Saturday, May 26, 2018

Ponzi In A Box

In business, if you design a system, someone will figure out a way to manipulate it for illicit profit.  The more complicated the system is, the easier it is to find a way to cheat.

Years ago, the heads of the rail lines got together and worked out an interchange service system, in which rolling stock such as boxcars and flatcars could be shared on multiple rail lines.  Instead of sending an empty boxcar back to the original shipping point, cars could be used by any rail line, by paying a fee to the car’s owner. 

In theory, such a system benefitted everyone.  In practice, it benefitted a few enterprising railroads more than others, especially when many rail lines were just then switching to computers to keep track of their cars.

The LaSalle and Bureau County Railroad Company, a tiny 15 mile rail line in North Central Illinois that operated a single purple locomotive, acquired boxcars from Penn Central.  I use the word “acquired” because there seems to be a great deal of confusion about just what happened.  Either LaSalle bought a few boxcars, or contracted to repair a few boxcars, from the larger railroad.  What is certain is that Penn lost a lot of cars and LaSalle had more than it had paid for, simply by changing the serial numbers on the repainted cars and putting them back on the rails as its cars.

One version of the story had Penn Central hiring LaSalle to repair boxcars, but LaSalle would take good Penn cars off the tracks and change their serial numbers to match the cars needing repair, sending them back to Penn and collecting the repair fee.  The old cars would be repainted and given LaSalle numbers and put back on the rails.  The boxcar at right was one of the renumbered cars.

Since the purloined rolling stock was scattered all over the country, no one noticed that a small rail line suddenly had more cars than it was supposed to, nor did the rail lines notice a modest increase in the amount paid to LaSalle for using “its" cars.  It was a brilliant scam--sort of like stealing a car and leasing it to taxi cab line. 

There were also accusations that the LSBC (laughingly referred to by locals as “Let’s Steal Box Cars”) took Penn boxcars off the line, and sold them for scrap metal, shipping the metal to scrapyards in Penn’s own cars.  Most of the allegations are hard to pin down, since both the LSBC and Penn went out of business. 

Note.  Railroads have frequently been the targets of scrap metal thieves.  In Nicaragua and Guatemala, the thieves were cash-strapped governments, who shortsightedly scrapped the rails and rolling stock for a quick profit.  Recently, in South Africa, enterprising thieves stole six miles of track--just under a thousand tons of steel--to sell as scrap metal.

All of this happened back in the 1970’s, but I was reminded of the story when I heard about the newest scam:  the German container scam.  At most, LaSalle stole slightly fewer than 400 boxcars, but a German company found a way to steal one million shipping containers. 

Containers, like rail cars, have an interchange system.  Containers travel all over the world on ships, trains, and trucks, and are rarely shipped empty back to an original shipping point.  (Yes, I have written about shipping containers before.  I admit to finding them fascinating.)

The P&R Group would sell an investor a new 40-foot shipping container for roughly $3,000, then manage the rental of the container to shipping companies through a sister company based suspiciously in Switzerland.  After five years—during which time the owner could depreciate the value of the container--P&R would buy back the container for 65% of the original price.  Some investors enjoyed as much as 10% annual return from their containers, prompting many to purchase additional units.

P&R is not the only company to sell containers to investors, and while private ownership of containers is not as common as it was a few decades ago, roughly 10% of the aluminum and steel boxes being used are still held by private investors.  What made P&R unique was its high rates of return and that guarantee to repurchase the container at a fixed price.

The number of investors skyrocketed, with many investors buying multiple contracts.  At its peak, P&R had 62,000 investors who had paid $4.12 billion for 1.6 million containers.  P&R was a 40 year-old company that was widely recognized as stable and well run from a beautiful building in Munich.   The company annually received a good bill of health from German regulatory agencies.

All was well--at least, until someone finally completely read its financial reports and noticed that annual payments to investors were actually higher than the income from the containers.  There was only one possible way the company could find the money to do this—it had to be selling an ever increasing number of containers, using the funds from new investors to pay the income of the established investors.  In other words, it was a Ponzi scheme.

