"Did Goldman really tell the government its high-speed, high-volume, algorithmic-trading program can be used to manipulate markets in unfair ways?"

Goldman Sachs Loses Grip on Its Doomsday Machine



7/9/09

Jonathan Weil
Bloomberg
Copyright 2009

Never let it be said that the Justice Department can’t move quickly when it gets a hot tip about an alleged crime at a Wall Street bank. It does help, though, if the party doing the complaining is the bank itself, and not merely an aggrieved customer.

Another plus is if the bank tells the feds the security of the U.S. financial markets is at stake. This brings us to the strange tale of Goldman Sachs Group Inc. and Sergey Aleynikov.

Aleynikov, 39, is the former Goldman computer programmer who was arrested on theft charges July 3 as he stepped off a flight at Liberty International Airport in Newark, New Jersey. That was two days after Goldman told the government he had stolen its secret, rapid-fire, stock- and commodities-trading software in early June during his last week as a Goldman employee. Prosecutors say Aleynikov uploaded the program code to an unidentified Web site server in Germany.

It wasn’t just Goldman that faced imminent harm if Aleynikov were to be released, Assistant U.S. Attorney Joseph Facciponti told a federal magistrate judge at his July 4 bail hearing in New York. The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

How could somebody do this? The precise answer isn’t obvious -- we’re talking about a black-box trading system here. And Facciponti didn’t elaborate. You don’t need a Goldman Sachs doomsday machine to manipulate markets, of course. A false rumor expertly planted using an ordinary telephone often will do just fine. In any event, the judge rejected Facciponti’s argument that Aleynikov posed a danger to the community, and ruled he could go free on $750,000 bail. He was released July 6.

Market Manipulation

All this leaves us to wonder: Did Goldman really tell the government its high-speed, high-volume, algorithmic-trading program can be used to manipulate markets in unfair ways, as Facciponti said? And shouldn’t Goldman’s bosses be worried this revelation may cause lots of people to start hypothesizing aloud about whether Goldman itself might misuse this program?

Here’s some of what we do know. Aleynikov, a citizen of the U.S. and Russia, left his $400,000-a-year salary at Goldman for a chance to triple his pay at a start-up firm in Chicago co- founded by Misha Malyshev, a former Citadel Investment Group LLC trader. Malyshev, who oversaw high-frequency trading at Citadel, said his firm, Teza Technologies LLC, first learned about the alleged theft July 5 and suspended Aleynikov without pay.

‘Preposterous’ Charges

Aleynikov’s attorney, Sabrina Shroff, told the judge at the bail hearing that Aleynikov never intended to use the downloaded material “in any proprietary way” and that the government’s charges were “preposterous.”

Goldman isn’t commenting publicly about any of this, though it seems the bank’s bosses want us to believe there’s no need to worry. On July 6, Dow Jones Newswires quoted a “person familiar with the matter” saying this: “The theft has had no impact on our clients and no impact on our business.” Note that this person was so familiar with Goldman that he or she spoke of Goldman’s clients as “our clients” and Goldman’s business as “our business.”

By comparison, last Saturday, while most Americans were enjoying the Fourth of July holiday, Facciponti was in court warning of looming threats to Goldman and the financial markets.

“The copy in Germany is still out there,” the prosecutor said, according to an audio recording of the hearing. “And we at this time do not know who else has access to it and what’s going to happen to that software.”

Secret Software

“We believe that if the defendant is at liberty, there is a substantial danger that he will obtain access to that software and send it on to whoever may need it,” Facciponti said. “And keep in mind, this is worth millions of dollars.”

By “millions,” it’s unclear if that would be enough to match Goldman Chief Executive Lloyd Blankfein’s $70.3 million compensation package for 2007. Or perhaps millions means thousands of millions, otherwise known as billions.

Facciponti said the bank told the government that “they do not believe that any steps they can take would mitigate the danger of this program being released.” He added: “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.” All Aleynikov would need to get the code from the German server is maybe 10 minutes with a cell phone and an Internet connection, Facciponti said.

Judge’s Ruling

The hole in Facciponti’s argument was that the government offered no evidence that Aleynikov had tried to disseminate the software during the month prior to his arrest, after he downloaded it and had left his job at Goldman. That’s the main reason the judge, Kevin N. Fox, cited in ruling Aleynikov could be released on bail.

