January 7, 2007

Editorial from New York Times

The Imperial Presidency 2.0

Observing President Bush in action lately, we have to wonder if he actually watched the election returns in November, or if he was just rerunning the 2002 vote on his TiVo.

That year, the White House used the fear of terrorism to scare American voters into cementing the Republican domination of Congress. Mr. Bush and Vice President Dick Cheney then embarked on an expansion of presidential power chilling both in its sweep and in the damage it did to the constitutional system of checks and balances.

In 2006, the voters sent Mr. Bush a powerful message that it was time to rein in his imperial ambitions. But we have yet to see any sign that Mr. Bush understands that — or even realizes that the Democrats are now in control of the Congress. Indeed, he seems to have interpreted his party’s drubbing as a mandate to keep pursuing his fantasy of victory in Iraq and to press ahead undaunted with his assault on civil liberties and the judicial system. Just before the Christmas break, the Justice Department served notice to Senator Patrick Leahy — the new chairman of the Judiciary Committee — that it intended to keep stonewalling Congressional inquiries into Mr. Bush’s inhumane and unconstitutional treatment of prisoners taken in anti-terrorist campaigns. It refused to hand over two documents, including one in which Mr. Bush authorized the Central Intelligence Agency to establish secret prisons beyond the reach of American law or international treaties. The other set forth the interrogation methods authorized in these prisons — which we now know ranged from abuse to outright torture.

Also last month, Mr. Bush issued another of his infamous “presidential signing statements,” which he has used scores of times to make clear he does not intend to respect the requirements of a particular law — in this case a little-noticed Postal Service bill. The statement suggested that Mr. Bush does not believe the government must obtain a court order before opening Americans’ first-class mail. It said the administration had the right to “conduct searches in exigent circumstances,” which include not only protecting lives, but also unspecified “foreign intelligence collection.”

The law is clear on this. A warrant is required to open Americans’ mail under a statute that was passed to stop just this sort of abuse using just this sort of pretext. But then again, the law is also clear on the need to obtain a warrant before intercepting Americans’ telephone calls and e-mail. Mr. Bush began openly defying that law after Sept. 11, 2001, authorizing the National Security Agency to eavesdrop without a court order on calls and e-mail between the United States and other countries.

•

News accounts have also reminded us of the shameful state of American military prisons, where supposed terrorist suspects are kept without respect for civil or human rights, and on the basis of evidence so deeply tainted by abuse, hearsay or secrecy that it is essentially worthless.

Deborah Sontag wrote in The Times last week about the sorry excuse for a criminal case that the administration whipped up against Jose Padilla, who was once — but no longer is — accused of plotting to explode a radioactive “dirty bomb” in the United States. Mr. Padilla was held for two years without charges or access to a lawyer. Then, to avoid having the Supreme Court review Mr. Bush’s power grab, the administration dropped those accusations and charged Mr. Padilla in a criminal court on hazy counts of lending financial support to terrorists.

But just as the government abandoned the “dirty bomb” case against Mr. Padilla, it quietly charged an Ethiopian-born man, Binyam Mohamed, with conspiring with Mr. Padilla to commit that very crime. Unlike Mr. Padilla, Mr. Mohamed is not a United States citizen, so the administration threw him into Guantánamo. Now 28, he is still being held there as an “illegal enemy combatant” under the anti-constitutional military tribunals act that was rushed through the Republican-controlled Congress just before last November’s elections.

Mr. Mohamed was a target of another favorite Bush administration practice: “extraordinary rendition,” in which foreign citizens are snatched off the streets of their hometowns and secretly shipped to countries where they can be abused and tortured on behalf of the American government. Mr. Mohamed — whose name appears nowhere in either of the cases against Mr. Padilla — has said he was tortured in Morocco until he signed a confession that he conspired with Mr. Padilla. The Bush administration clearly has no intention of answering that claim, and plans to keep Mr. Mohamed in extralegal detention indefinitely.

