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The Theory of Business Enterprises Part 3: Capital and Credit

In Chapter 5 Veblen takes up the use of credit. He defines credit as any money obtained from third parties to run a business, including the owner’s capital, but excluding profits. He disregards the form in which the capital is contributed: equity, preferred stock, debt whether collateralized or not, all are credit. That’s because the business has to pay for the use of the money one way or another. Of course, structure matters in bankruptcy, because debt gets a preference over equity, and the order of payment is set by the documents of the capital structure. Veblen says that in economic downturns, bankruptcy takes hold, and the creditors determine the ownership of the material means of production and redistribute them in their best interests.

Veblen distinguishes the newer credit economy from the money economy described by the earlier economic thinkers, including Adam Smith.

It has been the habit of economists and others to speak of “capital” as a stock of the material means by which industry is carried on, – industrial equipment, raw materials, and means of subsistence. This view is carried over from the situation in which business and industry stood at the time of Adam Smith and of the generation before Adam Smith, from whose scheme of life and of thought he drew the commonplace materials and conceptions with which his speculations were occupied. It further carries over the point of view occupied by Adam Smith and the generation to whom he addressed his speculations. That is to say, the received theoretical formulations regarding business capital and its relations to industry proceed on the circumstances that prevailed in the days of the “money economy,” before credit and the modern corporation methods became of first-class consequence in economic affairs. They canvass these matters from the point of view of the material welfare of the community at large, as seen from the standpoint of the utilitarian philosophy. In this system of social philosophy the welfare of the community at large is accepted as the central and tone-giving interest, about which a comprehensive, harmonious order of nature circles and gravitates. These early speculations on business traffic turn about the bearing of this traffic upon the wealth of nations, particularly as the wealth of nations would stand in a “natural” scheme of things, in which all things should work together for the welfare of mankind. Chapter 6.

In Adam Smith’s time, and the generation after him, production occurred in a “money economy”. The earlier economists examined this from the standpoint of natural law and later utilitarianism. I understand the first part, about natural law. That appears in a number of French thinkers and British as well, and perhaps is part of the thinking of Smith, as Veblen asserts. The idea is roughly that factory owners would benefit from an engaged working class, and all would want to improve things in their communities because that would benefit them and because it was the natural order of things. Veblen adds the notion of the utilitarian philosophy which I assume is a reference to Jeremy Bentham, although that name does not appear in the book. The connection isn’t obvious to me.

By the early 1900s the money economy was replaced by a “credit economy”. Veblen seems to be saying that the ideas of the money economy were imported into the credit economy, including the ideas of natural law and utilitarianism. He does not elaborate on this idea at this point, turning to a discussion of the general forms of business organization.

Chapter 7, The Theory of Modern Welfare, is primarily a discussion of the business cycle. Financing costs, including interest on debt, preferred stock dividends, and a normal rate of profit, are more or less fixed. Prices decline because of competition as new entrants use more efficient machines and processes, while facing the same or lower financing costs. When prices decline, the more heavily burdened businesses fail, causing a downward spiral in prices for suppliers and their suppliers. It takes an external shock such as a war to restore the previous price levels. And, as noted, the creditors get to decide how to redistribute the capital equipment and factories of the bankrupt companies. From this he concludes that the natural condition of the capitalist economy is chronic depression.

He concludes his discussion of the business cycle by arguing that the economy will sink unless prices can be maintained by oligopolies and monopolies operated through trusts. That’s not a complete solution, though, unless almost all competition can be eliminated.

The great coalitions and the business manoeuvres connected with them have the effect of adding to the large fortunes of the greater business men; which adds to the large incomes that cannot be spent in consumptive expenditures; which accelerates the increase of investments; which brings competition if there is a chance for it; which tends to bring on depression, in the manner already indicated.

That doesn’t include workers, though. They are hung out to dry in this setting. Or as Veblen puts it: “there remains the competitive friction between the combined business capital and the combined workmen.”

Veblen begins Chapter 7 with this interesting observation. In a money economy, the welfare of the community, apart from issues of war and peace, “turned on the ease and certainty with which enough of the means of life could be supplied.”

Under the old regime the question was whether the community’s work was adequate to supply the community’s needs; under the new regime that question is not seriously entertained.

This fleshes out the section quoted above about natural law. With this measuring principle, under the natural law, “…all things should work together for the welfare of mankind”. It makes a nice contrast with the credit economy which disregards the welfare of the community and concentrates all its efforts on the frantic search for profits.

It seems to me that the structures and theories Veblen identifies have grown into the structures of business today, but observing them in their earliest stages is helpful in thinking about alternatives. Veblen’s point that the costs of financing are included in the price reminds us of something we rarely think about. The price we pay for goods in a credit economy includes the amount necessary to pay off banks, bondholders, preferred stockholders and so on, and to produce profits to pay off shareholders and managers. The profits have to be great enough to persuade the businessman to stay in the business. At each step in the process, the ultimate consumer pays for capital.