“We don’t deal with speculation when we come to court,” Fox said. “We deal with facts.”

Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too. Oh yes, and could the bank be a bit more careful about safeguarding its trading programs from now on? Hopefully the government is asking the same questions already.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

© 2009 Bloomberg: www.bloomberg.com

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"Why does Senator Robert Nichols continue beating the toll road drum? The explanation may lie in his contributor list."

Senator Robert Nichols and Toll Roads


(For Part 1 click [HERE])

7/9/09

By Roger Gray
KYTX (East Texas)
Copyright 2009

In the last legislative session, the future of toll roads was on the line.

But one area state senator was more involved than most. In fact some critics say the fix was in.

"You can't do toll roads in rural Texas. It won't work," says State Senator Kevin Eltife.

Yes, the original Trans Texas Corridors were huge, and controversial.

Whitehouse rancher and toll road critic Hank Gilbert called it, "the largest land grab in the history of the U.S."

Senator Eltife agreed. "It's a total property right's mess."

Gilbert added, "I don't think the people of Texas, rural and urban, are going to allow that to happen."

And Austin seemed to get the message.

"I think there's no question, the Trans Texas corridor is dead," Eltife concluded.

But some advocates clung to the idea of foreign companies building and running toll roads as private enterprises. Eltife is an opponent. "They should never be owned by a private company, ever. That's a gold mine for the state." As is Gilbert, of Texans United for Reform and Freedom. "Comprehensive Development Agreements that would allow private investors to come in, plan, build, operate, maintain, the whole nine yards."

Eltife agreed, "The state ought to own them. They ought to be a small piece of the puzzle." State Senator Robert Nichols "seemed" to agree when we spoke to him by phone during the session. "The people of East Texas are clear," he said. "They do not want the East Texas Corridor. But they do want to develop Interstate 69."

But did Sen. Nichols want to insure that private toll road contracts were a part of that I-69 development? He added an amendment to his transportation bill that seems to guarantee a contractor couldn't lose money.

Gilbert explained, "You have one of our own East Texas Republican senators is offering an amendment to his own bill which would guarantee a profit. To me that kind of goes against capitalism."

Nichols, though, disagreed. "There is language related to buy backs, but there is absolutely no guarantee whatever that anybody will ever get any of their debt back."

But, we have a copy of an e-mail sent out by toll road lobbyist Gary Bushell, and it says,

"...we have reached an agreement with Senator Nichols on a buyout provision...that provides protection of their position in the event they find themselves upside down on their debt to fair market value...I want to thank Senator Robert Nichols and his chief of staff Steven Albright for making this outcome possible."

Nichols doesn't think that's what he did. "Well, it's incorrect, because that's not true."

Gilbert concluded, "That's not very free market."

So, according to one lobbyist, Senator Robert Nichols went to bat for private toll road contractors.

"That's crazy," he protested. "No. I don't know who told you that, but that's nuts."

I responded, "Well, I've got an email from a lobbyist who says that's exactly what you did."

Nichols again disagreed, "Well, it's incorrect, because that's not true."

"So this lobbyist is wrong," I replied.

"If that's your interpretation of what he says," Nichols responded. "I'm not looking at whatever it is you're reading."

"I read you exactly what he said, " I said. "that provides protection of their position in the event they find themselves upside down on their debt to fair market value.'"

"Ok, I did not write that." He concluded.

Toll road critic Hank Gilbert is skeptical.

"At any point in time, this developer comes to the realization that they're not getting the return on investment they anticipated from this road, they can sell it back to the state at that time and with this amendment, they're guaranteed not to lose money."

Nichols again protested, "If you're saying the State of Texas or any entity is going to guarantee an investor his money back, no. Not correct."

But we have a copy of the amendment and it says.

".the fair market value of the private entity's interest...is not less than the (entity's) outstanding debt at that time plus other reasonable costs."

In short, they get out at least what they've put in.

So why would Nichols continue beating the toll road drum? The explanation may lie in his contributor list.

His top donor by far, James Pitcock of Williams Brothers Construction of Houston, the second largest TxDOT contractor for toll roads and they only gave money to one candidate in 2008, Robert Nichols.

But Nichols still insists toll roads aren't a certainty.