Like all great Ponzi schemes (Bernie Madoff, Enron, The Illinois State Retirement System) the system could only survive as long as the pool of investors continually widened.  As soon as one blogger noted the financial discrepancy, the game was over.  P&R promptly filed for bankruptcy.  In the turmoil that followed, it eventually turned out that while the company had sold 1.6 million containers….It was managing only 600,000.

The standard cargo container is 40 feet long, 8 feet wide, and a little over 8 feet tall.  Put end to end, that’s enough missing containers to stretch in a line from Honolulu to New York, continue on through London, past Munich and end in Moscow—with still enough left over to stack up to the  International Space Station, twice.  (Or almost thirty times enough containers to ship the Great Pyramid at Giza).

It is rather obvious that the missing containers actually existed only on paper.  P&R was selling imaginary containers, and the rare investor who tried to actually see his container was probably told that at the moment it was floating across the Pacific, full of tennis shoes. 

The investors are probably going to lose more than their original investment.  I’m sure that lawyers could probably feast over the bones of the company for a few years, and eventually return ten or fifteen cents on the dollar to the original investors, but that is not the end of the story.  You will remember that P&R did not own the containers--individual investors did.  And since P&R is out of business, those containers are just sitting empty at docks, shipping companies, truck yards, and assorted shipping depots.  With no parent company to handle their leasing to shipping companies, the containers are racking up storage fees that will eventually be passed on to their owners.

If anyone can ever figure out who owns which one. 

Saturday, May 19, 2018

A New Idea For An Old Method

Hardly a week goes by but that I see a post on Facebook about how if there were fairness in the world, teachers would be among the professions receiving the highest salaries.  Usually, this includes a reference to the beloved children they teach.  Teachers who have the future of our children in their hands should be rewarded more than basketball players are....And so forth.

Having recently retired from teaching myself, I admit that I am a little conflicted:  while I would have loved to have had a larger salary, I’m also aware of how a free market works.  Salaries are based on the same inflexible market rules as everything else and are a function of supply and demand.  Unfortunately, teaching salaries are low not because of brainless school boards, ignorant state legislatures, and mindless school administrators.  (Though all three are indeed brainless, ignorant, and mindless.)

Teacher salaries are low because there is an overabundance of people who are willing to meet the extraordinarily low bar required to teach.  Simply put, damn near anybody can get a job teaching.  Licensing is a little complicated, the amount of paperwork is damn near overwhelming, and the pay is assuredly low, but the actual education levels required are lower than you might think.  If you have a college degree in can probably get a job.  Regardless of what your degree is actually in... you can probably get a job teaching anything you want.  While the introductory job may not be located someplace you really want to live, there are jobs available.

I suppose this would be a great place to issue the usual caveat.  Some teachers are wonderful, hardworking, dedicated and effective teachers.  I’ve had many of them in my classroom at Enema U, and I still regularly hear from many of them.  Unfortunately, I also had many semiliterate education majors in my classroom who graduated, got jobs teaching, and must be boring students to death daily.  Worse still, the latter far outnumbered the former.

To put this really plainly, education majors, on average, earned lower grades in my classes (and in those of my colleagues with whom I discussed this) than did any other major group.  If you thought that distinction was reserved for athletes—well, let’s just say if it weren’t for the women’s sports, you would be right.  (This is why the Athletic Director always speaks of the grade point average of all the teams combined.  I have always suspected that openings on the women’s volleyball team are based more on an SAT score than on the speed of a serve.)

The Education Department is swamped with majors.  Well-meaning students who have been taught from birth that they must have a college education but who have no clear plan for a career, simply drift into education, aided perhaps by the low requirements of the program.  If they required that majors take college algebra, I suspect that the ranks would be thinned out quickly.  (And they would probably end up in Criminal Justice or Sociology.)

Many students have told me that the coursework was easy, with little reading, and that purchasing textbooks was frequently simply a waste of money.  More than one student has reported passing classes that he had stopped attending and had forgotten to drop.  Nor is it an accident that the Dean of the College of Education used to frequently brag that his students had the highest grade point average on campus.  (Since most of the classes required for an education degree are taught within the college, it’s not surprising).

After a particularly good lecture, it is not uncommon for students to approach the professor and ask about changing majors.  While it might be sudden burst of passion for a new field, frequently the real cause is nothing more than an desire to escape from a boring major that the student never really cared for.  One student told me he was changing majors because he was tired of being the smartest person in the room.