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The Democratic majority in Congress has a moral responsibility to address all these issues: fixing the profound flaws in the military tribunals act, restoring the rule of law over Mr. Bush’s rogue intelligence operations and restoring the balance of powers between Congress and the executive branch. So far, key Democrats, including Mr. Leahy and Senator Richard Durbin of Illinois, chairman of a new subcommittee on human rights, have said these issues are high priorities for them.

We would lend such efforts our enthusiastic backing and hope Mr. Leahy, Mr. Durbin and other Democratic leaders are not swayed by the absurd notion circulating in Washington that the Democrats should now “look ahead” rather than use their new majority to right the dangerous wrongs of the last six years of Mr. Bush’s one-party rule.

This is a false choice. Dealing with these issues is not about the past. The administration’s assault on some of the nation’s founding principles continues unabated. If the Democrats were to shirk their responsibility to stop it, that would make them no better than the Republicans who formed and enabled these policies in the first place.

Books on the American intervention in Iraq


Anderson, Jon Lee. The fall of Baghdad New York (State): Penguin Press, c2004.

Bremer, L. Paul and Malcolm McConnell. My year in Iraq : New York (State): Simon & Schuster, c2006.

Etherington, Mark. Revolt on the Tigris : New York (State): Cornell University Press, c2005.

Packer, George. The assassins' gate : England: Faber and Faber, c2006.

Ricks, Thomas E. Fiasco : New York (State): Penguin Press, c2006.

Riverbend. Baghdad burning II : New York (State): Feminist Press, 2006.

Riverbend. Baghdad burning : New York (State): Feminist Press at the City University of New York, c2005.

Rosen, Nir. In the belly of the green bird : New York (State): Free Press, c2006.

Wright, Lawrence. The looming tower : New York (State): Knopf, 2005, c2006.

For Dog Lovers, a Bigger Kennel

As Contrarians Have Lost Big,
Some Investors Learn New Tricks
In Harnessing Distressed Stocks

By E.S. BROWNING
December 26, 2006; Page C1

In this joyous holiday season, with so many stocks looking like winners, we examine this year's rarity: the lumps of coal.

By almost any measure, true losers have been hard to find. Just four of the 30 stocks in the Dow Jones Industrial Average are down this year, compared to 16 last year.

As for the broader market, of 10 big industry groups tracked by Dow Jones Indexes, all 10 are comfortably up. Last year, three were down. The weakest industry groups this year are health care, up 5.4%, and technology, up 8.6%.

For one group of investors, this good cheer is unwelcome. Contrarian investors buy beaten-down stocks in hopes of a rebound. They use a host of systems and theories, some with folkloric names such as the Dogs of the Dow. With stocks so robust, what's a contrarian to do?

Some favor buying each year's weakest stocks, but that simple method has been disappointing -- especially if you are choosing from Dow stocks that are hardly down at all.

Even the 50 weakest stocks in the Standard & Poor's 500-stock index perform inconsistently. The 50 weakest from 2002, a year when stocks were hammered, rebounded 81% in 2003, according to research and money-management firm Birinyi Associates in Westport, Conn. But the 2003 losers trailed the index the next year, and the 2004 losers fell in 2005. The 2005 bunch are more or less matching the index.

What contrarians seek is a truly abandoned stock, one that is poised for a real rebound.

For that, they need one that investors have been fleeing for several years, in which the selling has run its course, says finance professor Werner De Bondt at Chicago's DePaul University, who has studied the phenomenon for the past 20 years. He recommends the 50 stocks that have fallen the hardest over the previous three to five years, and suggests using a broader universe than the S&P 500 in order to find real losers.

"But very few people have the emotional capability to implement such a strategy," Prof. De Bondt adds.

One reason: Some of the truly beaten-down companies will go bankrupt. And many investors have trouble holding on to their portfolios for the three to five years that Prof. De Bondt's studies call for. Some hedge funds -- sophisticated, loosely regulated investment pools -- do use a variation on his strategy, he says.

One way to avoid stocks that are headed for bankruptcy, Prof. De Bondt suggests, is to buy only after a stock shows signs of rebounding. You lose some of the initial pop, but you are less likely to buy a stock that is headed for the graveyard.

