Stock options and Congress

Economics

There is a huge argument on Wall Street and Capital hill right about what’s the proper way to account for stock options, and the whole thing is muddied further by the fact that neither side understands the whole thing. The Republicans actually have a very nice argument, but none of them can seem to articulate it.

On one side of the fence you have Greenspan and, surprisingly, the democrats. Greenspan has said that all the serious analysts have already factored in the dilution of stock options into their analysis, so releasing the data publicly should have no real effect on the markets. This is a very potent argument because if it’s not going to make a difference, what do you have to hide? Basically this falls in line with Greenspan�s drift towards transparency. The democrats are suggesting that stock options be shown in the bottom line. Republicans argue that it’s hard to accurately value stock options, but the dems are quick to counter that if it’s not worth anything, employees wouldn’t accept it as a form of compensation and if it is worth something than it should be reflected in the company’s books when they give it out. Wall Street, whose opinions are influenced more from the frenzy following Enron than anything else, also follows this line.

On the other side of the aisle, there is incredulity that people are suggesting that the books are tainted with something that cannot, as things stand, be accurately valued. There is a duality in options in that they are both income and remuneration. What it all really comes down to though is that options don’t cost the company money. The FASB almost mandated subtracting options from the bottom line but after an uproar from Silicon Valley and the Senate banking committee (most notable Phil Gramm) the proposal was reduced to a footnote, and with good reason. If my company has 5 million in profits from selling widgets, and I’ve given employees a million dollars worth of options, the company has still made 5 million dollars from widgets, there’s no reason that I should subtract a million dollars from my reported profits when it doesn’t accurately reflect my business.
There are a number of ways to account for options out there, most notable the Black-Schoals model that the most common, however not because it is good, but it’s simply the best out there. There are also guidelines for reporting options in taxes, and many have suggested that these should simply be applied to accounting. There are several problems with this, but the most serious is that tax laws are written to encourage and discourage businesses from doing certain things, and by definition accounting should be neutral, so if these suggested methods are introduced as accounting standards then suddenly there are very persuasive elements in the books that are going to change the way companies do business, and not necessarily for the better. Also, the minute that congress starts telling accountants what to do; accounting will become the only federally regulated profession out there. Doctors, lawyers, brokers, all exercise the right of self-regulation. You don’t see anyone suggesting that congress go create mandates for lawyers after Enron, even though arguably their law firm (whose name escapes me at the moment) is just as responsible for the situation as their creative accountants.

While I’m on this tangent I would like to suggest that the long term solution to the problems in the accounting business is to introduce competition into the field. Among large corporations there is a monopoly among the “Big Four” that now dominate the field, and there is really no incentive for them to rock the boat too much. If meaningful competition exists for the big accounts, such as GE and Fannie Mae, I think we’ll start to see the market forces drive accounting like they drive nearly every other profession.

Anyway, reporting stock options in the manner that the democrats and the more liberal media are suggesting will ultimately stifle the way business is done and hinder productivity, and therefore growth, in the long-term. Options give firms the oppurtunity to attract talent to the company that they could otherwise not afford, and give the employees’s of a stake in the company and interest in seeing that the company does well. A conversation earlier today Wayne Abernathi really clarified many of the things I’d been reading on the subject, and offered many of the insights here. He’s a really great staffer on the Senate Banking committee who deserves more recognition. He was one of the driving forces behind the Gramm-Leach-Bliley bill that revolutionize, amoung other things, banking regulation

Visit to Treasury

Uncategorized

Today was another very interesting day in DC, marked so far by a very eventful visit to the Treasury. We started out by a very thorough tour of the Bureau of Engraving and Printing. It was nice not having to wait in any of the lines, and because some of the other machines weren’t working they were making $10 bills instead of the $1s most people see on tours. Afterwards we had a nice lunch and headed to the Treasury building for our meeting with the Treasurer, Rosario Marin (pics). That was of course wonderful, though she couldn’t sign my sheet of $2 bills because her name wasn’t on them, something about protocol.

Some of the more interesting tidbits I picked up were about the new full-color bills being introduced next year, and that there is some serious discussion about putting a new face into the currency, but they won’t be taking any of the current ones out. Hmmmm. It’s all basically part of the fight to stay ahead of the counterfiters, but personally I’m going to miss the old greenbacks.

As almost more coincidence than anything else, we were able to meet briefly with John Taylor (pics), one of the greatest living economists and named as one of the main people to possibly succeed Alan Greenspan. Taylor is currently the Undersecretary of Foreign Affairs at the Treasury, no small job.

There were a few other things there, but it’s getting too late to write; check out the pictures

airport

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Today at the airport I was searched. It was not particularly thorough or extensive, they simply scanned by body with a metal detector, made me take off my shoes, and went item by item searched through my bag. The humanity of the security guards made it slightly more bearable — certainly the female one’s fascination with my MD player was nice, but there was still something inherently dehumanizing about the entire experience. Surprisingly though, throughout the entire thing I felt happy and amused: This was the good old U. S. of A. hard at work, protecting the innocent and creating a safer environment for me and my progeny. Perhaps this whole line of thought springs from the new Office of Homeland Security business, which comforts me on one level and deeply scares me on another. Is this a genuine requirement to ensure our safety against a world of terrorists, axis of evil, or is this simply the first step toward an Orwellian state. I do not believe that George Bush is a bad man, but I believe that he might be shortsighted enough to send our country down the wrong path at the wrong time. We’re thirty minutes out from DC, no one may exit their seats or they will turn the plane around.

I think what it really comes down to is the whole security business stinks of bureaucracy. Parking at the airport they required us to open the trunk to our car, but though it was chock full of stuff they didn’t look through it. How many of they caught by checking people shoes? Are the intangible benefits greater than the very tangible inconvenience? The security measures are, as they stand, not draconian by any means, but they do hint at increased censorship, profiling, and a lack of privacy. It’s a thought-crime to say certain words in a plane or in an airport; what is scary is that people accept these “minor” inconveniences as the price one must pay, as a requirement of the government, not a privilege. The road to tyranny begins with a single step, a single loss of freedom.