Fiddling while Wall & Broad & Main &

Great Debates
1

Hollywood & Vine and all the rest of America burns.
That to me is a good description of the ongoing elucidator v Scylla thread re the Shrub and his shady dealings.
Just to sum up, this is what we have so far, based on what I can remember, including the Shrub’s criminality (sorry, that’s what it is.):

1 - WorldCom: CFO decides that expenses should be capitalized. Basically, this means you can spread out over a large number of years expenses that should be charged in their entirety in the current year. Makes your profits look good. Basic fraud.

2 - Enron: take the debt and throw it overboard. Makes your profits look good. Not so basic, but still fraud.

3 - Imclone: Sam Waksal, CEO, sells all before the FTC decides his company’s main drug isn’t all that hot. Arrested by the FBI. Martha Stewart is caught up. Basic insider trading case.

4 - Generic options expense issue: more companies than you can name (28 out of the 30 Dow stocks, according to various sources I’ve read) don’t account for options on stocks given to CEOs and others as an expense. On top of that, when the option is exercised, the company gets a deduction. Makes your profits look good. Basic fraud, but still not even vaguely illegal. Largest users are tech companies, like Microsoft and Cisco. That 40 plus P/E on Microsoft? It assumes an E that’s made up of a large virtual part, courtesy of this options issue.

5 - Pension fund gains: because of the bull market, various companies have been able to pump up profits because they haven’t needed to make contributions to their pension funds. Some companies have made crazed assumptions about how much their pension funds will gain over long periods of time; the most outrageous offender here is GM. They assume 10%. Just to make clear how wild that is, that assumes a doubling in the pension fund every 7 years or so, without having to make a penny in contributions.

6 - Stuffing the channel: this is what Bristol-Myers Squibb is accused of. Basically, you make the wholesalers buy as much of your product as they can stand, so you can book the revenues and pump up your profits. Basic fraud. Not sure if this one is illegal, though.

7 - Loans to CEOs: this is one of the issues with the Shrub (although I’m not sure, and really don’t care, if he was a CEO or a mere director when he got the loans; fraud is fraud, and insider dealing is insider dealing), and it shows up at Worldcom also, where Ebbers, their former CEO, was given some amazingly huge loan. Frequently, they’re forgiven, which of course simply makes them a grant of money to the poor, impoverished CEO trying to get by on 30 or 40 mil a year.

8 - “Aggressive” recognition of revenue - this is the Cheney problem. ( The Prez AND the VP. Sounds like another sainted Republican administration, doesn’t it? ) Basically, Halliburton decided to pull out of its collective ass a bunch of what would normally have been iffy receivables, declare that they were good, and book 'em as if the money had been received. Fraudulent, but not sure if it’s illegal.

In short, the issues with financial statements and insider dealing are so widespread it’s unbelievable. An entire generation of Americans is going to come to the same conclusion that those who grew up during the Depression came to: to stay away from the stock market at all costs.
This will have a major, and not good, effect on the economy as the effects ripple through over the next couple of years. As for privatizing Social Security, fahgeddaboudit. After this, it’ll never happen.

2

It seems to me that the hot-shot “entrepreneurial geniuses” have done more damage to the US free-market, free-enterprise system in the last few years than all the Communists in the Politburo did in the 50 years after WWII.

On The News Hour With Jim Lehrer the other night there was a panel that included the Dean of the Business College at Notre Dame University. All of the panelists were rather full of ideas as to what should be done to correct and recover from the bad effects of this situation.

The Dean was quite loquacious as to what business should do, what Congress should do, and what the Executive should do. I kept waiting for Lehrer to ask her something like, “And what changes in curriculum and emphasis should the Business College at the University of Notre Dame and other business colleges institute?” It never came.

3

pantom, I agree with everything you said–including the fact that privatizing SS (which I thought was a stupid and grossly expensive idea anyway) will probably not happen.

However, unless there is a truly long and painful recession/depression fuelled by the stock market–as perhaps you’re predicting there will be–I’m not sure that the backlash against the market will be as severe as you predict. For one thing, I’m not sure that people whose retirement funds are vested in the stock market via mutual funds even know what a reasonable alternative might be. I put myself in this willfully clueless category.

My statements are looking so ugly these days that I don’t even want to open the envelope (though I did). Because retirement seems a long way off, I don’t pay as much attention as I probably should. I read about the economy mainly because I find the subject interesting–not because I believe I can make decisions for myself about where to invest. I assume the fund managers know what they’re doing.

Although I read a fair amount of dire opinion about the state of the economy and the market in general, and wasn’t surprised therefore by the current wave of scandals, I also sort of want to believe the old chestnut that over any 20 year period the stock market will perform as least as well as typical savings alternatives.