At the same time, Veblen points out that competition will force profits to zero over time through efficiency gains, mismanagement, or other mechanisms, usually with disastrous consequences. Theoretically the US has an antitrust policy which pushes back against monopoly, but that has mostly fallen into oblivion. As a result, we preach competition but operate in an oligopoly at best, and in many areas, in an effective monopoly. That means that capital is being paid more than necessary to produce sufficient goods and services for the community.

There is effectively no limit on the amounts that the monopolist can collect. We see this in operation in the pharmaceutical industry. Pfizer, for example, raises the prices regularly on drugs in which it has a monopoly or an oligopoly. See also this discussion of an interview Pfizer CEO Ian Read did with Forbes. The pricing strategy for new drugs is to maximize profits, not to provide for the needs of the community. The explanation is that a business valued by capitalization of future earnings, like Pfizer, must show increases in earnings every year, or the stock price will stabilize or perhaps fall, and perhaps even the interest rates charged by lenders will rise. That should make us ask why we think this is a good plan for something as important as medicine. But we don’t ask that question. Instead, our politicians protect businesses with favorable trade treaties and other accommodations, and raise prices to consumers for drugs.

Suppose the goal of manufacturing drugs is to produce sufficient quantities to meet the needs of the community, and to pay the owner of a plant a reasonable living wage, as Veblen says was the case in Adam Smith’s time. This business model was used by actual non-profit hospitals like the one my Dad worked at, a Catholic hospital built and operated with cash raised from the community. In that setting, there is no need to raise prices beyond inflation and depreciation (shorthand for new and replacement equipment and plant, training and so on). Any new entrant would face the same situation, so there is no advantage to be obtained in the near term from introduction of new capital. The business of creating new drugs can be pushed off to venture capital, as is mostly the case already, so there is no need to provide for R&D. There would be no need in this setting to pay dividends, and the need for interest payments would also be reduced. There would be other savings as well.

I leave as an exercise for the reader working out methods for forcing this outcome. I assume there must be some problem with this analysis, and leave that open as well.

Battening Down the Hatches — Stand By

As a few of you have noticed, the site has been misbehaving since Friday afternoon. We are working on the problem, but for now have battened down the hatches to try to isolate the problem. As part of that we have shut down commenting.

Please bear with us! As always, I’ll be commenting excessively [email protected] on Twitter if you need a fix.

The Origins of Totalitarianism: Index to All Posts

This post will be updated with all posts on The Origins of Totalitarianism by Hannah Arendt. Here’s a copy of this book. All page numbers correspond to that version

Posts in this series:

The Origins of Totalitarianism Part 1: Introduction.

The Origins of Totalitarianism Part 2: Antisemitism

The Origins of Totalitarianism: Interlude on the Tea Party

The Origins of Totalitarianism Part 3: Superfluous Capital and Superfluous People

The Origins of Totalitarianism: Interlude on The Commons

Capitalism Versus The Social Commons (published at Naked Capitalism; discusses privatization using Rosa Luxemburg theory)

The Origins of Totalitarianism Part 4: Humanity under Totalitarianism

The Origins of Totalitarianism: Interlude on Right-Wing Authoritarianism

The Origins of Totalitarianism Part 5: Artistic and Intellectual Elites and the Rise of Fascism

The Origins of Totalitarianism: Interlude Defining Elites

The Origins of Totalitarianism: Interlude On the Twilight of Conservative Elite Pundits

The Origins of Totalitarianism Part 6: Totalitarian Propaganda

The Problem of the Liberal Elites Part 1

The Problem of Liberal Elites Part 2 On Trade

The Problem of the Liberal Elites Part 3 on Trade

The Problem of the Liberal Elites Part 4 Conclusion

The Origins of Totalitarianism Part 7: Superfluous People

The Origins of Totalitarianism: Conclusion

Pew Poll Finding Majority Oppose Apple Is Premised on FBI Spin

Screen Shot 2016-02-22 at 9.00.37 PMImagine if Pew called 1000 people and asked, “would you support requiring Apple to make iPhones less secure so the FBI could get information on a crime the FBI has already solved?”

Respondents might find the entire question bizarre, as requiring a private company to damage its product for information on a crime the FBI had already solved would be a tremendous waste. Based on the argument I laid out here — that the information the FBI might get from Syed Rezwan Farook’s work phone wouldn’t add all that much to what they presumably already got off two phones he tried unsuccessfully to destroy, as well as the phones or iCloud accounts of his colleagues — that’s the question I think Pew should have asked in its poll.