A similar approach is to buy stocks that have been removed from the S&P 500. Those that suffered that indignity this year are up 27% on average since removal, while those that were added to the index are up only 1% since joining, notes Paul Hickey of Birinyi Associates. (Of course, there is the risk that a stock removed from the S&P 500 will fall into bankruptcy, although that hasn't happened to this year's crop, Mr. Hickey says.)

Similar trends can be seen among stocks that are added to and removed from the Dow Jones Industrial Average.

The idea is that, by the time a stock is removed, it probably has been heavily sold, while those that are added generally are at the peak of popularity and overdue for a pullback. (In the short run, those that are removed normally fall farther as index funds sell them, while those that are added do the opposite. But that process ends after a few days.)

An even simpler system is to look among stocks that have fallen to very low dollar prices, says Richard Evans, of Richard L. Evans Investments in Flossmoor, Ill. He believes the system works especially well in December, because of tax-loss selling. Investors often sell losers at year's end in order to generate capital losses, to balance capital gains for tax purposes. That selling can depress prices artificially.

"These are valid turnaround opportunities," Mr. Evans says. He looks for such stocks that have been down for a while, and for which he can find a logical reason to expect a turnaround. At the moment, he likes some down-and-out computer-chip stocks and makers of optical fiber.

One of the oldest year-end techniques involves buying small stocks in December in hopes of a January rebound. Despite widespread publicity, this "January effect" still occurs, probably due to tax-loss selling, says business professor Mark Hirschey of the University of Kansas.

His research shows that, even though small stocks' January effect gained notice in 1976, it has continued to occur. His research shows that small stocks still rise 6% on average in that one month, compared with a 1% large-stock gain.

Prof. Hirschey worries that small stocks in general might not benefit as much this January, because they have risen heavily in 2006. The small stocks that benefit most from the January effect are those that were sold in December, which is a relatively limited group this year, and which is the group he suspects will do best next month.

Prof. Hirschey has examined another once-popular system, called the Dogs of the Dow, and found it no better than buying the overall average.

The system calls for buying the five or 10 highest-yielding Dow stocks each year. The idea is that the high yield (dividend divided by price) often indicates a low price. Even if the doghouse stocks don't soar, the thinking goes, they at least pay good dividends.

The problem, Prof. Hirschey says, is that Dow stocks rarely fall deeply into disfavor, leaving them less room to rebound. Investment firms including Payden & Rygel, which once used versions of the Dogs of the Dow strategy, have stopped. And the system has proved inconsistent.

After a disappointing performance over the previous five years, the Dogs this year have risen more than 20%, well ahead of the overall average, which is up less than 16%. But Dow Dog General Motors, up 50% this year, still yields enough that it will be a Dog again next year. Some investors wonder whether it can deliver such brilliant gains for a second year in a row.

Neil Hennessy, whose Hennessy Funds in Novato, Calif., offers two funds based on the Dogs of the Dow, says fading interest in the system may mean that it won't be overused and might work better in the future. Anyhow, he says, buying high-yielding Dow stocks helps investors limit risk.

"Our philosophy is that it isn't what you make on the upside, it is what you don't lose on the downside," he says.

Write to E.S. Browning at jim.browning@wsj.com¹

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Kenya: No end to the corruption

