company has been less than clear about what it has done or plans to do about this problem. When I called Edison's Chief Financial Officer Adam Field, one of his assistants told me that everyone at the company was busy today and that no one was available to answer the question. Tomorrow? She told me that everyone would probably be busy tomorrow as well.

It now seems so easy for corporations to falsify profit reports (and so unlikely that outside auditors will succeed or even try to catch such shenanigans) that it's time for the federal government to set up some sort of watchdog agency to make sure that publicly-traded companies don't cook their books or wildly over-extend themselves. Maybe they could call it like the securities commission or the securities and exchange commission? You know, a watchdog outfit that could give everyone confidence that this sort of funny business could never happen.

If you look below the fold in these articles about the Worldcom debacle, you'll see an interesting detail. Who was Worldcom's auditor? Right, Andersen. A month or so back they fired Andersen and brought in KPMG to scrutinize their books. And well, the rest is history.

Sorta like Worldcom.

Another interesting detail is that former CEO Bernard J. Ebbers who "abruptly resigned in April" according to the New York Times still owes WorldCom about $366 million which the company loaned him on sweetheartish terms back in the good old days.

This sort of thing is apparently quite common. In fact, TPM has uncovered a similar instance in another publicly traded company. This company is much smaller. But it's one that's been the toast of political Washington in recent years. We'll be reporting our findings later this week.

Let me expand on what I said yesterday about the Bush peace plan.

The problem with the plan is not that it's foolish or misguided, though I think it's both. The problem is that it's not a plan. It is simply an endorsement of the position of the Sharon government. What's dishonest is to present it as though it is in any way advancing the ball toward peace or a final settlement.

When Ariel Sharon came to power he said, in essence, that he just wasn't going to do business with Yasser Arafat. I don't agree with that position. But it's a perfectly reasonable position. Bush has now endorsed that position. Why not just call this what it is?

It's not unreasonable for the Sharon government or the Bush administration to say they won't do business with Yasser Arafat's government. It's simply a judgment. If for instance, the next Palestinian government were a Hamas government I think it would be sensible and reasonable to say, "I don't think the Palestinians should be under occupation. I think there should be a Palestinian state. But as long as the Palestinian government is run by Hamas, we won't agree to anything, period."

The question is whether the Palestinian Authority and Hamas are fundamentally the same thing.

Any government - let's call it government A -- has a perfect right to say it won't do business with government B and that it wants government B thrown out. But let's make sure we have the vocabulary right. There's a word for this state of relations: war.

Like cheap donuts the low quality of President Bush's new Middle East proposal only becomes completely clear after the first couple bites.

The highlight, the shot in the arm, of this exercise is supposed to be the US endorsement of a Palestinian state, or rather a provisional state. But isn't that what the Palestinians already have? Or thought they had? What is the Palestinian Authority after all but a provisional state? What they get is a change in vocabulary.

The rub to the proposal is that the Palestinians can have their state - or rather their provisional state - only if they get rid of their current leadership. So they can rule themselves if they choose leaders acceptable to the United States and/or the Israelis. Not to be knee-jerk about this, but isn't that almost the definition of colonialism, the antithesis of what it means to have your own state? The essence of sovereignty or statehood is that you pick your own leaders. (Grotius defined sovereignty as "that power whose acts are not subject to the control of another, so that they may be made void by the act of any other human will.") The whole thing makes no sense.

Geopolitics and diplomacy isn't about 'fair.' Israel is more powerful than the Palestinians. And the United States is infinitely more powerful than the both of them. So maybe the Palestinians just get what we tell them they can have. But that's the law of power and violence. And that law more or less gives the Palestinians free rein to continue their own campaign of unbridled violence. The White House apparently thinks this is deft geopolitical jujitsu: making the door to statehood open wide for the Palestinians, but making it one Arafat can't pass through. Actually, the whole thing makes no sense. It's illogical - which doesn't in itself make for bad policy in this world - but it's bad policy too. You can't say it's a recipe for bloodshed. They've got that taken care of. But it is a recipe for more foolishness and wasted time.

Is the Bush administration creating the new Department of Homeland Security in its own image? It sure seems that way. This article in today's Washington Times if anything doesn't ring out the full measure of irony in the story's topic.

According to the article, the administration's proposed legislation specifically exempts the department from the federal whistleblower law and the Freedom of Information Act.

Didn't we find out about the problems that prompted the creation of the Homeland Security Department because of whistleblowers and releases of embarrassing information?

Perhaps it shouldn't come as such a surprise since the announcement of the plans for the department were timed to overshadow the very damning testimony of FBI whistleblower Coleen Rowley. But still, it's little short of astounding.

Why isn't more being made of this?

The John Thune vs. Tim Johnson race in South Dakota is one of the most hotly contested and closely watched of this election cycle. Both Thune and Johnson are popular South Dakota politicians. (If you visit their sites, I warn you, you'll see many farms.) But the race is widely seen as a proxy battle between President Bush and South Dakota's senior senator, Tom Daschle (Johnson is Daschle's protege). The race will also be key in determining control of the Senate.

But DC Republicans -- particularly the folks at the RNC and the NRSC -- aren't that happy about the race Thune is running. His staff looks weak; they're easily provoked by their opposites on Johnson's campaign; they've just gotten goaded into a flurry of negative ads against Johnson; and they're apparently not that cooperative with the master-strategists in DC.

It's not that Thune's out of the race. Far from it. The polls have been neck and neck for some time. And Thune's got tons of advantages. It's a strongly Republican state where Bush won by like a million points in 2000.

But the campaign Thune's team has put together is getting decidely lukewarm reviews. If that doesn't change, might Republicans shift some resources to other races?