"So, it's your contention that even though these CDA's, comprehensive development agreements are in HB300," I asked, "we're not talking toll roads for East Texas."

"Well, now, that's a different question." He replied. "You have toll roads in Tyler."

And Robert Nichol's tried to push these CDA's again in the special session last week. He didn't succeed.

Apparently, as long as the political money is there, toll road advocates will keep pitching.

© 2009 KYTX: www.cbs19.tv

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Fair Game? Masters of the Great Bailout worry someone else could use their stolen software "to manipulate markets in unfair ways.”

Goldman Trading-Code Investment Put at Risk by Theft

7/6/09

By David Glovin and Christine Harper
Bloomberg
Copyright 2009

Goldman Sachs Group Inc. may lose its investment in a proprietary trading code and millions of dollars from increased competition if software allegedly stolen by a former employee gets into the wrong hands, a prosecutor said.

Sergey Aleynikov, an ex-Goldman Sachs computer programmer, was arrested July 3 after arriving at Liberty International Airport in Newark, New Jersey, U.S. officials said. Aleynikov, 39, who has dual American and Russian citizenship, is charged in a criminal complaint with stealing the trading software. Teza Technologies LLC, a Chicago-based firm co-founded by a former Citadel Investment Group LLC trader, said it suspended Aleynikov, who started there on July 2.

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov’s alleged theft poses a risk to U.S. markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated.

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

‘Preposterous’

The prosecutor added, “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.”

The proprietary code lets the firm do “sophisticated, high- speed and high-volume trades on various stock and commodities markets,” prosecutors said in court papers. The trades generate “many millions of dollars” each year.

Defense attorney Sabrina Shroff said in court that the government’s allegations are “preposterous.” The firm was aware that Aleynikov, who is the father of three young girls, was downloading programs to his personal computer to do work at home and that he hasn’t disseminated the code, the lawyer said.

“If Goldman Sachs cannot possibly protect this kind of proprietary information that the government wants you to think is worth the entire United States market, one has to question how they plan to accommodate every other breach,” she said.

Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment.

$750,000 Bail

U.S. Magistrate Judge Mark Fox ordered Aleynikov, who earned $400,000 a year, to be held by on $750,000 bail, after prosecutors claimed he posed a threat to the community. Aleynikov planned to earn three times his salary by joining a startup company and engaging in high-volume automated trading, prosecutors said. Aleynikov posted bail today and was released.

Aleynikov didn’t speak at the hearing, except to say that he understood the conditions of his bail.

Teza, co-founded by former Citadel trader Misha Malyshev, said in an e-mailed statement that it first learned of the allegations on July 5 and suspended Aleynikov without pay following an investigation.

The firm “was not aware of the alleged misconduct” and offered to cooperate with the government, according to the statement.

Reverse Engineering

“Someone stealing that code is basically stealing the way that Goldman Sachs makes money in the equity marketplace,” said Larry Tabb, founder of TABB Group, a financial-market research and advisory firm. “The more sophisticated market makers -- and Goldman is one of them -- spend significant amounts of money developing software that’s extremely fast and can analyze different execution strategies so they can be the first one to make a decision.”

Someone could use the code “to implement the same strategies and maybe on certain stocks they can be faster and, in effect, take away money that would normally be Goldman’s,” Tabb said today in a phone interview. “The second thing that they can do is actually analyze the code so that they know what Goldman’s going to do before Goldman does it and kind of reverse engineer Goldman’s strategies and make money basically at the expense of Goldman.”

‘Wake-Up Call’

Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission, said proprietary electronic data poses significant risks for all financial institutions.

“This is a wake-up call to all financial institutions to review their security systems, not just with respect to trading codes, but with respect to all proprietary information,” said Pitt, now chief executive officer of Kalorama Partners LLC in Washington.

Goldman appeared to have taken some steps to prevent the theft of its code, Pitt said. “The real question is whether, in light of this outrageous conduct on the part of one of its employees, it should have taken more steps,” Pitt said.

Aleynikov spent four hours with a Federal Bureau of Investigation agent after his July 3 arrest, Shroff said. He told the agent that he’d done nothing wrong, authorized prosecutors to seize his personal computers, and said he hadn’t known the server he was using was in Germany, she said.

32 Megabits

Only 32 of 1,024 megabits of the software code was transferred, Shroff said.