Yes, I’m a little critical of the field of education, but I have a suggestion.  Actually, my suggestion is not new, but is something really old:  I think teachers should try collective bargaining.

Yes, I know there are already teachers’ unions.  They are everywhere and they are the black hole of education, sucking in everything good—including light, reason, and logic.  While they are great at politics and at getting themselves in the press, the only people they do less for than their own members are the students. 

I propose that teachers organize a guild.  Guilds are the centuries-old method for artisans and small manufacturers to collectively protect themselves and their trade.  While unions are usually comprised of employees, guilds mostly admit independent contractors and artists.  These latter traits perfectly describe teachers.

While teachers are technically employees of a school district, as soon as they enter that classroom, they are monarchs in their own kingdoms.  For as long as the class is in session, they are totally in control of their workplace.  No artist has more true independence than a teacher standing at the front of a classroom.

Guilds were formed, in part, to restrict membership to those who were worthy, thus upholding a level of quality that guaranteed members received maximum compensation.  Guild members reviewed the work of apprentices, guided their training, and voted on whom to allow to enter.  They worked together to weed out the incompetent and to set high standards for those who remained.   All of which is exactly opposite of what the teachers’ unions do. 

The number of guilds expanded when trade expanded and increased the demand for quality goods.  One of the roles of guild members was to insure that even as the number of members increased, the quality of the work did not diminish.  Unions did not really begin to form until the industrial revolution produced large quantities of unskilled laborers.

There are still guilds out there.  Hollywood has guilds for writers and directors.  Their level of pay remains high and they are restrictive as hell, only allowing the best to join their ranks.

While the union wants the maximum pay for their members, they are more interested in increasing and protecting jobs of their members, than concerned with the quality of their work.  A guild member’s job protection lay in his laboriously learned skills, not in the collective actions of relatively easy to replace union members.  Teachers need to realize that market forces will continue to control their salaries—not unions or administrators or politicians.  If they want to change this, they need to change the market.

Good teachers have more skills, frequently possess graduate degrees, and usually have quite a few years experience.  For a guild to really work, teachers need to start working on a method of weeding out the incompetent, rewarding the good and removing the bad.  They should embrace teacher testing, continuing education, and peer review.  Teachers should demand that all teachers have a content degree.  (That means to teach math, you need to have a math degree.)

It would take time, but if teachers want to receive the compensation that can only come with quality work, they need to stop being employees and start being artisans.

Saturday, May 12, 2018

The Death of the Battleship

For almost five hundred years, the queen of the seas was a battleship.  Beginning with warfare in the Mediterranean, the Muslims were the first to add primitive cannons to galley ships, effectively ending the age-old contest to find the most effective means of conducting naval warfare—ramming, boarding, or throwing things.  Gunpowder artillery—the ultimate method of throwing things—immediately proved to be the most effective method of destroying enemy vessels, but the heavy guns required larger ships.  This was the birth of the battleship.  

While ships would still be boarded, and the deliberate ramming of enemy ships would still occur as late as both world wars, it would be the artillery aboard ships that would dominate what the Greeks called "thalassocracy"—the control of the seas—for centuries. 

The first use of the phrase “great ship” occurred during the reign of Henry V, in an inventory of his navy.  At the time, these fighting ships were little more than commercial vessels (usually carracks) with fighting castles constructed on their decks to provide platforms for archers, men armed with primitive muskets, or for small cannons.  The term, "forecastle" is a reminder of this age.

Over time, ships grew in size, as did their armament.  By the time of the American Revolution, a first-rate ship of the line might contain more than a hundred cannons, throwing solid iron balls of roughly 40 pounds at a distance up to a mile.  (While the main gun decks of the HMS Victory (commissioned in 1778) used 32- and 24-pounders, the forecastle housed a pair of 68-pound carronades.) 

Over the next century, the ships went from wood to steel, powered by steam turbines, gained rifled cannons with fire control systems, and became the behemoths we associated with the term battleship.  By the end of the Nineteenth Century, battleships became the main tool of powerful nations to protect imperial possessions, secure foreign markets, protect trade, and wage war.  Every industrial nation seeking a place on the world stage, sought to build bigger and more powerful battleships. 

