[Swiftwater Gazette] politics: This is attributed...

[Michael D. Weisner]

Rik,

Interesting reading ...

I propose that we solve the issue of overcompensated CEOs and the loss of 
corporate jet transportation industry jobs.  We will take a few of the 
unproductive CEOs with their "Golden Parachutes" up in the corp jets over 
unpopulated areas and see if a chute made of gold is better than one made of 
nylon.  After a few hit the ground, we may just see a turnaround in 
corporate politics.  I have no problem with highly paid talent, just they 
need to be talented at what they are being paid for.

Mike

From: "Rik Sandberg" Thursday, February 05, 2009 1:39 PM
Ed, Brad, Michael,

Here's something I read this morning that I thought was worth passing
along in light of all the hubub over CEO, etc. compensation and the
death (as some would have it) of capitalism.

Here's a link to the whole site. It comes out every morning.

http://www.agorafinancial.com/afrude/

*Demerit-Based Pay*
By Eric J. Fry

Russia, according to Winston Churchill, was a "riddle wrapped inside an
enigma." Wall Street's version of capitalism, according to us, is a
fraud wrapped inside a delusion.

The fraud is that merit-based pay is always meritorious; the delusion is
that capitalist enterprises are always capitalistic.

When you combine these two deceptions, you find lots and lots of people
defending the right of incompetent corporate executives to receive
multi-million-dollar paychecks…even after the companies that employ
these executives receive multi-billion bailouts from the U.S. government.

Sadly, mass deceptions tend to maintain their grip on the public
imagination for destructively long periods of time. The executive
compensation deception is no different. During the many years that
stocks priced trudged from their 1982 lows to their 2007 highs, the
merit-based pay deception advanced from benign heresy to malignant gospel.

A series of warped deductions about cause and effect led America to
embrace one of the greatest financial frauds of all time. Here's how the
rationale for merit-based pay mutated over time:

A CEO who increases shareholder value is a good CEO; and if a company's
shareholder value is increasing, its share price will also increase over
time. And if a company's share price increases over time, shareholder
wealth increases. Therefore, to the extent that a company's share price
is rising, the company's CEO is a good CEO who deserves hefty compensation.

Unfortunately, dear investor, "rising share price" is not a synonym for
"shareholder value"…and every merit-based CEO in America understands the
difference. Indeed, some of America's worst CEOs deliberately and
methodically erode shareholder value, solely for the sake of boosting
their company's share price and – oh by the way – their own "merit-based
pay."

One of the most popular tactics is called the "option grant," whereby a
company dispenses massive amounts of stock options to its executive
team, in addition to traditional cash compensation. The stated rationale
for these option grants (often stated by a grant recipient) is to
incentive executives to focus their efforts on activities that will
produce a rising share price. But of course, most executives exercise
about as much influence over their companies' share prices as a starfish
over a tsunami.

By contrast, the option grant compensation mechanism itself CAN
influence the share price. Back in the go-go days of the dot.com era,
lots of tech companies doled out lots of stock options. And since these
option grants did not show up in the income statements as a compensation
expense, the companies that dispensed the grants were able to report
much higher earnings than if they had paid equivalent amounts of
compensation in cash. This practice provided no small benefit in the
dot.com days, when "beating the estimate by a penny" could goose a stock
by 30% or 40% in a single day.

As long as share prices were rising, no one cared that the expense of
option grants landed squarely on the backs of common shareholders as a
reduction of "shareholder equity." But they should have. To satisfy the
option grants, companies issued new shares. If the share count goes up
without any underlying change to the balance sheet, each share of stock
outstanding represents a smaller piece of the company and, therefore, is
worth less than before.

Favored tactic #2: The share buy-back. This tactic is a very simple, and
effective, executive-enrichment tool, especially when used in concert
with tactic #1, the option grant. The share buy-back is exactly that,
buying shares of the company with cash from the corporate treasury.

Not all buy-backs are bad, of course, but many are. A good buy-back uses
corporate cash to buy the DEPRESSED shares of a company – e.g., buying
one dollar of assets for fifty cents. A bad buyback does the opposite.
But for some corporate insiders, nothing feels quite as good as a
buyback that is bad…very, very bad.

An option-laden executive loves the buyback for two reasons: 1) It
contributes some marginal buying interest to the marketplace, thereby
helping to boost the share price and; 2) It reduces the number of shares
outstanding, which helps to produce a more flattering earnings per share
result.

Are you confused yet? You should be; Tactic #1 increases the share
count. Tactic #2 DECREASES the share count.

The sinister nature of coordinated option grants and share buybacks
becomes painfully clear when you realize that many, many American
companies simply churn the number of share outstanding without producing
a net benefit for the common shareholder. The churning activity does,
however, produce an enormous benefit for company insiders.

