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Expose on Insider Loans

Posted by ryuzaki0 on from the still-waiting-for-slashdot-to-loan-me-ten-million dept.

Ctimes2 writes "Everyone's been grousing a lot lately about high priced CEO's and compensation packages, in no small part due to the 'Enron incident'. Business2.0 has a lengthy but enjoyable feature about how corporate loans became 'compensation packages', forgivable, sometimes tax free the and norm for corporations. And Slashdot's favorite whipping boy Microsoft, while not leading the pack, certainly isn't the poster child for trustworthy finance. More importantly (or rather, to our eternal annoyance), the article provides some much needed information trolls can add to their 'CEO's are bad!' rants: "Insider lending added thrust to the long surge in executive pay that has pushed the average major-company CEO's compensation from 45 times that of the average worker in the early 1970s to about 500 times worker pay today.""

3 of 315 comments (clear)

  1. In other news... by Anonymous Coward · · Score: 4, Informative

    The "Thief-in-chief" today asked congress to cut by 27% the amount of money allocated to fight corporate fraud -- yet more evidence that this administration's main goals are a) ensuring that the rich texas oil barons get richer while the middle class sinks below the poverty line, b) the good old boy system remains firmly entrenched, and c) Saddam Hussein must die for humiliating George H.W. Bush.

  2. This has nothing to do with making money... by revscat · · Score: 5, Informative

    ...and everything to do with unethical business practices.

    Scan through that list on the first page of the article. You'll notice names like Enron, Dynegy, Tyco, WorldCom, and Adelphia. Executives are getting these loans, securing them with stock options, and when the options tank the companies have no choice but to write them off. Instead of profits going towards incrasing the skillset of their workforce, or dividends, or any other number causes that would actually benefit the company as a whole, this money is just being written off.

    And these aren't small sums, either. We're talking about billions of dollars.

    I wonder if you even read the article. If anything, it was somewhat favorable to Microsoft. They have had some executives who are no longer with the company but, through these insider loans, have been able to walk away with millions of dollars.

  3. It's unfortunate that it's no longer legal... by tlambert · · Score: 5, Informative

    It's unfortunate that it's no longer legal, due to a bill passed into law last July: no more insider loans.

    The reason it's unfotunate is that making unsecured loans, and later forgiving them was one of the ways you could avoid getting taxed twice on the same income. It was also one of the few ways an ordinary human whose last name was not "Heart" or "Rockafeller" or "Hilton" could afford a home in California.

    I know people who killed themselves after the market crash in 2000, because their tax bill for their "Alternative minimum tax" exceeded $4M on stock whose value was far, far less than that (one of them was a Netscape employee, who exercised at the market high in February of 2000, and then was screwed, when the stock didn't go back up after falling later that year before April 15th of 2001,
    when his tax bill came due.

    These days, this is closed by a mechanism called "early exercise", where your company gives you a loan to buy the stock options at the time of grant, and then payment is due at the point you sell the stock, or you can surrender the stock in lieu of payment. This avoids the capital gains tax burden (in the form of state and federal AMT) in the case of a loss, by eliminating the appreciated value between the time of grant and the time of exercise.

    Now this is illegal; so if you accept stock options and do an early exercise, and the company goes belly up (like 9 in 10 startups do)... well, the paper turns into a debt instrument, and they come after you for the value at the time of the exercise.

    It's really assinine to tax deferred compensation in the form of stock or loans, and it's really assinine to tax-collect people to death over it: but now, this is the only option, for ISO grants to employees.

    You may think "Good, we'll stop those Enron bastards!"; but the people you are really screwing over are line employees with ISO grants, who are generally taking a below market wage in exchange for a stake, and startups. The "Enron bastards" will just come up with a different approach to the problem, which is that we have a capital gains tax in the first place.

    -- Terry