“It is not disseminated,” she said of the code.

Facciponti said at the hearing that Aleynikov could disseminate the code “in 10 minutes” using a cell phone. Once the government obtains access to the German server, prosecutors will see if Aleynikov transferred other confidential data as well, he said. It’s logical to conclude that Aleynikov planned to use the code at his new company, the prosecutor said.

“This is the most substantial theft that the bank can remember ever happening to it, in the sense the entire platform has been taken from it,” Facciponti said. “There has been no breaches anywhere on this magnitude at the bank.”

Aleynikov worked at Goldman from 2007 until June, the government said in the complaint. He was part of a team of workers responsible for improving the computer platform. His alleged transfer of computer codes ran from June 1 to June 5, according to prosecutors.

Moscow, Rutgers

Aleynikov studied applied mathematics at the Moscow Institute of Transportation Engineering before transferring to Rutgers University, where he received a bachelor’s degree in computer science in 1993 and a master’s of science degree, specializing in medical image processing and neural networks, in 1996, according to his profile on the social-networking site LinkedIn.

Before joining Goldman Sachs, he worked for about eight years at IDT Corp., the U.S. vendor of prepaid calling cards, where he led the team responsible for developing routing systems, according to the profile.

His profile on LinkedIn describes him as a vice president in equity strategy at Goldman Sachs and includes two recommendations from colleagues at the firm.

Goldman Profit

Goldman was the world’s biggest and most profitable securities firm until it converted to a bank in September following the bankruptcy of smaller rival Lehman Brothers Holdings Inc. Goldman earned $2.3 billion last year, down from a record $11.6 billion in 2007, as market turmoil caused it to report a fourth-quarter loss, its first in a decade as a public company.

Goldman’s equities business generated $2 billion of revenue in the first three months of 2009, down 20 percent from the first quarter of 2008, the company reported in April. Second-quarter results are due to be reported next week.

Goldman rose $2.97, or 2.1 percent, to $146.46 in New York Stock Exchange composite trading.

The case is U.S. v. Aleynikov, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

© 2009 Bloomberg: www.bloomberg.com

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"It's intriguing how a spotlight can change a politician's perspective...."

In spotlight, toll roads too hot to handle

During special session, it's safety first for lawmakers.



7/6/09

Ben Wear
Austin American-Statesman
Copyright 2009

It's intriguing how a spotlight can change a politician's perspective. Or in the case of the special session just past, a whole bunch of politicians' perspectives.

Way back in the spring of 2009 (OK, about three months ago), the Texas Senate overwhelmingly passed Senate Bill 404 and Senate Bill 17. The House Transportation Committee later passed both bills. And the Senate even passed them again, this time while they were taking a ride on the Texas Department of Transportation sunset bill that later died.

In fact, all of these bills died in the House late in the session. But it had nothing to do with the content of SB 404 and SB 17, which occasioned little debate during the regular session.

Then, last week, members of the House and Senate turned their noses up at both bills and declined to even vote on them.

To refresh your memory, SB 404 would have extended by several years the authority of TxDOT and regional mobility authorities to sign long-term toll road leases with private companies. Its companion bill, SB 17, would have mandated that such contracts protect the state's and residents' interests by making it easier to build nearby free roads and setting prices now for the state to buy back a private toll road if it ever wanted to.

Those two bills were combined, for the special session, into a single bill. Neither could get a vote in the House Transportation Committee or the Senate Finance Committee. The House Transportation Committee chairman, Joseph Pickett of El Paso, said members did not consider it a "safe vote." Meaning, it was a vote that could turn a legislator into a former legislator.

Remember, this same committee voted for the same changes to the law about seven weeks ago.

Why was it a safe vote in May and a dangerous vote in July?

Back then there were thousands of bills up for consideration, and thus the attention of the public and the press was fragmented. Transportation insiders, anti-toll activists and the few transportation writers for major dailies were paying attention to this. But most people weren't.

Now, with only three subjects on the special session call, and no controversy on two of them, that left the entire focus on this one bill. On legislators voting to allow private toll roads, potentially operated by (and sending profits eventually to) foreign companies like Spanish toll road builder Cintra. On lawmakers in effect undoing a moratorium on most such contracts that they voted for in 2007.