Is that just so much bullshit in your opinion? (If it isn’t bullshit, how old should a person be, I now wonder, before they start moving their savings out of funds and into more stable alternatives?)

So I guess part of what I’m saying is a hijack (do you think my actions are stupid, however typical they may be), and part an extrapolation that I am indeed a typical investor, at least one my age–one of those Americans who owns stock in an effectively bureaucratic and auto-pilot kind of way. Are you predicting that people like myself will get out of funds?

Aside to David Simmons: Is it your belief that business schools have been teaching unethical business practices to students?

4

I believe I asked what “changes in curriculum and emphasis” should be made. Wherever did you get that I think they were teaching unethical behavior out of that? Maybe ethics was taught but was too little emphasized. Maybe the “bottom line for this quarter” mind set dominated.

In any case, I think it was a perfect opportunity for the questioner to ask the Dean of an important business college if, in addition to specifying what others should do, she could do anything, or had been doing anything to raise the ethical standards in business. Or are you satisfied with the status quo?

5

Dave, time for a major chill pill! My question wasn’t intended in adverserial manner, and I’m not sure why you took it that way.

I know exactly what you wrote, and it prompted me to pose the question that I did. I’ll explain why by way of responding to your latest:

“I think it was a perfect opportunity for the questioner to ask the Dean of an important business college if, in addition to specifying what others should do, she could do anything, or had been doing anything to raise the ethical standards in business. Or are you satisfied with the status quo?”

I don’t have a strong opinion–or any basis for a strong opinion–on the matter of business schools.

I do listen to NPR which, as you may know, features lots of business school professors explaining economic matters and giving investment advice. By the sound of them they are within the political and ideological mainstream, ranging from somewhat conservative to somewhat liberal.

I have a vague impression from the odd personal encounter with such people, and from very slight knowledge of what is taught to students majoring in business, that they are fairly upright, and that the curriculum teaches, for example, accounting procedures, by the book. It’s my impression that courses in business ethics are part of the major. It’s not my impression that Enron, WorldComm, Xerox, et.al. shenanigans are either taught in business schools or countenanced by their faculties.

But, since I have so little real knowledge, I’d be all ears if anyone had a different kind of case to make.

So let me rephrase.

Do you think that business schools are accountable in some form for the current mess that we’re in. My impression is not, but I might be wrong.

In the future, I’d appreciate it if you’d save your gunslinging for someone who’s looking for a fight. I really dislike hostility and I find it especially unpleasant when it comes from someone whose views are so close to my own.

Deal? :slight_smile:

6

No, I do not hold business colleges accountable for the current mess. However, difficulty in separating what’s good for the manager from what’s good for the company does seem to be so pervasive that if many current managers studied any ethical case histories or other ethical material in school they seem to have either forgotten it, or ignored it. So it would appear that the schools’ ethics teaching methods, if any, haven’t been very effective and it would be interesting to know if the deans recognize this and are going to do something about it.

Deal. But I wish you would explain to me what part of my original post elicited this: “Is it your belief that business schools have been teaching unethical business practices to students?” Maybe if that is pointed out to me I can better phrase things in the future and avoid misunderstandings.

7

I simply made an inference from your feeling that Lehrer should have quested the Dean that you saw business schools as part of the problem. This made me curious.

I will admit, though, that the way that I phrased the question was probably influenced by your offhand remark about tenure being a sinecure in another thread. Back then, when you were also a bit hot and hasty I thought, it struck me that you might have some bone to pick with academia, apart from your otherwise liberal outlook (as I’ve seen it). But honestly, there’s no need to go into it here; I’m sure pantom would just as soon we not hijack his thread.

pantom, still waiting for your return!

8

You forgot these:

  1. Presenting phony budgets to the public by counting earmarked funds in the pension plan as ‘general revenue’ so the books look better than they are.

  2. Taking pension funds and spending them so you don’t have to borrow money and pay interest on it.

  3. Preparing financial forecasts by making outrageous assumptions about growth so the forecast looks better than reality.

  4. Accepting bribe money from certain customers to modify behaviour in the customer’s favor.

Oh, sorry. That’s the government that does that.

The big story missing in this debate is that the government is the absolute champ when it comes to deceptive practices, lies, and cooking the books. And in the case of government, we’re not talking about million or even billion dollar deals. We’re talking about deceptive accounting that hides tens or hundreds of billions of dollars. We’re talking about raiding a social security system that is relied upon not just by the employees of one company, but for every person in the country.