Here’s what Pew asked :

As you may know, RANDOMIZE: [the FBI has said that accessing the iPhone is an important part of their ongoing investigation into the San Bernardino attacks] while [Apple has said that unlocking the iPhone could compromise the security of other users’ information] do you think Apple [READ; RANDOMIZE]?

To be fair to Pew, FBI has said this phone will be “important,” and to Pew’s great credit, they described Apple’s stance to be about security, not privacy.

But the fact of the matter is FBI is demanding access to this phone knowing full well who the perpetrators are — Farook and his wife — and knowing (per Admiral Mike Rogers and a slew of FBI statements before his) that the couple didn’t have overseas help. San Bernardino was, the FBI has known for months, a particularly brutal workplace killing inspired by radical Islam.

I sort of suspect Americans might think differently about this particular back door request (though maybe not another case where the phone really would be central to solving the case) if it were explained in those terms.

Hillary’s Admission Diplomacy Couldn’t Get Pakistan To Hand Over Bin Laden

There was a really weird moment during the foreign policy section of last night’s debate.

Bernie, to respond to Hillary’s explanation of what we need to do to win wars against terrorism, said he doesn’t support regime change. To counter him, Hillary said, in part, that he had voted in favor of regime change in Libya.

Which led to this exchange:

SANDERS: Judy, if I can, there is no question, Secretary Clinton and I are friends, and I have a lot of respect for her, that she has enormous experience in foreign affairs. Secretary of state for four years. You’ve got a bit of experience, I would imagine.

But judgment matters as well. Judgment matters as well. And she and I looked at the same evidence coming from the Bush administration regarding Iraq. I lead the opposition against it. She voted for it.

But more importantly, in terms of this Libya resolution that you have noted before, this was a virtually unanimous consent. Everybody voted for it wanting to see Libya move toward democracy, of course we all wanted to do that.

SANDERS: That is very different than talking about specific action for regime change, which I did not support.

CLINTON: You did support a U.N. Security Council approach, which we did follow up on. And, look, I think it’s important to look at what the most important counterterrorism judgment of the first four years of the Obama administration was, and that was the very difficult decision as to whether or not to advise the president to go after bin Laden.

I looked at the evidence. I looked at the intelligence. I got the briefings. I recommended that the president go forward. It was a hard choice. Not all of his top national security advisors agreed with that. And at the end of the day, it was the president’s decision. So he had to leave the Situation Room after hearing from the small group advising him and he had to make that decision. I’m proud that I gave him that advice. And I’m very grateful to the brave Navy SEALs who carried out that mission.

This is not the first time Hillary has changed the subject by bringing up the Osama bin Laden killing — a far more awkward example came when she did so to respond to Chuck Todd’s question whether she would release her Goldman Sachs speech transcripts.

TODD: Are you willing to release the transcripts of all your paid speeches? We do know through reporting that there were transcription services for all of those paid speeches. In full disclosure, would you release all of them?

CLINTON: I will look into it. I don’t know the status, but I will certainly look into it. But, I can only repeat what is the fact that I spoke to a lot of different groups with a lot of different constituents, a lot of different kinds of members about issues that had to do with world affairs. I probably described more times than I can remember how stressful it was advising the President about going after Bin Laden.

But this example is more telling in a number of respects.

First, consider why she had to change the subject, aside from the fact that Libya has turned out to be such a colossal mistake. Hillary claimed Bernie voted in favor of regime change and then, without a break, described the vote as favoring Security Council involvement.

He voted in favor of regime change with Libya, voted in favor of the Security Council being an active participate in setting the parameters for what we would do, which of course we followed through on.

The resolution included, among other things, these three parts:

(3) calls on Muammar Qadhafi to desist from further violence, recognize the Libyan people’s demand for democratic change, resign his position and permit a peaceful transition to democracy governed by respect for human and civil rights and the right of the people to choose their government in free and fair elections;

(7) urges the United Nations Security Council to take such further action as may be necessary to protect civilians in Libya from attack, including the possible imposition of a no-fly zone over Libyan territory;

(11) Welcomes the outreach that has begun by the United States government to Libyan opposition figures and supports an orderly, irreversible and transition to a legitimate democratic government in Libya.

It certainly called for Qaddafi to resign and transfer power to a democratic government. It even endorsed the “outreach” — which ultimately involved barely covert support for rebels — as a means to “transition to a legitimate democratic government.” And it called for the UNSC to take further action, which it did weeks later in calling for a no-fly zone. Famously, Russia and China only permitted that resolution to pass because Susan Rice had led them to believe it did not entail regime change (which is why Russia refused to play along with multilateral efforts to do something about Bashar Assad’s massacres).