So, why not just bring it up and vote against it? Well, that could then be used against lawmakers later by an opponent saying they'd voted against badly needed roads. And it would be a vote against Gov. Rick Perry, who wanted to extend the authority for private toll roads. A vote against Perry, who has enthusiastically wielded his veto pen through the years.

Of course, presumably somewhere amid all this there is the "right" position to take on this issue — even if what is deemed right might vary from lawmaker to lawmaker — rather than the "safe" position. But Jefferson Smith went to Washington, not Austin.



And he was a fictional character.

For questions, tips or story ideas, contact Getting There at 445-3698 or bwear@statesman.com.

© 2009 Austin American-Statesman: www.statesman.com

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"More than a year after TxDOT was labeled an out-of-control agency in need of reining in...No TxDOT reforms were put into state law."

TxDOT: After all the outcry, no changes in law

7/5/09

By Peggy Fikac
San Antonio Express-News
Copyright 2009

AUSTIN — More than a year after the Texas Department of Transportation was labeled an out-of-control agency in need of reining in, lawmakers made their decision: No TxDOT reforms were put into state law.

That means no alteration in the makeup of its governing commission, which is appointed by Gov. Rick Perry and in the past was accused of pushing his ideas without heeding lawmakers leery of such things as privately run toll roads. No special legislative oversight committee. No changes except for those TxDOT carries out on its own.

That's the upshot after a reform bill failed in the regular session and lawmakers meeting in a quickie special session simply continued the agency as is until they reconvene in 2011.

“Certainly I think this is a missed opportunity,” said Rep. Ruth Jones McClendon, D-San Antonio, a House Transportation member who pushed for such changes as an elected commissioner.

The good news: McClendon and some other lawmakers said TxDOT is working to change. Among actions they like is a new contract for a thorough review of agency operations.

TxDOT says it has acted on last year's Sunset Advisory Commission staff recommendations, including an update of its complaint receipt and tracking process. Senate Transportation and Homeland Security Chairman John Carona, R-Dallas, said most Sunset changes are under way.

Among items not addressed is the Transportation Commission makeup. But Carona, who opposes an elected panel as too political, said members are listening to lawmakers' concerns.

McClendon and House Transportation Chairman Joe Pickett, D-El Paso, say there's a need to change the agency “culture.” Pickett said that without a legislative overhaul, “I think they'll try to paint the trim on the ... building, but it's not going to make any real significant difference.”

Lawmakers said even without a new oversight committee, they'll keep close tabs on TxDOT between now and 2011.

“We recognize that TxDOT has been a troubled agency,” Carona said, “and it needs significant attention from the Legislature.”

As some lawmakers fruitlessly urged Perry to add a bill to expand the Children's Health Insurance Program to the special-session agenda, U.S. Sen. Kay Bailey Hutchison's camp still wouldn't say if she supported the measure. Her spokesman, Hans Klingler, said she will be detailing a plan for children's health care and make the issue “a centerpiece” of her expected tough campaign against Perry for the GOP nod for governor.

Perry spokesman Mark Miner said, “Once again, she doesn't have any details to discuss.” He noted Perry's stand that the focus should be on children who already qualify for CHIP but aren't enrolled, adding that Hutchison supported a CHIP expansion in D.C.

Lt. Gov. David Dewhurst, who married Houston lawyer Tricia Bivins just over a week ago, got to spend part of his honeymoon at the Capitol. Session over, he said they plan to go to Colorado or California. His take on his marriage: “Even a blind squirrel sometimes finds a beautiful acorn.”

© 2009 San Antonio Express-News: www.mysanantonio.com

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"Perry's Department of Transportation fought like a badger to put state highways 121 and 161 in the hands of private toll road firms."

Long a leader in toll-road pursuits, Texas taps the brakes on efforts



7/5/09

By MICHAEL A. LINDENBERGER
The Dallas Morning News
Copyright 2009

AUSTIN – Texas spent the past six years leading the nation in its pursuit of private toll roads. Now, it looks to be among the first to call a timeout.

Lawmakers quit the Capitol on Thursday after refusing Gov. Rick Perry's pleas to extend the state's authority to enter long-term contracts with private toll-road developers beyond this summer.

The decision won't kill all private toll roads in Texas – not yet. But it signals a significant halt to one of Perry's signature initiatives, and a pause for a policy that not only helped launch a powerful trend in statehouses across the U.S., but also sparked an explosion of toll roads in Texas, nowhere more extensively than in Dallas.