Then there’s the pork. Unrequested earmarks, meaning money slid into bills in committees rather than being actually requested formally. That’s about 30 BILLION a year - that alone is a bigger scandal than every shady deal by every company in the last year.

You want to talk sleaze, the government is the champ. It makes me sick to here these clowns in government getting on their high horse and talking about being honest and forthright.

9

Global Crossing.

Hmmm, why was that forgotten?

10

The OP got me thinking (and this is a tangent, I know): What happens to the stock market when the Baby Boom generation retires and, en masse, starts taking money out of their mutual funds? Is a crash at that point predestined?

Or maybe that’s fodder for another thread.

11

All of the things you list are well known and reported by columnists and other pundits as well as news media on a routine basis.

As a result of this information being widely disseminated have US government bonds taken a nosedive? Do foreign investors shun US government obligations because of what your refer to as “sleaze?” Does anybody? Au contraire.

However, at least in part because of corporate managers dealing out misinformation, some individual stocks have become nearly worthless, some investors and employees in particular have been left in terrible financial straits, and the stock markets are close to a panic mode.

So it sure looks to me like you are doing your best to drag the red herring of irrelevancy across the trail. You aren’t by any chance a PR man are you? Or a GW shill?

12

Uh, I wasn’t suggesting anything of the sort.

What I’m suggesting is that people save up some of the outrage they are directing at the corporate world, and when this is all over, direct some of it at the government.

And even more importantly, that they remember that when the government wants to pass a bunch of new laws and give itself sweeping new powers to ‘protect’ you, that they are the worst offenders around. Having the government come in to ‘clean up’ business is a bit like hiring Anderson to come in and ‘clean up’ bad accounting.

13

I am not David Simmons, but I’d like to weigh in here on this one.

I believe that they have. This belief, however, is based solely on anecdotal evidence, although I have no reason to believe it is not representative of most business schools.

My girlfriend is currently a senior accounting student at St. John’s University in NY. We were discussing the whole situation and she told me that in her classes (post-basic), that the job of an accountant in the real world is to make the books look as good as they can legally, not to make the books give as accurate a picture as they can. This means using the inventory technique that makes the books look the best, not the one that gives the most accurate picture of the company’s finances. Moreover, they are taught to NOT blow the whistle if they come across a situation of fraud/completely unethical practices…but to just walk away instead. The reason for this is that if you blow the whistle and the stock takes a nose-dive, you just hurt lots and lots of people who own that stock.

Part of the problem is the reality of the situation, and the business school is merely teaching reality. If the accountant sticks to ethical and accurate accounting, s/he might get replaced by the CEO with an accountant who is willing to cook the books, since the CEO’s main job is to make the books look their best.

The whole system is completely messed up (IMHAUO) and securities laws need to be knocked down and rebuilt on common sense. However, I am not afraid to invest in a mutual fund right now for retirement since it is likely that all this will be fixed by the time I retire, and I believe that reasonably diversified portfolios grew in value, even during the Depression.

14

Maybe the business colleges are too much into the, “To get along you have to go along” mode.

The whole thing in the current financial reporting world is reminiscent of that old story about everyone standing in s*** up their chins and the command comes down, “Don’t make waves!”

15

Mandelstam, sorry to take so long to weigh in, but this was a busy weekend.
As to the 20 year time horizon, believe it or not there was one period in the twentieth century when you would have LOST money, on an inflation-adjusted basis, in the stock market. This would have been the first 20 years, from 1900 to 1920.
There’s a site called globalfinancialdata.com that will, as an enticement to get you to subscribe to their data service, allow you to download some of their historical series for free. I downloaded their historical stock and historical inflation files, then adjusted the stock one with the inflation one. My calculations may of course be off, so feel free to go out there and do the same. In fact, you absolutely should, because looking at historical stock prices and playing numbers games with them is a great way to educate yourself about the risks/rewards of stock market speculation.
Lest you get too discouraged, this was the only period in which you would have recorded an actual loss in real terms, and this was followed by the Roaring Twenties of course, when the value would have increased by six and a half times in real terms.
Of course by 1931 this would have been cut by more than half in real terms. Who said timing wasn’t everything?
Re Sam Stone’s point about the government’s flimflammery, there is one site which posts, every day, the complete, unvarnished truth about the public debt of the U.S.:

http://www.publicdebt.treas.gov/opd/opdpenny.htm

Another VERY revealing site.

Neurotik’s post about what they’re teaching his girlfriend is the point I want to make with this thread: the dishonesty is endemic. One should assume dishonesty, not honesty, at this point. And if that’s the case, the market could fall a lot further than it has, simply because there will be no way for anyone to know what any company is really worth.

16

…on this very subject:

Remaining U.S. CEOs Make a Break For It