VITALY CHURKIN (Russian Federation) said he had abstained, although his country’s position opposing violence against civilians in Libya was clear.  Work on the resolution was not in keeping with Security Council practice, with many questions having remained unanswered, including how it would be enforced and by whom, and what the limits of engagement would be.  His country had not prevented the adoption of the resolution, but he was convinced that an immediate ceasefire was the best way to stop the loss of life.  His country, in fact, had pressed earlier for a resolution calling for such a ceasefire, which could have saved many additional lives.  Cautioning against unpredicted consequences, he stressed that there was a need to avoid further destabilization in the region.

In last night’s debate, Sanders responded — after talking about what good friends he is with the woman who just claimed he had supported regime change — that he had supported more democracy in Libya, not regime change.

Everybody voted for it wanting to see Libya move toward democracy, of course we all wanted to do that. That is very different than talking about specific action for regime change, which I did not support.

Which led Hillary to suggest, in response, that “we follow[ed] up on,” which led directly to Qaddafi taking a bayonet up his rectum.

You did support a U.N. Security Council approach, which we did follow up on.

Hillary is suggesting (whether solely for political gain or also for legal cover, it’s not entirely clear) that that Senate call for democracy entailed permission to execute regime change. That is, she seems to be claiming that the intent all along was regime change and Sanders should have known that when he did not object to a voice vote in favor of the Libya resolution.

Then, BOOM, dead Osama bin Laden…

… Just in case you start thinking too much about what it means that Hillary suggested that Senate resolution amounted to support for regime change which therefore amounted to an authorization to use military force.

Now, thus far, the exchange is troubling, but not surprising. Hillary’s hawkishness and fondness for fairly broad exercises of executive authority are known qualities.

But the juxtaposition of the disastrous regime change effort in Libya with Obama’s decision to secretly send Navy SEALs into Pakistan to execute Osama bin Laden got me thinking about how different that OBL decision looks when the former Secretary of State is boasting about it, rather than the President.

Once you decide that the way to respond to locating OBL is to sneak into a sovereign country and execute someone, you clearly have to consult with the Secretary of State, as she’s going to have to deal with the diplomatic fallout. That was all the more true as things rolled out, given that we were already conducting delicate negotiations to get Raymond Davis out. Not to mention the way that Davis fiasco soured relations between CIA and State.

Left unsaid, though, is the other option: developing good enough relations with Pakistan — or, more likely, being able to wield enough leverage against Pakistan — such that they would turn him over without the sovereignty violation.

Maybe — likely — that was never going to happen. Maybe — likely — within the bowels of CIA and State and the White House we had good reason to know that Pakistan would not turn over OBL, no matter how much leverage we used. Maybe — likely — it’s also true that the Obama Administration thinks special forces have a better success rate than diplomacy — or thought that, in his first term; his second term, post-Clinton, has had a series of impressive diplomatic successes.

I’m not suggesting I think we could have just asked nicely. But I find it notable that the Secretary of State describes her role as advising the President on whether or not to violate another country’s sovereignty to execute someone, not as considering whether there are other ways to achieve the same objective. I find it remarkable that a Secretary of State boasts about this decision, which ultimately is about the limits of diplomacy even with our so-called allies.

Pfizer’s Vision of R&D

Recently I saw Ian Read, the CEO of Pfizer, on CNBC explaining that the Pfizer/Allergan merger would enable the combined companies to spend more on research and development of new drugs. He also confirmed that Pfizer raised prices on at least 105 drugs for no apparent reason. You can watch a small part of the interview here.

Read tries to pass the price hikes off as some kind of market-driven thing, which is stupid because price hikes are mostly either for drugs protected by patents or for generics which have no competition. The increases averaged 9.4%, far in excess of inflation, and faster than the expected increase of 5.4% in total health care spending. It’s a money grab pure and simple. The CEO then explained that these prices are a drop in the bucket, since drugs account for only about 10% of total health care spending, which comes to a total of about $310 billion, or roughly $1000 per person in the US. Drug prices rose by an average of 10.4% in 2014, so a drop in the bucket is roughly $100 per US person. And anyway, Read says, they do negotiate prices with some providers and cut prices for some poor people; meaning that the rest is paid by drug insurance policy holders. All this public talk is just politics, says Read, who in 2014 received total compensation of $23.3 million. Surely for that kind of money he could do a better job of defending his company’s rapacious behavior.

Pfizer is planning to merge with Allergan and move to Ireland to cut taxes. Read claims he needs the money for research and development of wonderful new drugs. That suggests that Read thinks he doesn’t have enough money for R&D right now. Let’s see what the 2014 financial statements say about that. In 2014, Pfizer reported net income of $9.1 billion. P. 58. It paid dividends of $6.6 billion, and repurchased stock for $5.0 billion, a total return to shareholders of $11.1 billion. With that kind of management, no wonder there is no money for an increase in R&D.