Perry's policies, first given life by the Legislature in 2003, have meant both billions of dollars in new highways constructed and ever-higher tolls for millions of Texans.

Now, the state may be headed down another road as its authority to strike new deals expires Aug. 31.

"I am as happy as a hog taking a bath in a pond of slop," said Hank Gilbert, an East Texas farmer who was the Democratic – and losing – candidate for agriculture commissioner in 2006. He also has been one of the loudest voices against toll roads in Texas. "It just couldn't be no better than this."

Gilbert and many other grass-roots activists had campaigned tirelessly against toll roads, public or private, since 2003.

The strongest opposition came from voices in rural Texas, where roads are already adequate and where many feared, unnecessarily it turned out, that Perry's proposed Trans Texas Corridor would result in a giant land-grab.

Urban impact

But it is places like Houston, Austin, and, especially, Dallas that have seen the biggest impact of Perry's push. Two of the richest toll contracts in the country involved highways running through North Texas, and Perry's Department of Transportation fought like a badger to put state highways 121 and 161 in the hands of private toll road firms.

Instead, those contracts went to the North Texas Tollway Authority, although the Highway 161 deal is not final.

But in large measure, Perry's approach won there anyway. To beat out private-sector competitors, NTTA had to embrace the same kind of staggering debt loads, quickly escalating toll rates and big upfront payments to the state that characterize the private deals.

The impacts are everywhere in North Texas. Drivers here pay higher toll rates on NTTA's growing network of roads. Rates that were less than 10 cents a mile just a few years ago are about to be 14.5 cents per mile. Rates on so-called managed lane projects, where drivers are given the choice of driving on optional tolled HOV lanes, could be 50 cents to 75 cents a mile, or even more, during rush hour.

Under pressure from local leaders demanding more roads, NTTA plans to build a half-dozen or more major toll roads in the next five to 10 years.

Meanwhile, the Spanish firm Cintra has agreed to spend billions to rebuild LBJ Freeway in Dallas and to construct the North Tarrant Express near Fort Worth. Both projects involve a mix of tax dollars and private funds, and will result in highways with free lanes and tolled managed lanes.

NTTA chairman Paul Wageman said Perry's push for private toll roads has clearly had its benefits but also comes at a price.

"It's not for me to speak to the governor's legacy when it comes to this policy," Wageman said. "But it has allowed the state to build out a network of roads that would not have otherwise been built."

On the other hand, Wageman said, "I do have concerns" that voters don't realize just how many toll roads are headed their way.

"The public needs to be educated and made aware that is what is going to happen," he said.

Some of those toll roads, and others throughout Texas, might end up being private roads despite lawmakers' decision last week.

The Highway 161 project in Dallas County, and the Grand Parkway, a 200-mile tolled loop around Houston, could still be private roads – if the public toll authorities decide they can't build them. A 2007 bill gave state transportation officials until 2011 to conclude private deals on those two projects, and some others throughout Texas.

Kris Heckmann, deputy chief of staff and top transportation expert on Perry's staff, said public toll authorities don't have much time.

"If they don't want it, then they have got to give it to TxDOT in a hurry," Heckmann said, noting that 2011 is not as far away as it seems, given how long some of the private deals can take. "There's still time, but if they screw around for six months there may not be."

Other projects, including the conversion of local HOV lanes to tolled lanes, had been expected to involve private toll road companies, but now can't unless the Legislature restores private toll road authority in 2011.

State has stood out

But whatever the impacts on local roads, one thing is clear, lawmakers have ended, at least temporarily, Texas' role as a national leader in the race among states to embrace privatization.

"Texas was huge," said Leonard Gilroy, an analyst at the Reason Foundation and one of the nation's most insistent voices in favor of privatization of government functions. "They came out with a bold agenda that was combined with a massive need [for new roads]. Other states looked at what was happening and said, 'Wow.' "

The Bush administration championed highway privatization religiously, and praised Texas' push at every turn. But President Barack Obama's secretary of transportation, Ray LaHood, has also embraced it, as have many Democratic leaders in Congress.

New York, Florida, Virginia, Georgia and Pennsylvania all have expanded authority for private toll roads. California, debt-ridden to the point of near-collapse, recently approved new laws that give a green light to Perry-style privatization.