That the battleship was crucial for the development of an industrial nation was best reflected in the words of Theodore Roosevelt while still the Assistant Secretary of the Navy. 

“Oh Lord!  if only the people who are ignorant about our Navy could see those great warships in all their majesty and beauty, and could realize how well fitted they are to uphold the honor of America.”

By the turn of the century, a nation without a battleship was impotent, since an enemy fleet led by a battleship could easily overpower its navy, use its massive guns to destroy ports, and reduce coastal cities to rubble.  Every country had to have its own version of the great ship or forever be at the mercy of its enemies.

So every developed industrial nation did build battleships.  It was the fact that every nation possessed these ultimate weapons of war that produced the terrible paradox.  If your country  must possess a battleship to survive, you did not dare use your battleship in an actual battle with other enemy battleships, for fear that you might lose it, thus losing the whole war.

The reality of this paradox was not actually realized until the Battle of Jutland in World War I when the Royal Navy of Great Britain met the High Sea Fleet of Germany.  While both sides continue to claim victory, neither country sought a reengagement, usually keeping its battleships in harbor for the rest of the war.  Winston Churchill wisely noted that the British admiral in charge was the one man who could have lost the entire war in an afternoon.

Effectively, the battleship had become too valuable to use.  Or as Admiral Jellicoe put it, a naval commander would be a fool to commit a battleship in battle unless he was certain of victory. 

This was the high watermark for the great ship.  At the end of the First World War, 118 battleships were in the service of thirteen navies.  By the start of the next war, a generation later, the number of great ships had been reduced by half, even though the battleship had grown to its maximum size and power.

While Jutland was the last real battle between battleships, every country continued to build them in the years between the wars.  You still had to have them, even if you couldn’t really use them.  And while Admirals continued to argue for larger and bigger ships, that were faster, longer, and carried more and larger guns, the entire argument was becoming moot, since the newest method of throwing things at sea—the airplane—was to soon prove the end of an era for battleships.

When World War II started, the supremacy of the airplane over the battleship was proven in two early battles.  At Taranto in 1940, and at Pearl Harbor in 1941, airplanes easily destroyed the largest of the great ships.  The Bismarck was destroyed by obsolete British biplanes.  In 1945, the largest and most powerful battleship every constructed, the Yamato, was sunk from the air.

During the entire Second World War, an exchange of fire between battleships on anything close to the scale of Jutland—never occurred.  The decisive naval battles were fought across hundreds of miles between aircraft carriers who never sighted each other.  Or as Admiral Cunningham said after the destruction of the Italian battleships at Taranto, “Taranto….should be remembered forever as having shown once and for all that in the Fleet Air Arm the Navy has its most devastating weapon.”

Battleships did play a role in the war, but were primarily used as escorts to invasion fleets and to bombard coastal defenses.  The sixteen inch guns of the Iowa, for example, can fire a two thousand  pound explosive shell 25 miles, devastating any target.

Long after other nations had permanently retire their battleships, only America periodically used them.  After President Reagan reactivated the USS Iowa (right) and the USS Missouri, theirs were the first guns to fire when the US retook Kuwait from Saddam Hussein.  And for a little while, naval tacticians argued that there was still a place in the modern navy for the great ship, chiefly because it would be cheaper to renovate these ships than to build new ones.

With new, fin-stabilized rounds, the massive guns of the Iowa class battleships are capable of hitting targets as far inland as 75 miles, putting over half the world’s population within the range of their guns.  Even today, no other weapon system yet designed is capable of putting more tonnage of explosives on target as fast as, or as accurately as, or for a more prolonged time, than a battleship could. 

Even in this role, however, the ships are simply too big, too costly to operate, and require too many skilled men to keep in action.  As a weapons delivery system—essentially still a platform from which to throw things—there are other and more cost-effective methods. 

Sadly, in the day of the Exocet missile and in the day of an expensive drone capable of sinking even a great ship, the day of the great battleship is truly over.  For centuries there was a continual drive to make the ships bigger, faster, and carrying bigger and more powerful guns….until the day came when they could not be really used.  The human race had, in effect, created a rock it could not lift.

