Jim was one of my very best friends. He died a year and a half ago of brain cancer, leaving a wife and three wonderful pre-teen children. He knew he was going to die, and he and I had some of the best conversations as he prepared to go. It stripped through the barriers and defenses guys tend to have.
Jim was a brilliant guy. He had a math degree from Rice University and a law degree from University of Texas. He could dissect businesses like no one else I have ever met. I remember having cocktails with him and his then girlfriend on the rooftop bar Cody's in 1993. He had been interviewing at Enron, who was interested in him because his gas cogeneration experience.
I asked him if he was going to take the job offered.
"No way. They are going to go under. It is the most unbelieveable ponzi scheme I have ever seen. They are using something called Mark to Market accounting for all of their projects, and book each idea as if it is a full defensible and operating business. I can't believe they can get away with it," he replied.
In fact, he felt so strongly about it that he contacted a mutual friend who was on Congressman Mike Andrews staff, and ask him to set up a meeting with someone in the SEC to look into it. His meeting with the SEC lawyer ended up with her blinking stupidly at him.
1993. 8 years before Enron fell.
I also remember having lunch with him in 1999 or so, when Dell stock was a high flying deal and jobs there were highly sought.
"I want to short Dell, I just can't get the timing down", he told me.
"Why? They are the darlings of Texas!" I replied.
"Their annual report and quarterly statements are unnecessarily complex. They buried in their footnotes the amount of money they make on derivitives trading. They essentially rent their treasury stock to short sellers and use the proceeds to buy calls on their own stock. Essentially a double bet on the price of their shares rising," he stated.
"What's wrong with that? They believe in their company..." I replied.
"Sure. Except when you subtract the footnoted amount from their bottom line, you are left with a negative number. They essentially make all their profits betting their stock will go up, and they lose money making computers. "
Jim had a tough go of it. He worked for major corporations in M&A, and the CEO typically didn't like hearing things like "we need to restate our annual report because we are not disclosing some significant liabilities". Jim knew what it felt like to be fired. He was a deeply principaled man.
The problems he noted were the ones that got everyone in trouble. Companies quit making money making goods or providing services. The financial markets evolved into places where major corporations could gamble outright, with the potential liabilities neither disclosed, or perhaps even fully understood. Companies like Enron recognized this early. Why own a lot of iron or facilities when you could just... gamble?
Jim got this earlier than nearly everyone. He missed the days of reckoning. He was right all along. As he told me one time... "It isn't a very valuable skill being right too early". I wish there were more of him today...
Miss you, buddy.