But the legal authority for such projects has often not been followed by new toll roads, at least not to the scale and scope of the leveraged deals in Texas.

Many of the most recent privatization deals involve endeavors other than highways, such as private contracts for city parking in Chicago and Pittsburgh and even, in California, public courthouses.

And increasingly, the existing private toll roads, others note, are confronting the same problems facing NTTA, including sagging traffic and huge debts.

A much-watched deal to sell Chicago's Midway Airport collapsed this spring, and a $12.8 billion proposal to privatize the Pennsylvania Turnpike collapsed last year.

Former U.S. Secretary of Transportation James H. Burnley, who served under President Ronald Reagan and now represents transportation-related clients as a lawyer in Washington, said Wall Street's appetite for the highly leveraged toll road deals has waned.

There is significantly less capital available for those kinds of investments, he said.

"Virtually all of the public-private deals that have been seriously discussed in the past decade have involved significant leverage," he said. "As we return to a more normal economy those kinds of deals will be attractive again. But lenders [may] continue to be more conservative for many years to come, reducing availability of capital for infrastructure."

Because the need for highways is so much more than the available tax funds to pay for it, private toll roads will continue to be important, Burnley said. "But they will play a reduced role."

Break may benefit

Gilroy said a two-year pause in Texas might help strengthen support here for privatization, given that the state's need for new highways isn't going anywhere.

That could make Perry's sales job easier in 2011, when, if re-elected, his aides said he would try to put Texas back on the path to private toll roads.

"Absolutely, the governor is going to keep pushing, pushing for putting this tool back in the box," Heckmann said. "If he had waited for the Legislature to raise taxes or for Congress to send us back an even return on what we send to Washington in gas taxes, then nothing would ever get built."

Gilbert said anti-toll activists are now going to work just as hard to convince lawmakers that a modest increase in gas taxes is politically viable.

Otherwise, Texas will either return to tolls or, just as bad, keep borrowing billions in a race to keep up, he said.

"That is just as fiscally irresponsible as the [private toll roads]," Gilbert said. "The vast majority of Texans would much rather pay at the pump than at the toll booth."

That's not clear. Lawmakers haven't raised the state gas tax since 1991, when they set it at 20 cents per gallon. Congress last increased the federal rate in 1993, to about 18 cents a gallon.

Efforts by Sen. John Carona, R-Dallas, to persuade Texas lawmakers to attach a modest gas tax increase died this past session, just as they did in 2007.

Indeed, probably the most important political dynamic in Perry's push for toll roads lay in the fact that it produced billions in new revenue, without requiring elected officials to raise a single tax. Instead, they simply made it legal to expand tolling, and let it be embraced by local planning boards and toll road authorities themselves, whose members are only indirectly accountable to voters.

Heckmann said that's a good deal for Texans, since "using a toll road is an option."

But as they proliferate, especially in North Texas, and as free roads are allowed to become increasingly traffic-jammed, the notion that toll roads are optional is quickly losing its virtue.

Drivers who use toll roads are paying far more for their highways than they would if they were simply required to pay higher gas taxes. But on the other hand, drivers who don't use them, or use them only rarely, pay much less than they would if gas taxes were increased.

Heckmann said that if lawmakers decide they want to raise gas taxes, then Perry might go along – as long as it was first put to the voters in a constitutional amendment. He said his boss, however, is a political realist.

"We're not holding our breath for that to happen," he said.

WHICH PROJECTS WOULD BE AFFECTED?

Lt. Gov. David Dewhurst, flanked by two leading senators, stressed last week that the decision not to extend the state's authority for private toll roads would not have a negative impact on North Texas drivers. Still, several North Texas projects could be affected. Here's how:

STATE HIGHWAY 161: This Dallas County highway is among a handful of toll roads in Texas that have a special extension from the lawmakers' decision. That means state officials have until 2011 to sign a private toll contract. NTTA has conditionally been awarded the deal but has until February 2010 to sign it. If NTTA passes, the state will have to race to complete a private contract by 2011. Regional transportation officials advanced hundreds of millions of dollars from other projects to speed the highway's construction, and if it is not built as a toll road, they could lose that money.