Kenya No end to the problem
Nov 16th 2006 NAIROBI From The Economist print edition
Ever more reasons to worry about endemic corruption
THERE are few people left, even in Kenya, who dispute the fact that the country is one of the most corrupt in the world. Guesses about how much senior officials pinch from the public coffers range from $1 billion a year and up. But if that aspect of the country's corruption problem is well known, it is now doing other kinds of damage. For a rotten Kenya has also become an international security concern.
That was the message of Kim Howells, a Foreign Office minister from Britain, the former colonial master, on a visit to the country last week. In unusually frank terms, Mr Howells argued that because everyone, from Mombasa dockers to senior government officials, can be bought off, Kenya is “wide open” for drug cartels and terrorists. The cartels move large quantities of cocaine and heroin through Kenya and the drug money washing through Kenya's political bloodstream is making it even harder for honest ministers and civil servants to do their job.
Terrorism is another concern. Intelligence sources suggest that a few jihadists among the Somali Islamists in Mogadishu may be readying suicide attacks against targets in Kenya. Corruption certainly makes it easier for them to move between the two countries. Small bribes at remote border posts and larger bribes at Kenya's domestic airports are enough to make Somalis invisible to Kenya's security services. Corruption at the highest levels provides cover for stealing down the line. Some of the proceeds go on country club memberships and luxury cars. But far more is spent on political campaigns: rallies, paying off tribal elders, gangs to intimidate opposition supporters, and sometimes the voters themselves.
The present government was elected on an anti-corruption platform, but has done little to fulfil its promises. From the start, it borrowed money from many of the same individuals as the previous regime, and set about paying off debts with similar dodgy schemes. A few of these were laid bare by John Githongo, a government-appointed investigator who had to flee the country when his findings got too close to the top. His revelations did prompt two ministers to resign, but this week they were both reinstated. Some of the $300m or so involved in the scams has been returned to the treasury.
Donor countries are confining their aid to ever more strictly audited projects. Sir Edward Clay, an outspoken former British high commissioner to Kenya, says donors should be using their own laws more effectively against corrupt African officials. “Corruption is too far down the development agenda,” says Sir Edward. Kenya has made some progress. Mr Githongo and other brave whistle-blowers, after all, are Kenyans speaking for Kenya. But too many of them have had to flee abroad. Nor is there a single conviction in sight.

Mearsheimer and Walt on the Israel lobby

There is some debate in academic circles of American support for Israel.
This is in contrast to the US political scene where support of Israel is sacrosanct and Hamas and Hezbollah are invariably labeled as terrorist without any acknowledgement of the fact that both organizations are democratically elected and have been the targets of massive Israeli terror.
This is an excerpt from a front page story that ran in the New York Time on November 13 about Israel and America.
http://www.nytimes.com/2006/11/13/world/middleeast/13israel.html
But Mr. Zelikow's close ties to Ms. Rice are well known, and the furor over his comments was amplified because they appeared to some to echo criticisms published in March in The London Review of Books by two American scholars, John J. Mearsheimer of the University of Chicago <http://topics.nytimes.com/top/reference/timestopics/organizations/u/univers
ity_of_chicago/index.html?inline=nyt-org> and Stephen M. Walt of the Kennedy School of Government at Harvard.
http://www.lrb.co.uk/v28/n06/mear01_.html
They suggested that from the White House to Capitol Hill, Israel's interests have been confused with America's, that Israel is more of a security burden than an asset and that the "Israel lobby" in America, including Jewish policy makers, have an undue influence over American foreign policy. In late August, appearing in front of an Islamic group in Washington, Mr.
Mearsheimer extended the argument to say that American support of the war in Lebanon had been another example of Israeli interests trumping American ones.
The essay argued that without the Israel lobby the United States would not have gone to war in Iraq and implied that the same forces could drag the United States into another military confrontation on Israel's behalf, with Iran. It urged more American pressure to solve the Palestinian question as the best cure for regional instability.
Some Israelis worried that the implicit charge of dual loyalty would be underlined by the trial of two former officials of the prominent pro-Israel lobbying group, the American Israel Public Affairs Committee, on charges of receiving classified information about Iran and other issues from a Defense Department official and passing it on to a journalist and an Israeli diplomat. The trial is scheduled to begin early next year.
Mr. Walt, in an interview, argued that the first President Bush had worked to restrain Israel, and that Mr. Clinton worked to attain diplomatic concessions to achieve a peace. But when this Bush administration took office, "they first had no use for the Mideast, then took a more balanced position, calling for a two-state solution, and then were completely won over by Israel's argument that it is simply fighting terrorism."