Saturday, May 5, 2018

Die Haengerbaende

As a child, I remember my father telling me that any building in Texas that had stood long enough to be called ‘old’ was either made out of adobe or built by Germans.  Traveling through the Hill Country of Texas (roughly the center of Texas—atop the Edwards Plateau and extending northwest and east of San Antonio), you run across countless little towns with German names, and the center of each of those towns consists of solid stone buildings.

Back then, many of these little communities still had German local newspapers and it wasn’t hard to find the occasional German sign in the shop windows.  Several of these towns still had small local breweries producing German-style beer.  Sadly, most of those have either closed or been absorbed into large multinational corporations that sell a watered-down lager that should be labeled “American Lawn Mowing Beer.”

After Texas secured its independence following the victory at the Battle of San Jacinto in 1836, Texas changed rapidly.  Where the original settlers had picked land along the coast, favoring land where the annual crop of cotton could be floated down rivers to the Gulf, the new immigrants established communities farther inland.  Among the numerous immigrants moving westward from the old South were thousands of European immigrants, mostly from Germany.

During the 1850’s, roughly 20,000 German immigrants poured into Texas, encouraged by enterprising real estate entrepreneurs who advertised (meaning they lied their asses off) in Germany about abundant cheap land in a peaceful and settled paradise brimming with infrastructure. 

The Allen Brothers, for example, bragged about the thriving metropolis of Houston, situated along an active ship channel—a town “handsome and beautifully elevated, salubrious and well-watered.”  The last, at least, was true. 

Actually, it was a mosquito-infested swamp along a bayou so muddy that it took a week to travel the forty miles from Galveston.  The first log cabin constructed there sank.  The "thriving metropolis" of Houston had a population of twelve people residing in one log cabin in 1837, when the first steamship visited.  Four months later, there were 1,500 residents and over 100 houses.  What the Allen brothers lacked in honesty, they made up in salesmanship.

One visitor who was more honest than the Allen brothers, said the city was “one of the muddiest and most disagreeable places on earth.”  Twelve months later, one out of every eight inhabitants died of yellow fever—including one of the founding Allen brothers.  By the time he was buried, Houston was the temporary capitol of Texas and was receiving thousands of new immigrants annually.

The Germans who arrived were a highly diverse group—Catholics, Protestants, Jews, and Atheists.  Though most were farmers, there were stonemasons, intellectuals (teachers, newspapermen), merchants, brewmasters, and clergymen among them.  In fact, almost everyone except aristocrats came to Texas from Germany. 

Overwhelmingly, they were morally against slavery and they moved inland in search of cheaper land, past the coastal plantations where slavery was the norm.  In the Hill Country of Texas, they used the abundant limestone and granite hills to build new towns.  By the eve of the Civil War, German immigrants numbered about 5% of the Texas population, a number roughly equal to number of Tejanos.

Far from being peacefully settled land, this was a lawless land, plagued by frequent attacks from the Lipan-Apache, the Comanches, and the Kiowa, who resisted the loss of their lands.  The Army established a series of forts and posts across the area, helping to protect the settlers as much by buying their agricultural surplus as by their military activities. 

By the time the Civil War started, these communities were predominantly pro-Union, siding with Sam Houston—who was both a former president of the Texas Republic and a former governor—against joining the Confederacy.  The German immigrants correctly believed that the movement to secession was primarily a political ploy to protect slavery.  The Germans were proud of their new American citizenship, friendly with the local military and rightly suspicious of the politicians in Austin pushing for secession.  Though some German communities voted 95% against secession, Texas seceded in 1861.

When Texas seceded, Governor Lubbock promptly enforced the Confederate Conscription Law, which required all men between the ages of 18-35 to swear allegiance to the Confederacy and to “volunteer” for service in the Confederate Army.   Unlike military commanders in other Confederate states, Lubbock included male slaves in this enforcement.  The conscription law was unpopular in all of the the Southern states, but nowhere was the resistance to the mandate more violent than in Texas.

In May, 1862, the commander of the Confederate Military Department of Texas, seeking to implement the law, put the entire state under martial law and appointed provost marshals to administer conscription.  These provost marshals were particularly ruthless in the pro-Union German communities, confiscating wagons, horses, mules and any material thought to be “critical to the success of the Confederate forces.”  Naturally, a lot of this material made its way to the black market, enriching the provost marshals.