Remember that R&D expenses are deductible in full in the year incurred, a temporary tax law now permanent thanks to Congress. So let’s see what we get for that tax cut. Pfizer reports that in 2012, it had an R&D expense of $250 million to “obtain the exclusive, global, OTC rights to Nexium”. P. 28. Pfizer get Uncle Sam to pay about $80 million of that price. In 2014, Pfizer counted as part of its increase in R&D this gem: “$309 million, reflecting the estimated fair value of certain co-promotion rights for Xalkori given to Merck KGaA”. That’s a non-cash transaction that cut Pfizer’s taxes.

And here’s a description of the R&D program at Pfizer:

We take a holistic approach to our R&D operations and manage the operations on a total-company basis through our matrix organizations described above. Specifically, a single committee, co-chaired by members of our R&D and commercial organizations, is accountable for aligning resources among all of our R&D projects and for seeking to ensure that our company is focusing its R&D resources in the areas where we believe that we can be most successful and maximize our return on investment. We believe that this approach also serves to maximize accountability and flexibility.

That’s management speak for “we make drugs that will maximize our income.”

Turning to the Allergan deal, CEO Read assures us that Pfizer will use the tax savings for R&D. Let’s first see what the savings might be. According to Americans for Tax Freedom, Pfizer paid effective world-wide tax rate of 7.5%. That compares with the 25.5% reported on its 10-K. P. 28. ATF offers a detailed explanation of the accounting, and explains that most US multinationals don’t use the same accounting treatment. ATF adds that Pfizer had as much as $148 billion parked overseas and untaxed in the US. At least that explains where they get the money to pay off their shareholders and keep Wall Street happy.

Let’s just ignore the claim of Frank D’Amelio, Pfizer’s CFO, that half the tax savings will go to shareholders as dividends. Pfizer has shut down a bunch of R&D facilities after each of its recent mergers.

Writing in Nature, former Pfizer R&D executive John LaMattina noted that the company’s three largest buyouts–Warner-Lambert, Pharmacia and Wyeth–resulted in sweeping research cuts and site closures, leaving more than 20,000 scientists out of work. And those who stick around were saddled with major R&D delays, LaMattina wrote, as integrating two large companies involves a painstaking review of assets that can slow development down to a crawl. Even more difficult to quantify is the effect on productivity, he wrote, as word of potential layoffs spreads fast throughout a large company and distracts workers from their projects.

After the merger the number two man, Brent Saunders of Allergan will oversee operations, including R&D. Here’s Saunders in August, 2015, discussing his vision of R&D with Randall Pierson of Reuters.

Saunders said discovery research, where researchers test ideas and compounds in test tubes and animals, typically eats up about 30 percent of pharmaceutical company research budgets, although only about one of every 20 such products that enters human trials succeeds and is approved.

“Discovery is where the industry has its lowest return on investment,” he said, “and not a good (use) of Allergan’s research dollars.”

Instead, he said Allergan will acquire products from companies that have already done the research spadework, and then itself develop the medicines and submit them for regulatory approvals.

In other words, Saunders and Read like the business of buying other people’s research and then doing some tests and filling out the paperwork for drug approvals. This gets them a patent/monopoly, and a fat tax deduction for all the paperwork. Then they can sell the drugs for a profit that is taxed (if at all) at capital gain rates, and if a US company buys it, the US company gets to treat the price it paid as a fully deductible R&D expense. Sweet.

Remember that Read is magnificently compensated for running this business, but what does he bring to the table? It has nothing to do with drug creation and manufacture. His contribution is measured by how little Pfizer pays in taxes, and how well he engineers earnings, and certainly not by any contribution to the well-being of humans.

We don’t have to allow this business model to flourish with tax cuts and benefits. It’s corrupt to the bone.

NFL Pro Bowl Trash Talk

Hahahahaha, psyche!

No, there is no substantive Pro Bowl Trash Talk. Because the Pro Bowl is a complete worthless joke.

This is a let loose on idiocy in general post. Which is more than what the NFL Pro Bowl is at this point.

Have fun and let yer hair down.

Music by Jefferson Airplane. Paul Kantner was an incredibly nice, and extremely under appreciated, seminal musician. RIP Mr. Kantner, and thanks.

Sean Penn, Intelligence Dangle

The press is outraged that Sean Penn gave Chapo Guzmán editorial veto over the Rolling Stone story he published about their interview.

Disclosure: Some names have had
 to be changed, locations not named, and an understanding was brokered with the subject that this piece would be submitted for the subject’s approval before publication. The subject did not ask for any changes.

Though the press is outraged based on the assumption that what they’re reading is journalism. Note that Penn (or whoever wrote this paragraph) didn’t name Chapo? Why should we assume “the subject” is Guzmán and not some American three letter agency that set up this meeting?

