Posted on 07/17/2002 8:46:06 AM PDT by ken5050
Much has been written, and babbled, about executive stock options as the root cause of much of the recent financial shenanigans. Yet what is more remarkable is what isn't being said about them. Most congresscritters, tripping over themselves to get to a microphone, know not of what they speak. Even Larry Kudlow, on Rush's show yesterday, got several things wrong. And surprisingly, it may well be that the income tax code ( no real surprise here,) is a major cause of much of this financial manipulation. So, if you'd like to learn a little more, read on...
Still doesn't change the issue that a stock option is a distribution of capital from the firm by the board of directors as reward for supposed good deeds. If this is the case, it is not an expense. Instead, it is a dilution of the capital stock, which is why Microsoft and all the big stock option boys spend billions to repurchase their stocks to prop up its value and to also, not coincidentally, leave the option holders in better stead for future capital gains, as long as the money remains in the treasury.
Stock options and their associated cash buybacks are thus theoretically the most tax-efficient means of distributing gains to shareholders, since they do not have to go through the P & L to get to the shareholder. Thus, they are balance sheet transactions.
However, in the practical world, shareholders often prefer steady dividends to uncertain share buybacks.
Since this is a primer and since some of us are totally new to the stock option game, can you define "flipping an option"? Thanks.
I guess I now have a better idea of why Bush2000 is trying so desperately to tout Microsoft on these boards!
Everybody who is interested in having companies report their real earnings gains. Why now? Because politicians normally blinded by the wishes of campaign contributors are for a short window in time motivated (for crass political reasons) to act in the public interest.
All American companies ALREADY expense their options.
They expense them for taxes at the time granted (reasonable) and never as an expense vs. current earnings for financial purposes (I believe). You seem to believe they are expensed at time of exercise. I don't think you are right (does anyone, here, know for sure). In any event, expensing them at exercise (while better than not at all) does not reflect an expense at the time it is incurred. This misstates earnings. Anyway, the reason I think you are wrong is because Bill Parrish (who knows more than either of us) has been calling attention to this problem for many years and describes it as "the greatest pyramid scheme of all times." He states that Microsoft would have incurred losses for the last 5-7 years if it reported stock options as incurred. You ought to check out Bill Parrish's site>
You've just demonstrated by saying the above that you don't understand options.
That's the problem. There are lots of neophytes running around screaming that we must "expense options" as if they knew what they were talking about.
They don't, nor does Bill Parrish.
If you want to understand options, I'll be happy to explain them. If you just want to parrot ridiculous sound bites, then let me know so that I don't waste my time on you.
I can say this without too much effort, however: companies have to use their cash resources to pay for administrative overhead and actual "exercising" expenses of options. There is no current legal way to keep those real expenses off of American accounting books.
But change the rules so that companies are forced to guess at what the final value of an option will be at some point in the future (care to predict the precise price of a stock for March of 2003?), and then there WILL be a way to hide the actual expenses from American accounting books.
Forcing companies to "expense options" on the day that options are issued, prior to when they are exercised (as opposed to today's system that expenses options only when/if they are exercised so that the precise value of the option is known) would literally force companies to engage in a practice that makes large-scale corporate embezzelment child's play.
"Everybody who is interested in having companies report their real earnings gains." - Duece
BWWWAAAAAHA ha ha!
The real expenses for stock options can only be precisely known AFTER the options have been exercised. That's how our system works today.
In contrast, if we change the accounting rules to make companies "expense" options prior to those options being exercised, then companies will have to GUESS at the final value of those options.
Call it what you will, but GUESSING at expenses is NOT the same as knowing the actual expenses.
In my opinion, GUESSING at the final value of options is a far WORSE system than what we have today.
This whole craze about "expensing options" is a push to make companies start placing guesses into their accounting books. That's a process that is ripe for corporate abuse.
That's right, and options that are worthless cost the company in question ZERO in "expenses".
Yet if we forced companies to "expense options" when they were issued, then Microsoft would have been given a tax credit for all of those zero-expense options.
Who gains from that, and why the big push now for it?
BTW...if I accept all your points about the problems with estimating the value of options grants, what's wrong with correcting the valuation each year....there are lots of ways it could be done...hire three investment firms who have NO investment banking relationship with the company, and take the average of the three..Also, to avoid the number being skewed up or down, because of a sudden swing in the stock price, do it on the first day of each month of the last quarter of the company's FY, and average those....wouldn't be perfect, but would be far better than what we have now....
On a related topic.....what do you think should happen when and if a company decides to reprice its options grants? ( Hint: I've tried to gently hoist you on your own petard.)