MANAGED LANE PROJECTS: North Texas' network of HOV lanes has more than doubled in recent years, and scores of miles are slated for conversion to tolled lanes by 2030. Two big projects, the LBJ Freeway reconstruction and North Tarrant Express, will proceed despite lawmakers' decision. Many others won't, or they'll be delayed until at least 2011, when Gov. Rick Perry tries again to get lawmakers to authorize private deals. They include: Interstate 35E from Northwest Dallas to Denton County; I-30 in Dallas and Tarrant counties; and State Highway 183 in Dallas County.

© 2009 The Dallas Morning News: www.dallasnews.com

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"Like a pig laying in a cool pool of slop in hundred-degree weather.”

Inaction pleases opponents



7/5/09

By Josh Baugh
San Antonio Express-News
Copyright 2009

AUSTIN — At the end of the 81st Legislature's special session last week, toll-road opponents went home happy — like “a pig laying in a cool pool of slop,” as one of them put it.

The agency poised to bring toll roads to San Antonio, meanwhile, was left looking toward the 82nd Legislature in 2011, with hopeful expectation that lawmakers then will extend the life of a controversial road-building tool that could pave the way for new toll roads in San Antonio and elsewhere.

In a speedy two-day special session that wrapped up well before dinner Thursday, Texas lawmakers rested on the laurels of two pieces of legislation that extend the life of several state agencies, including the Texas Department of Transportation, and the funding of road projects.
They took the safe road on the hot-button bill that would have extended comprehensive development agreements, or CDAs, letting it die in committee and kicking the issue down the road to a later date — though its proponents vowed to bring it up again at the earliest opportunity.

The controversial measure was vehemently opposed by Texans Uniting for Reform and Freedom, or TURF — a grassroots group that fights toll roads across the state — whose members could scarcely contain their glee.

“Man, we couldn't be any happier,” TURF board member Hank Gilbert said. “I think it's kind of like a pig laying in a cool pool of slop in hundred-degree weather.”
The highly controversial element of CDAs, known as concession contracts, allow private companies to design, build and operate toll roads, and then collect revenue from them for at least the next five decades. The less controversial component of CDAs is the “design-build” agreement, which keeps control of the project with the government agency that built it.

That's a distinction that often gets lost in the vitriolic toll-road debate, and one that Alamo Regional Mobility Authority officials tried to impress on lawmakers during the special session.

Rep. David Leibowitz, D-San Antonio — perhaps TURF's best friend among the Bexar County delegation — said CDAs are nothing more than a way for wealthy private company owners to make even more money. His solution to congestion problems is rooted in the statewide gas tax, which for years has been raided to pay for nontransportation projects. Leibowitz acknowledged the difference between concession contracts and design-build contracts but said the latter is just a “lesser evil.”

But by all accounts, there was no urgency for legislators to take up the issue in the special session because no projects were at risk. There will be building pressure, however, to address CDAs in 2011 because the RMA wants to use design-build contracts to develop the U.S. 281 and Loop 1604 corridors.

By then, Gilbert says, it may be a moot point. In a few months, TURF plans to announce a “more conventional” plan for dealing with congestion problems — one that should receive widespread support from grassroots groups and industry alike, he said. Gilbert wasn't willing to provide further detail.

That aside, lawmakers say they plan to address CDAs in 2011, and Alamo RMA Executive Director Terry Brechtel said she's confident they'll authorize the use of the contracts.

“We have complete confidence that CDA authority will be extended in 2011, specifically the design-build piece that we're interested in,” she said, drawing a nuanced distinction among the contract models that fall under CDAs.

While the bill's failure won't immediately affect any projects in San Antonio, the RMA will push for CDA extension in 2011 because it plans to use design-build contracts to add capacity to U.S. 281 and Loop 1604. By the next Legislature, the RMA will have spent some $18 million on environmental studies for expansion on the two highways. RMA officials say those projects aren't in jeopardy even if CDAs were to die in 2011 because the agency could use traditional low-bid construction contracts rather than design-build contracts.

It's important to note that while the RMA has never ruled out the use of concession agreements, Brechtel said that there's no support to use that form of financing in San Antonio. “Our county judge has not supported concessions. So until our county judge supports concessions, we will not support concessions,” she said. “It's going to take political will to do a private concession in San Antonio, and I don't see the political will.”

© 2009 San Antonio Express-News: www.mysanantonio.com

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