Chased by Gang Violence, Residents flee Mathare

Chased by Gang Violence, Residents Flee Kenyan Slum

November 10, 2006
Nairobi Journal
Chased by Gang Violence, Residents Flee Kenyan Slum
By JEFFREY GETTLEMAN
NAIROBI, Kenya, Nov. 9 — In the past five days, more than 10 people have been killed and 600 homes burned to the ground in an unusual burst of violence between Nairobi gangs.
The fighting has emptied out an entire slum in central Nairobi, and on Thursday, women fleeing with mattresses on their backs slogged through the streets, while men with hammers knocked down the metal shanties that used to be their homes, selling their very walls for scrap.
The bloodshed began with a bootlegging dispute, but it has been fueled by ethnic rivalry. The epicenter is Mathare, a cluster of slums with approximately 500,000 people, crammed between downtown Nairobi and an affluent neighborhood where many ambassadors live. Mathare is a landscape of rust — thousands of shacks squeezed together with rusted metal roofs and rusted metal sides, and the occasional rusted metal bridge between. Even the mud here, where not a blade of grass grows, is rust red.
The area is notorious as a pocket of anarchy in a relatively orderly city, a place where street gangs levy taxes and teenage boys with machetes and dreadlocks shake down people at checkpoints. Most days, the police are nowhere to be found. Residents say it has been like this for years.
“You pay security, you pay electricity, you pay for toilets and what do you get?” said Morris Odek, a father of three. “Nothing.”
On Sunday, violence erupted between the gangs fighting for control of this impoverished turf. One gang is the Mungiki, a secretive, quasi-religious sect whose members cut out their enemies’ navels and worship a leader who says he came from a ball of shining stars. The other is a band of vigilantes who call themselves the Taliban, even though they are Christian and have nothing to do with the original Taliban group that imposed a harsh brand of Islam in Afghanistan.
“They just wanted a name that sounded tough,” said George Wambugu, a youth counselor for a soccer league in Mathare. The Mungiki and the Taliban have clashed before, but not like this. According to residents, the Mungiki tried to impose a higher tax on brewers of chang’aa, an outlawed homemade liquor with a kick stronger than that of vodka.
The brewers resisted and enlisted the help of the Taliban to fight back. That led to a cycle of street rumbles, shanty burnings and reprisal killings. Most victims were hacked to death with machetes, though some apparently were shot.
Like so many of Africa’s conflicts, this one has an ethnic dimension, with most Mungiki from the Kikuyu tribe, one of Kenya’s biggest, while the Taliban are primarily Luo, another prominent tribe.
“That’s why this won’t end,” said Daniel Opiyo, a shoe seller whose home was burned down. “It’s tribal, and it will go on and on.”
The police flooded into Mathare on Tuesday, but the killing continued. On Wednesday, the Kenyan government sent in soldiers with machine guns and declared a dusk-to-dawn curfew.
On Thursday, the soldiers prowled the muddy streets, seemingly grabbing at random the few young men left.
“See this guy,” one soldier said, laying a thick hand on a boy with a string of beads around his neck. “Mungiki.”
After the boy explained that he was Borana, a tribe from northern Kenya, he was let go. Other boys, though, were marched through the streets with their hands tied behind their backs and tears in their eyes.
Thousands of people have been streaming out of Mathare, creating a refugeelike crisis in the middle of Nairobi, Kenya’s capital.
On Thursday, as shiny Mercedes-Benzes drove by, along with packed minibuses heading downtown, a crowd of Mathare residents huddled outside a nearby air force base. Beds, tables and rolls of soggy clothing were piled around them. Because it is the rainy season, many people have been sleeping on wet ground. Residents said several babies had died of exposure.
“But nobody really cares,” said Angelina Okumba, a 52-year-old mother of 11 children.
Kenyan officials have tried to reassure residents that the fighting is finished.
“It’s time to go home,” said J. K. Ndegwa, a police commander. “There’s no problem here.”
On a smoldering hillside, children played among shattered teacups while their parents packed the last of their things. The smell of char stung the nose, and though it had been pouring all week, the fires still burned.