Because it sure looks like the latter provides a better explanation for this story. It reads better as retroactive cover, published to protect Penn and the woman who, he explains, set up the meeting between him and Guzmán, Kate del Castillo, than it does as any real journalism.

Consider these details. Two men whose real names Penn doesn’t provide — one of whom Penn met with amid Enrique Peña Nieto’s security forces at a hotel in New York just before they made the final decision to take this trip — set up the meeting, playing both the role of Hollywood producer and key broker. The one he met in EPN’s hotel, Espinoza (“espinosa” translates as “spiny”), wears a “surgical corset” for his back (get it? spiny?) that somehow gets through Chapo’s extensive security unchecked.

Espinoza had recently undergone back surgery. He stretched, readjusted his surgical corset, exposing it. It dawns on me that one of our greeters might mistake the corset for a device that contains a wire, a chip, a tracker. With all their eyes on him, Espinoza methodically adjusts the Velcro toward his belly, slowly looks up, sharing his trademark smile with the suspicious eyes around him. Then, “Cirugia de espalda [back surgery],” he says. Situation defused.

Right after arriving in Chapo’s presence on what would be October 2, 2015, Espinoza goes by himself to a bungalow, purportedly to take a nap. Penn and his party stay overnight with the cartel boss. Immediately upon their departure, according to Penn’s sources, who apparently have better information than all the reporters who work this beat did last October, Mexican authorities started a siege on Chapo that was publicly explained by claiming they had geolocated the cell phone of one of his men but isn’t that a remarkable coinkydink that it actually happened immediately after Espinoza and his spiny back device showed up?

Note carefully how Penn describes searching his phone immediately after being reunited with it on what would be October 4 and not yet knowing about the siege that was going on.

In the backseat, my L.A.-based assistant had left a manila envelope with my cellphone in it. I turn on the phone to the explosion of a two-day backlog of e-mails and text messages. Ignoring them, I hit my browser for updates. What I didn’t know, and what was not yet being reported, was that from the time the weather cleared, a military siege on Sinaloa was imminent.


According to media reports that didn’t come until days later [ed: here are two examples], a cellphone among his crew had been tracked. From the time the military and the DEA moved in on them, the reports of what happened are conflicted. A source familiar with the cartel informed me on October 3rd that the initial siege had begun. That source and another on the ground in Sinaloa reported that over the next several days, two military helicopters were shot down and Mexican marine ground troops laid siege to several ranch properties.


El Chapo’s own account would later be shared with me, through a BBM exchange he had with Kate. “On October 6th, there was an operation….Two helicopters and 6 BlackHawks began a confrontation upon their arrival. The marines dispersed throughout the farms. The families had to escape and abandon their homes with the fear of being killed. We still don’t know how many dead in total.” When asked about the reports of his own injuries, Chapo responded, “Not like they said. I only hurt my leg a little bit.” [my emphasis]

What curious grammar describing Penn’s source’s remarkable knowledge. “A source familiar with the cartel informed me on October 3rd that the initial siege had begun.” Did his source inform him on October 3rd, as this passage literally claims? (The second facilitator in the story, whom Penn calls El Alto, stuck around after they emerged from the jungle on October 3.) The muddled structure of this passage would certainly allow for that, or it might mean his source informed him that on October 3 the siege began.

Curiously, when Penn provided his bona fides to Chapo — which for the cartel boss, largely rested on the actor’s relationship with Hugo Chávez — he didn’t mention that he had a relationship with people who would be privy to otherwise unavailable information about what really went down in October, though he did admit he has “many relationships inside the United States government.”

I tell him, up front, that I had a family member who worked with the Drug Enforcement Agency, that through my work in Haiti (I’m CEO of J/P HRO, a nongovernmental organization based in Port-au-Prince) I had many relationships inside the United States government. I assure him that those relationships were by no means related to my interest in him.

Elsewhere in the story Penn claims he is telling the truth, but keeping information compartmentalized.

I take no pride in keeping secrets that may be perceived as protecting criminals, nor do I have any gloating arrogance at posing for selfies with unknowing security men. But I’m in my rhythm. Everything I say to everyone must be true. As true as it is compartmentalized.

Perhaps the most interesting detail is that when Chapo asked Penn to come back in 8 days for a return visit that never took place, Penn responded by asking for a photo — for Rolling Stone. Except that he arranged it so that it would be usable for facial recognition.

I say I can. I ask to take a photograph together so that I could verify to my editors at Rolling Stone that the planned meeting had taken place.


I explain that, for authentication purposes, it would be best if we are shaking hands, looking into the camera, but not smiling. He obliges. The picture is taken on Alfredo’s cellphone. It would be sent to me at a later date.