Despite the fact that the original law specified no punishment for noncompliance, Captain James Duff, the provost marshal for the Texas Hill country, began an outright reign of terror.  Employing night riders, his band began burning homes and hanging German immigrants without trial.  According to one of his men, the best method of convincing men to become Confederate volunteers was by hanging a few Union sympathizers. 

The German communities attempted to resist the conscription act and remain loyal to the Union.  After a Union Loyal League was founded in protest, the Confederate military declared Gillespie, Kerr, Kendall, Medina, and Bexar Counties to be in open revolt and declared war on them.  Captain Duff occupied Kerrville—which had voted 400 to 17 to remain in the Union—then declared himself Provost, and began enforcing his personal version of the law on members of the league.  In a letter to a friend, he declared, The God damn Dutchmen are Unionists to a manI will hang all I suspect of being anti-Confederates.

The hangings became so frequent that Germans began to sleep in their fields or in nearby woods at night for fear of being taken by “Die Haengerbaende” (the hanging band).  These guerrillas would arrive in the night, take the young men, hang the parents, and burn the homes and barns of those suspected of being pro-Union. 

The Union Loyal League attempted to hide in plain sight—they formed three companies of supposedly Confederate militias who were assigned the duty of guarding the Hill Country against raids by the Comanche.  Since they were in an active militia, this would exempt them from conscription.  As you can imagine, their real duty was to guard against the thugs employed by Captain Duff.

Duff retaliated by jailing most of the League’s officers, threatening to hang or jail the remainder of the League.  The militia companies disbanded and word was quickly passed to the young men that anyone desiring to flee to Mexico should meet along the Guadalupe River.  On August 1, 1862, sixty-eight men—nearly all of them German immigrants—met and began riding south to escape from Captain Duff.  Believing that there would be no active pursuit, the group’s progress was somewhat leisurely (perhaps, either because they were unsure of where in Mexico to go, or of what to do when they got there).

The group probably would have escaped successfully had it not run out of supplies and robbed a settler to replenish them (ironically, their victim was another German immigrant—who promptly reported the theft to the Confederate authorities).  Furious, Captain Duff sent a force of nearly a hundred to intercept the fleeing Unionists, who—being unaware of their eager pursuers—were still making their way at a leisurely pace towards Mexico.  Whether as a result of the slow pace or the general lack of a plan of action after they arrived in Mexico, twenty-eight of the Germans had abandoned the group and returned home.

On August 9, 1862, the Confederate force of ninety-six men under Lieutenant Colin McRae caught up with the men on the banks of the Nueces River about fifty miles from Mexico.  The fierce skirmish began at 3:00 AM, and left casualties on both sides.  Of the Unionists, eight were killed, eleven were wounded, and the rest managed to escape towards Mexico. 

At first, the wounded were well-treated and received medical care for their wounds.  Several hours after their capture, however, Lieutenant McRae ordered the men to be executed.  The bodies of all of the dead Unionists—whether killed in battle or subsequently executed—were left along the banks of the Nueces River, where they remained for the rest of the Civil War, since the Confederate authorities prohibited anyone from visiting the site.  After the war, as family members gathered the remains for burial, it was discovered that most of the men had been shot in the back of the head.

When news of the Nueces Massacre reached Captain Duff, he organized another force and arrested and hanged another fifty immigrants—including all of the twenty-eight who had abandoned the earlier party—in town centers, and fields across the Texas Hill Country.  Similar hangings were carried out in North Texas, particularly Gainesville.  These mass hangings are the largest in American history.

When the war was finally over, the scattered bodies of the men slain along the Nueces River were finally gathered.  Time, spring floods, and the ravages of wild animals had made identification impossible, so the remains were returned to Comfort, Texas and buried together in the town center.  A limestone obelisk was erected in their honor—one of the first to memorialize the Civil War and it stands in a former Confederate state to honor the men who remained loyal to the Union.  It is the only Union monument erected in the former Confederacy.

On the side of the marker are listed the names of the men buried under the inscription, “Trëue der Union”, or in the language of the men who murdered them, “True to the Union”.