Books about the American invasion of Iraq

Books about this subject were few and far between a couple of years ago, but with the three and a half year anniversary of the invasion, there are some notably good books:

The Assassins Gate, George Packer
Cobra II
Fiasco
Imperial Rule in the Emerald City

Fw: Low interest rates to drive strong growth in Kenya

 

Despite a budget deficit, a marked increase in domestic debt, the Central Bank of Kenya is predicting a rosy future, based on a projected growth rate of 5.5 per cent this year and low interest rates.  However, overall inflation dropped to 14.9 per cent in April compared with 19.1 per cent in March. In its monthly economic review for April released on Tuesday, Central Bank of Kenya (CBK) says the onset of the long rains should see inflation begin to level off and drop, after a prolonged drought pushed up food prices, and created a budget deficit of Sh30.9 billion. Domestic debt increased from Sh315.6 billion at end of June 2005 to Sh338.6 billion in February this year, as the Government borrowed heavily through the bond market to finance drought relief activities. External debt declined from Sh434 billion to Sh407.1 billion during the same period. The deficit was 2.2 per cent of the country's gross domestic product (GDP) – a measurement of locally-based economic activity – in the first eight months of the Government's current financial year, which ends on June 30. Notable among the events in the period under review was the improved performance of the Nairobi Stock Exchange equity market in March this year, largely due to the KenGen share offer of 659 million shares that was oversubscribed to the tune of Sh26 billion.  The NSE 20 Share Index increased to 4,101.64 points from 4,056.6 in February, while turnover grew by 8.8 per cent to Sh3.69 billion from Sh3.4 billion in the same period. The number of shares traded rose 12 per cent to 69.2 million from 62 million shares, while market capitalisation increased by Sh14.5 billion to Sh484.2 billion from Sh469.7 billion in February 2006.  TPS East Africa also listed 89 million shares during the month, following the integration of the Tanzanian hotels with the existing operations of the TPS Ltd Kenya. The Bond market turnover took a battering in March from falling interest rates, dropping to Sh2.8 billion from Sh4.7 billion in February.  The most traded bond was the eight-year Treasury Bond with a coupon rate of 13.25 per cent per annum. From March to May 2006, Treasury bonds totalling Sh19.2 billion, and Treasury bills worth Sh58.6 billion will mature.  At the end of February the Government owed non-bank investors 61.3 per cent of total domestic debt, with National Social Security Fund (NSSF) held the remaining 38.7 per cent. CBK says the economic outlook for its next financial year which begins on July 1, remains good, thanks largely to the onset of the long rains and stable domestic interest rates which have remained that way for over two years. Short-term interest rates declined in March, with the 91-day Treasury bill rate falling to 7.60 per cent, from 8.02 per cent in February, reflecting increased liquidity in the market. Another factor that serve to boost the current stability in domestic interest rates is the low expectations for inflation following the onset of March/April rains and due to consistently low underlying inflation.