Who knows? Maybe Rolling Stone uses sophisticated facial recognition software in the wake of their UVA rape story disaster?

What’s perhaps funniest is this passage, which has attracted the most attention (and figures prominently in the NYT’s A1 story on Penn’s tale, which actually appeared before the tale itself in Rolling Stone and isn’t behind NYT’s paywall).

My head is swimming, labeling TracPhones (burners), one per contact, one per day, destroy, burn, buy, balancing levels of encryption, mirroring through Blackphones, anonymous e-mail addresses, unsent messages accessed in draft form. It’s a clandestine horror show for the single most technologically illiterate man left standing.

While Penn describes his discussions with Kate as being encrypted, Kate is the one who conducted negotiations with Chapo’s people, using a blackberry. Moreover, what Penn describes here doesn’t seem to match what he describes of communications with the cartel. So who was he using this operational security with?

Then there are the parts of the story that don’t cohere, not because Penn is an egotistical buffoon, but because they simply don’t make sense. Remember, the story is that Chapo is so narcissistic that he compromised his considerable operational security to reach out to some film people.

Penn is a film person, but as was decided before Chapo escaped from prison, there was no way they were going to be able to make a film (though somehow Penn managed to bring a knapsack with him to meet the drug lord, but it didn’t even contain a pen or paper). So instead the idea was to write a magazine article.

When Chapo’s men don’t show up to pick up Penn after 8 days (the siege in Sinaloa was still going strong), Penn kept pushing Kate to recontact Chapo under the premise that someone in his camp would translate Penn’s English language questions (for some reason Kate, who translated for Penn when he was in Mexico, didn’t translate them…), and Chapo would film himself answering them.

Penn attributes the delay to Chapo Guzmán’s humility (!!!!!), rather than what had to have been legitimate concern that this lefty actor had visited immediately before a massive manhunt started in October.

Without being present, I could neither control the questioning nor prod for elaborations to his responses. In addition, every question sent first had to be translated into Spanish. Remarkably, while Chapo has access to hundreds of soldiers and associates at all times, apparently not one speaks English.

At the end of each day that passed without receipt of the video, Kate would reassure me that it was only one more day away. But each night, El Chapo contacted her with more delays and apparent doubts. Not about my inquiries, but seemingly about how to make a tape of himself. “Kate, let me get this straight. The guy runs a multibillion-dollar business with a network of at least 50 countries, and there’s not one fucker down there in the jungle with him who speaks a word of friggin’ English? Now tonight, you’re telling me his BBM went on the blink, that he’s got hardly any access to a goddamn computer?! Are you saying he doesn’t have the technical capability to make a self-video and smuggle it into the United States?”

I ask myself, How in the fuck does anyone run a business that way?! I go Full-Trump-Gringo on Kate, battering her daily by phone, text and encrypted email. In the end, the delay had nothing to do with technical incompetence. Big surprise. Whatever villainy is attributable to this man, and his indisputable street genius, he is also a humble, rural Mexican, whose perception of his place in the world offers a window into an extraordinary riddle of cultural disparity. It became evident that the peasant-farmer-turned-billionaire-drug-lord seemed to be overwhelmed and somewhat bewildered at the notion that he may be of interest to the world beyond the mountains. And the day-after-day delays might reveal an insecurity in him, like an awkward teenager bashful to go unguided before the camera. Or had all of this been an orchestrated performance?

Right. Chapo Guzmán is bashful, and bewildered that he might be of interest to the entire world. And as it turns out the answers to the question — which Rolling Stone published as a verbatim transcription — are less insightful than details (such as that Chapo drew fake pesos when he was a kid) Penn must have gotten during the hours he spent with the drug lord in October. Penn had his story, but insisted on this video (remember, they had decided months earlier they weren’t doing an actual film!) so someone in Chapo’s camp would once again send video to him.

In short, it’s a load of horse shit that is entirely inconsistent with Chapo’s assent to do the meeting in the first place.

But it makes a nice cover story, even if it doesn’t amount to journalism. And journalists are so obsessed with the ethics of this non-journalism they’re not noticing all the other details that don’t make sense.

Update: There’s something else stupid about assuming Rolling Stone let Chapo approve this.

He’s in prison!

So either, they had the article ready to go, but held it until such a time he got caught (as if they knew he was about to be caught). Or they went to Altiplano, where Chapo is being held, to ask for his approval.

Or, they got approval from someone else entirely.

Update: The Rolling Stone spoke with NYT (you know, the newspaper that reported on RS’ story before they did) to defend their article. They do seem to suggest Chapo is the one who got final say.

As for giving Mr. Guzmán final approval over the article, Mr. Wenner said: “I don’t think it was a meaningful thing in the first place. We have let people in the past approve their quotes in interviews.”

