Wednesday, October 01, 2008
Cyclical Hypocrisy On Wall Street
57 seconds in:
"TODAY, MANAGEMENT HAS NO STAKE IN THE COMPANY!!!"
That was the general case in the 1980s.
But in the 1990s, companies, tech in particular, started lavishing stock options on their employees. It was a way to get everyone's interests aligned with those of the shareholder. Then came the tech bubble with a few accounting frauds and the resultant backlash. All of a sudden employees had too many stock options; they were incented to *pump* up share prices at any cost; or so the argument went. The next thing you know, Congress is forcing companies to expense stock option compensation. This all but neutered what had recently been, a progressive way to structure a public company. Mrs. C-Nut used to get stock options annually - but for the past 5 years she's been handed *restricted stock* instead. The same goes for almost all employees of large public companies now.
Now these things always cycle back, and forth.
Today's analogy would be the desperate plea to suspend mark-to-market accounting. Read what alleged capitalist Steve Forbes wrote a few weeks ago:
Also of immediate urgency is for regulators to suspend any mark-to-market rules for long-term assets. Short-term assets should not be given arbitrary values unless there are actual losses. The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline.
Think of the mark-to-market madness this way: You buy a house for $350,000 and take out a $250,000 30-year fixed-rate mortgage. Your income is more than adequate to make the monthly payments. But under mark-to-market rules the bank could call up and say that if your house had to be sold immediately, it would fetch maybe $200,000 in such a distressed sale. The bank would then tell you that you owe $250,000 on a house worth only $200,000 and to please fork over the $50,000 immediately or else lose the house.
Absurd? Obviously. But that's what, in effect, is happening today. Thus institutions with long-term assets are having to drastically reprice them downward. And so the crisis feeds on itself.
Wasn't it just a eight years ago that Regulation FD was thrust upon public companies?
How the heck have we gone from wanting to know everything about a company to today's idea that they should have full license to mark their *assets* at whatever value they want AND in the face of current prices? How did this fundamental transformation of sentiment happen in such a short span?
Steve Forbes wants Mark-to-Market replaced with Mark-to-Myth accounting. (Though it's euphemized as *Mark-to-Model*.)
What kind of economy, what kind of country are we living in today that has politicians COLLUDING with banking executives to defraud the public???
Besides all that, Steve Forbes has no freakin' clue what he's talking about. He throws out this ridiculous strawman, this example of a homeowner making their payments but gets *called* by the bank for more cash. This is garbage.
The fact is, the large banks NEVER INTENDED TO HOLD THE JUNK on their books. Much of it they were stuck with when they could no longer dump (i.e. securitize) it on investors and taxpayers (Fannie Mae and FHA) at the prices they desired. Across the board, the large banks Wells Fargo, JP Morgan, and Bank of America have been relabeling these *assets* as Level Three - meaning they intend to hold them to maturity. But this is a flat out misrepresentation, a flat-out lie.
This would be like me buying Google at $400 this morning hoping to flip it at $405 by the end of the day. BUT, unfortunately the stock dumped and closed at $350. So now I tell everyone that my *trade* was actually an *investment* which I want to hold on to indefinitely. Us traders indulge in this self-delusion, and suffer greatly from it,....all the time. I know what I am talking about here!
So in the past few years, while bond prices screamed, credit spreads evaporated, and investment banks leveraged up their balance sheets 30 and 40 to 1, how many times did Steve Forbes clamor for the suspension of Mark-to-Market? How many times did he call for more *reasonable* accounting from the big banks?
The answer, of course, is zero.
Fair weather capitalists, all of them over there at Forbes.
How bad is it when the Associated Press has a better handle on economic reality than Steve Forbes?