Rasul Shariff

Rasul Shariff

Market DeclineHow a Glitzy Mall Developer Built Its Way Into Big Trouble
Mills Corp. Courted ShoppersWith Mini Golf, Massages;Now Banks Crack Down
'Larry, He Is a Salesman'
By RYAN CHITTUM and JENNIFER S. FORSYTHApril 14, 2006; Page A1
As recently as last summer, Mills Corp. was soaring.
Its giant retail and entertainment complex near Ft. Lauderdale, Fla., drew more visitors than Disney World, the mall company told analysts. Its development pipeline popped out a blockbuster project nearly every year. Its stock performance was the envy of the industry.
Larry Siegel, its 52-year-old chief executive, was credited with injecting new life into the nation's tired mall industry. His "shoppertainment" retailing formula offered customers more than just stores. There was glow-in-the-dark miniature golf, simulated Nascar driving and dining in faux rain forests. His staid competitors took notice.
But now Mills, a real-estate investment trust based in Arlington, Va., is drawing attention for different reasons. Its recent developments have largely been flops. One in five employees has left or been laid off, including its development director, raising doubts about whether it can finish the projects it hasn't already abandoned. Last month, the Securities and Exchange Commission launched an investigation into its accounting practices. Its stock has plummeted 55% over the past eight months. On Wednesday, its lenders forced it to slash dividend payouts and to submit biweekly financial reports while it readies itself for a likely sale.
Mr. Siegel stumbled during one of the hottest real-estate markets in years by pushing into markets that were either too small or too competitive to support the company's mammoth malls. Mills compounded its problems, say investors and analysts, by focusing more on development than on managing its existing properties. Its current struggles raise questions about whether its unique and expensive approach to retailing can survive.
"I think their projects are the most creative of any developer out there," says Warren Weiner, executive vice president of Philadelphia-based Deb Shops Inc., which has 340 teen fashion stores nationwide and six in Mills properties. "The question is: Is it possible to be that creative and be financially successful?"
Mills, which has 42 malls in the U.S. and abroad, has said it is exploring "strategic alternatives," but declines to elaborate on disclosures it has already made about its current financial troubles. Mr. Siegel declined to be interviewed for this article.
In recent years, mall companies have performed well as consumers continued to spend despite recession, terrorism and the war in Iraq. The nation's major mall developers -- now big public companies mostly run by the scions of the original mall magnates -- expanded primarily by buying other mall companies.
Mr. Siegel decided to expand by building new properties. A balding, gregarious Philadelphia native, he got his start in retailing as a leasing agent for a predecessor company of Mills, and ascended to the chief executive position shortly after Mills went public in 1994.
Mr. Siegel saw most malls as ho-hum rectangles with four large anchor stores. The outlet malls that came in the 1980s and '90s, which carried name brands at discount prices, often offered no place to eat or sit down. Mr. Siegel decided to marry two concepts: to build full-service malls with food courts and even massage zones and skateboard parks, then fill them with outlet retailers.
He wasn't the only mall developer to explore ways to combine retailing and entertainment. The Simon family of Indianapolis and Sheldon Gordon of Greenwich, Conn., were also moving in that direction. But Mr. Siegel became one of its most enthusiastic proponents.
He pursued retailers not typically found in malls, such as Bass Pro Shops, which offers a 60,000-gallon aquarium and an archery range along with its outdoor supplies. Mills was one of the first mall companies to offer prominent space to IMAX theaters instead of sticking movie theatres in an unused corner of the parking lot, says Paco Underhill, who runs a New York-based retail consulting firm, Envirosell Inc., and has written about the mall industry.
Shoppers flocked to Mills's early projects, such as Potomac Mills near Washington, D.C., and Sawgrass Mills outside Fort Lauderdale. So Mr. Siegel picked up the development pace. After building just four large malls between 1985 and 1995, over the next decade Mills built 13 malls and converted two more to its shoppertainment formula.
Mr. Siegel planned on an especially large scale. Mills's properties typically sprawl over about 1.5 million square feet, compared with about 1 million square feet for other major regional malls. At its enormous Xanadu project now under construction in the New Jersey Meadowlands, the company spent some $120 million or more before it even won the right to develop the site, analysts estimate. Mills promised an indoor ski slope, a roller coaster and a 300-foot-tall Ferris wheel.
More Vulnerable
While a typical large mall draws customers from a 10- to 20-mile radius, many Mills malls are so big they need to draw from a larger area to attract enough customers. As a result, Mills became more vulnerable to new competitors, including outlet centers, discount stores and the hot new model -- open-air "lifestyle centers," which adhere to a "Main Street" approach, with stores opening onto a street, says Steven H. Gartner, president of Metro Commercial Real Estate Inc., a Conshohocken, Penn., retail consultant. And high gas prices made shoppers less willing to drive long distances for a deal on a pair of blue jeans.
