--- http://www.upi.com/view.cfm?StoryID=20040402-083837-5018r The Bear's Lair: Lobbyists of fraud By Martin Hutchinson Published 4/5/2004 12:53 PM View printer-friendly version WASHINGTON, April 5 (UPI) -- For sheer chutzpah, Intel chief executive officer Craig Barrett's Wednesday piece in the Wall Street Journal, explaining why he opposed expensing stock options, took some beating. The following day, it was revealed that Barrett himself doubled his allocation of stock options in 2003, presumably on the principle of "Get it while you can." The exposure draft by the Financial Accounting Standards Board, recommending that stock options be expensed on the income statement, although remaining agnostic on the method, produced an even greater howl of outrage from the tech sector and its tame politicians than had been expected. Most ominously, House Minority Leader Nancy Pelosi (D.-Ca.), who presumably has many tech sector constituents and donors, and House Speaker Dennis Hastert (R.-IL.) who cannot possibly have the same excuse (at least in the case of the constituents) vowed to introduce legislation preventing the FASB from doing its job. When politicians, particularly those with the intellectual qualifications of former wrestling coach Hastert, start setting accounting rules, the U.S. financial system is in trouble! Make no mistake about it: the current method of accounting for stock options may not legally be fraudulent, but economically it is fraud. It pays employees and management something of immense value, that directly reduces shareholders' wealth, and then declares to shareholders that no value has been given. It is thus similar to embezzlement, which (because the embezzler knows he's got the embezzled money whereas the victim doesn't know he's lost it) also produces "higher productivity, higher returns on equity, higher returns on assets" (Barrett's words) -- until the embezzlement is discovered and the victim realizes something has been stolen. Technically, discovering embezzlement, by lowering the total of perceived wealth, through the "multiplier effect" reduces gross domestic product. It is on this level, and only on this level, that the current mis-accounting for stock options costs can be justified. Barrett goes on to claim that if options costs are expensed "no wise investor or professional analyst will pay much attention to the expense figure." In that case, his argument that expensing would reduce productivity, return on equity and the joys of motherhood makes no sense -- how can a figure to which nobody pays attention have any effect at all? Thomson FirstCall, the earnings estimates reporting service, has announced that it will strip out options costs when calculating quarterly earnings, so that those companies that have switched to options expensing are not penalized compared with their competitors. This is not really a defensible position even while only some companies expense options, because the volumes of options granted varies so enormously even within sectors, so that some companies, such as E-Bay and Cisco, would in most years lose their earnings altogether if options were expensed properly. However, Thomson FirstCall uses primarily the sell side analysts to calculate its estimates; there is no question that the sell side -- brokers attempting to peddle stock -- benefits enormously from having earnings numbers artificially inflated, particularly in the tech sector where earnings are so scarce. ----- End forwarded message ----- _______________________________________________ Politech mailing list Archived at http://www.politechbot.com/ Moderated by Declan McCullagh (http://www.mccullagh.org/)
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