Regards...
Condolances appreciated, but we've been remarkably Clinton free all this year.....guess Slick and Slicker have better places to be....
BTW...if I accept all your points about the problems with estimating the value of options grants, what's wrong with correcting the valuation each year
You are missing the point. Why add in a new level of GUESSWORK to our current accounting mess? What does that improve? Our current system doesn't have to make guesses as to the final value of options, and it does this because it waits until options are exercised.
When options are currently exercised, the corporation is charged the precise expense, and that expense is then written into the accounting books. Thus, a single revision is made to accurately reflect expenses.
Why change that process? Why force companies to make more guesses into their acconting books? Why make accounting more complicated and more subject to guesswork, revisions, and opportunities for fraud and embezzelment?
You can rest assured that the crooks are cheering you on. The crooks WANT American companies to change their accounting procedures to expense options with guesswork when those options are issued, instead of the current system that enteres the precise expense for options when/if they are exercised.
Senator McCain, who had a hand in cheating honest citizens out of millions of Dollars via his S&L scandal (which included "cooked books") in the 1980's, is currently the biggest cheerleader for changing over to a system that "expenses options" with guesswork.
I wonder why...
I traded options for my own account as a member of the AMEX. I am thoroughly conversant with the Black Scholes pricing model, personally developed sophisticated option trading software to support my trading activity, and if I turn my head 90% to the left, there are about 10 books on my book shelf on options and option trading. I, therefore, doubt you can be all that instructive.
Let's assume a company pays its CEO a salary of $10,000 cash, plus 1,000,000 ounces of gold to be paid in 5 years. What would you record as the CEO salary cost against current earnings? How about if they pay $10,000 plus the right to buy 1,000,000 ounces of gold at $300/oz.?
Let's consider two identical companies. Each company has revenue of $1 billion dollars with non salary expenses of $400 million. Company A pays salaries of $550 million. Company B pays salaries of $50 million, plus options to buy 100,000,000 million shares of stock at $10 per share. For simplicity, let's assume the current price is $10/share. As I understand it, you favor saying that Company A earned $50 million in this period; Company B earned $550 million or 10 times as much. If a valuation of the options (when granted) was $5, I'd say the two companies earned the same amount.
Now let's say, the next period is identical and the price of the stock of B(in the open market) is $20. Now those original options are exercised (Company B prints the certificates at a cost of $150 out of pocket). The value of the bought shares is $2 billion. The value of the exercised options is $1 billion. The company TAKES IN $1 billion in cash in the exercise process. Do you charge the $1 billion to the current period's earnings; do you restate the initial earnings? do you charge the cost of $150 to print the certificates?
McCain has been trying to close this loophole since the mid 90s. He introduced a bill with Carl Levin. Microsoft spent huge amounts tro stop it (Joseph Lieberman was one of the biggest Microsoft cheerleaders. He even threatened to take money away from FASB if they went along with the reform)
You charge ALL of the money that the company paid out as soon as the company cuts checks.At least, that's what you do under today's accounting rules.
If you change the accounting rules to comply with this ridiculous new "expense options" fad, then the company will have to GUESS at its expenses and mark up its accounting books to reflect first the "guess" at the initial time the options were issued, and then later revise the accounting books to reflect true market value (Oh, and that true market value changes every hour of every business day).
Why?
Why change from using the ACTUAL money that a company is out (i.e. today's existing accounting process) to one where guesses and constant revisions are required (i.e. this new "Expense Options" craze)?
Why change our accounting processes to make large-scale corporate embezellment easier? That's what "expensing options" does. It forces companies to clutter up their accounting books with guesses and revisions that can easily be manipulated by insiders to defraud stock-holders of corporate equity.
In this climate of massive accounting crisis, why would ANYONE support that sort of change?
"McCain has been trying to close this loophole since the mid 90s." - Duece
Of course he has. That was my point. McCain is either a dupe or a crook. He has had a hand in robbing honest citizens of Millions of Dollars in his Keating 5 S&L scandal, and the people who control him know that they can sucker him into "closing this loophole" so that they can embezzel even more money.
Right now, all options are already expensed, but they are expensed only when the corporation is actually out money. That's how expenses should work.
Changing the accounting over to McCain's crooked system (popularly known as "expensing options") would force companies to GUESS at their expenses in advance rather than use the actual numbers.
Heck, you might as well do away with accounting as make this change that McCain wants because this change will render accounting books useless for all honest investors and priceless for all fraudsters.
Fill an accounting book full of GUESSES rather than use the actual numbers?! Yeah, like I was born yesterday...
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