To stand out from the crowd and draw traffic, Mills began adding more entertainment components. But the entertainment offerings took away valuable retail space, pushing down average sales per square foot at the properties.
All along, Mills had been attempting to lure more shoppers by allotting more space than a typical mall does to anchor tenants, which usually pay lower rent than smaller specialty stores and post lower sales per square foot. As a result, Mills's properties brought in an average of about $370 of annual sales per square foot in 2004, below the average for regional mall REITs.
Its aggressive development mentality rendered the management of its existing properties a second priority, analysts say. "They focused more on the next great development and less on continuing to run the properties they had and [getting] the full values out of those properties," says Rich Moore, an analyst with New York-based RBC Capital Markets.
Mills took on projects in Singapore, Madrid and Scotland in an effort to become a global REIT. In the U.S., it was becoming difficult to find large new markets where the Mills concept would still be novel. Mills pushed into the outskirts of the Pittsburgh and St. Louis markets, which already had quality malls and didn't have enough demand to support newcomers. Last year, in Pittsburgh, Mills resorted to its first-ever "soft opening," starting operations without a big marketing campaign due to a low number of retail tenants.
Mills's growth plans began to outpace its ability to finance new projects, forcing the company to borrow more and enter into joint ventures that gave its partners preferred returns. Mills had little margin for error in its developments. The company's ratio of debt to market capitalization reached 72%, compared with 53% for the average regional mall REIT, according to Harris Nesbitt, the U.S. research and investment-banking subsidiary of Toronto-based BMO Financial Group.
Newer projects struggled. In Lakewood, Colo., Mills had projected Colorado Mills to have annual sales of about $300 million. The mall, which opened in late 2002, so far has generated average annual sales of $215 million, says city spokeswoman Stacie Oulton. The expected $4.5 million in annual sales taxes from the mall has averaged only $3.2 million, she says. Malls in St. Louis and Cincinnati also fell short of company projections.
Over the past decade or so, malls built by Mills have earned the company about 20% less than it projected, estimates Greg Andrews of Green Street Advisors, a Newport Beach, Calif., real-estate research firm.
Some investors and analysts became skeptical of Mr. Siegel's promises. "Larry, he is a salesman," says Dionisio Meneses, an investment manager with Global Real Analytics LLC in San Francisco, which holds an undisclosed number of Mills shares. "You have to discount some percentage of what he says."
The SEC investigation begun in March has added to the uneasiness of investors. Company filings indicate about a dozen areas of accounting are under review, including revenue recognition, lease accounting and cost capitalization. Mills capitalized its pre-development costs to spread them over several years, for instance, rather than expensing them all at once like most real estate companies do. Mills says it may have to restate six years of financial results.
Investors and analysts have also expressed frustration over company disclosure about joint-venture deals with partners, saying a lack of details makes it difficult to accurately value the company's assets.
As its problems mounted, Mills faced increasing competition from other companies pursuing similar strategies for merging retail and entertainment. Rajendra Sisodia, a professor of marketing at Bentley College in Waltham, Mass., notes that there are now IMAX theaters in a chain of furniture stores in the Boston area.
New Formulas
Moreover, new retail formulas are gaining popularity. Mr. Gartner, president of Metro Commercial, a Philadelphia-based retail consultant, contends that "the behemoth mall is clearly giving way to more manageable, accessible and open-air centers."
"It isn't that the huge center doesn't have a future. It's just that it's no longer a slam-dunk proposition that it used to be," says Mr. Underhill, the retail consultant. "The shopping malls that are being built in the U.S. now are being built basically to steal other people's markets."
The pact Mills struck with its lenders earlier this week makes it likely that the company will be sold, analysts and investors say. Some assets are expected to be coveted by competitors. The bank deal included a refinancing of Sawgrass Mills that valued that property alone at $780 million. "Sawgrass is 10% of the value of this company," says David Fick, an analyst with St. Louis-based Stifel Nicolaus who was once Mills's chief financial officer. "It's worth more than all their bad stuff combined, times three."
Many of its competitors, including Simon Property Group Inc. of Indianapolis and Vornado Realty Trust of New York, are taking a look at the company, which owns 51 million square feet of property in the U.S. and abroad.
"The issue that somebody's going to have to decide is: Does the model work or not?" says David Lichtenstein, owner of Lightstone Group, Lakewood, N.J., one of the largest private owners of real estate in the U.S., who says he intends to bid. "I think the buyer is going to have to be convinced that Larry Siegel's dream can become reality and not a nightmare. He's an absolute visionary. But very often the first visionary isn't successful."
Write to Ryan Chittum at ryan.chittum@wsj.com1

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Rasul Shariff

Rasul Shariff

Waiting for the results of the KenGen IPO.
In the meantime, Ugandan equities look cheap.