Many, many other tactics – both legally fraudulent and overtly criminal
– can combine to produce simultaneous wealth creation for management and
wealth destruction for shareholders. Few played this game with greater
audacity than the federally coddled GSEs, Fannie Mae and Freddie Mac.

In July 2003, my former colleagues at Apogee Research, led by a
brilliant forensic accountant named Robert Tracy, observed, "For the two
years ended December 2002, Fannie [Mae] lost $11.8 billion of asset
value that was never reflected in its GAAP [accounting] calculations,
while simultaneously reporting GAAP earnings of $10.5 billion. Had the
lost asset value been included in Fannie's GAAP net income, it would
have booked losses for both years."

Obviously, the difference between a profit of $10.5 billion and a loss
of more than $1 billion during the years 2001 and 2002 would have seemed
material to some investors – material enough to have kicked Fannie's
share price into cellar.

The list of abuses committed in the name of merit-based pay does not end
with option grants and buybacks. Indeed, many of the merit-based
compensation schemes do not erode shareholder value methodically.
Instead, they place shareholder capital in extreme peril, solely for the
sake of a rising share price. Let's call this the "Wall Street Model."

The main advantage of this tactic, from a CEO's standpoint, is that
criminal intent is much harder to prove. A CEO who causes his company to
leverage up the balance sheet 45-to-1 and uses the leverage to buy risky
securities that no pawnbroker would buy at any price can say, "Hey, it
seemed like a good idea. Everyone else was doing it. Besides, it wasn't
even our fault. It was those damn short sellers that caused the problem!"

And if you believe that, then you might also believe that nominally
capitalist enterprises always behave capitalistically. But they don't.
And neither does the American capitalistic system.

The "capitalists" on Wall Street probably imagine that their DNA
descends from the likes of Henry Ford, Sam Walton, Bill Gates or some
other legendary entrepreneur. But under the microscope of honest
examination, Wall Street's DNA appears almost identical to that of most
DMV workers.

Like their DMV counterparts, Wall Street's chieftains punch a clock each
day, devise ways to work as little as possible, provide as little
assistance to clients as possible, and periodically tabulate the value
of their entitlements.

Stated simply, CEOs are not entrepreneurs. They are stewards of the
owners' capital. A good steward deserves a good reward…after the fact. A
bad steward deserves a pink slip, and two weeks severance. A very bad
steward deserves litigation.

But American capitalism has strayed very far from these simple precepts
of appropriate compensation. Miserable CEOs make spectacular amounts of
money. And recent attempts to bring compensation back into line with
actual merit must face an indignant chorus of apologists who complain
that government-mandated pay is anti-capitalist and interferes with the
free market.

Really? Don't trillion-dollar bailouts interfere just a little bit with
the free market?

Wall Street's version of "capitalism" seems to distinguish between
different parts of a corporate balance sheet. Assets and revenues belong
to the "capitalists;" liabilities and expenses belong to the government.
I've got a four-letter word for that: Balderdash.

A capitalist takes responsibility for every part of the balance sheet
and a truly free market treats assets and liabilities with ambivalence.
A free market does not care if the assets belong to a sinner or a saint,
or if the liabilities belong to high school dropout or a PhD in
Economics. And a free market doesn't give a hoot if the victims of
financial mismanagement belong to a country club or a bowling league.

So if the truly free markets don't care about these considerations, why
should anyone else?

To conclude, we would like to issue both a word of caution and an
apology. First, the word of caution: The fact that obscenely large
executive compensation packages can still claim legions of defenders and
apologists suggests that the financial crisis has not yet run its
course. When merit-based compensation features more prison bracelets
than option grants, the crisis may be drawing to a close…but not until
then.

And now for our apology: We admit that comparing a Wall Street CEO to a
DMV employee is neither exactly fair, nor exactly kind. We apologize,
therefore, to all employees of the DMV.


I carry a firearm because I'm too tired to run, and too old to take a 
beating.
Joel, mount hope, USA




Michael D. Weisner wrote:
> Brad,
>
> The attack has been gaining momentum for years but it went over the top 
> when
> a few self-serving CEOs flew into DC on their aluminum winged chariots as
> gods asking for handouts.  That image will be very hard to reverse.  It 
> will
> take a decade or more, depending on how long the depression (or severe
> recession, if you must) lasts.
>
> Mike
>
> From: "Brad Haslett" Thursday, February 05, 2009 1:11 PM
> {clip}
>
>> He used to be a buyer for Dillards and flew around the country on
>> Dillards fleet of corporate airplanes (which got them home that night
>> and in the office the next morning).  Barney Frank, et al, have
>> declared war on corporate aviation.  What does Barney, Obama, and
>> friends know about being economically productive?  Their class warfare
>> is a direct attack on a million jobs.  The pendulum has indeed swung,
>> which is the whole point of having two or more parties, but it's
>> swinging too far, too fast, and is being pushed by idiots.
>>
> {clip}
>
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