Mr. Guzmán, he said, did not speak English and seemed to have little interest in editing Mr. Penn’s work. “In this case, it was a small thing to do in exchange for what we got,” Mr. Wenner said.

Logistically, that would be made possibly by RS sitting on the story several weeks.

A lawyer for the magazine, and its managing editor, Jason Fine, were eventually brought in to help with the editing process. Work on the article was completed about two weeks ago, Mr. Wenner said, but because of Rolling Stone’s production cycle, those involved were subjected to an excruciating wait for the next issue, during which time Mr. Guzmán was captured.

So we’re to believe the timing here was just an unbelievable coinkydink. And that it took RS from Thanksgiving, when — according to the new details in NYT — Penn got his video, until January, so almost as long to edit as it took to convince a top drug lord to shoot a video of himself. There were 3 issues of RS released between the time Penn would have gotten that video and the release it will go in. Though of course, if they had given Chapo final say, it would mean they contacted him just before Mexico closed in. The story spins out of control every time you try to make it make sense.

But the funniest part of the story is this: RS fact-checked it by conducting interviews with eyewitnesses.

Of Mr. Penn’s article, which was subject to follow-up interviews with eyewitnesses for fact-checking, Mr. Wenner said, “It’s not a vindication but a restatement of how good we are, how strong we are.”

Unless RS was interviewing Chapo’s men, again (as they were being rounded up), then those eyewitnesses would be limited to del Castillo or … Spiny and El Alto, whose names RS hasn’t even shared.

Wild Divisional Card Trash Talk

Four games on the schedule this weekend. No time for chit chat about balls that are round, whether large, as in the NBA, or small, like MLB. This is Playoff Football baybee!

In order, we have these games:

Chefs at Texans: This looks to be a surprisingly good game. Like the Skins in the other conference, Houston is hard to read. On a late roll. But they are4 on a roll with great defense and a boring, if marginally competent offense. That has been working for the Texans down the stretch. The line seems to consistently be on the Chefs. The real hesitation seems to be KC’s quarterback, Alex Smith. So, okay, Smith is not Joe Montana, but, then again, neither is Brian Hoyer, of whoever Houston is sporting. Edge Tejanos.

Steelers at Bengals: The matchup all the howling jackals on ESPN are uniformly calling the best of the playoffs. As usual, they are a bunch of NFL league co-opted mouthpieces that make Edgar Bergen and Charlie McCarthy look like pikers. Especially twats like Chris (11 out of 12 balls) Mortensen. Welp,back to the game, Cinci is a minor favorite at home. But they are starting Mr. AJ McCarron. Is that enough to squash Big Ben and the Stillers? Yeah, not if.

Squawks at Teh Norske: Wowzah. I have no idea on this, but a shocking lot of talking heads on ESPN and whatnot are saying Minnesota has a real chance and may well win this. As Lee Corso would scream, not so fast! I will stick with Pete Carroll and the Emerald City Boys, even if Beast Mode is not in the mix. Squawks are on a roll, and my bet is only Carolina or the Cards will stop that roll. Hope I am wrong, but not betting otherwise.

Pack at Skins: Probably the best game of the weekend. Will Rahdgahs be Rodgers? Can the Pack O-Line block, or would H and R do better? Is there any secondary left for the Pack? I have no clue. It is not a pretty picture in Title Town right now. Yes, the Cheese are in the playoffs, but as our greatest President, Jed Bartlett said, “Boy, I don’t know”. On the other hand, I liked Kirk Cousins from the get go. Before the Cards collected up Carson Palmer, I actively lobbied to have them trade some bullshit to Dan Snyder to get Cousins. Ask Marcy, she will confirm. But Shanahan was right about Cousins being the man, and not RG III. You like that? I do, and right now, if I had to put money down, I would take the Skins, and that would be a fine story. But my heart will always be made of Cheese and my eyes filled with Geezers and Starrs, of the Brett and Bart variety. I will throw my sorry lot in with the Cheese, but the Washington Professional Football Franchise has been playing awfully well lately. This is a pick em.

Music this fine weekend by the one and only, dearly departed, Robet Palmer. Don’t kid yourself, the dude and his band seriously rocked. I wish there were words, but there are not.

Vacation Sucky Blogging Schedule

Alright all you lugnuts that frequent the Emptywheel blog, as you may know, blogging gets a bit inconsistent Christmas week. And so it is again this year. Marcy is traveling, I am in New York City with my wife and daughter, and Jim is in Hawaii (surfing the big waves I presume) with his family.

So, we are all somewhat preoccupied. Feel free to use this post or the previous Real Housewives Trash Talk post to chat on any and all topics de jour. We will be along here or there, but in the meantime, if there is something to discuss, get on with it! Hope you all are having a great holiday week.

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