Expose on Insider Loans

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.""

Comments

Story about a total jag CEO

[Anonymous Coward]

A new company, feeling it was time for a shake-up, hires a new CEO. This new boss is determined to rid he company of all slackers. On a tour of the facilities, the CEO notices a guy leaning on a wall. The room is full of workers and he thinks this is his chance to show everyone he means business!

The CEO, walks up the guy and asks - "and how much money do you make a week?"

Undaunted, the young fellow looks at him and replies, "I make $200.00 a week. Why?"

The CEO then hands the guy $200 in cash and screams - "here's a week's pay, now GET OUT and don't come back!" Feeling pretty good about his first firing, the CEO looks around the room and asks - "does anyone want to tell me what that slacker did here?"

With a sheepish grin, one of the other workers mutters - "That was the Pizza delivery guy".

_______________________________________________

printed from fullofjokes

hehe - have a laugh folks, people take this shiat way too seriously. The firm foundation theory is now in full swing! :0

But

[Junky191]

"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"

But they are the main figureheads responsible for the astounding progress of our economy- they increase productivity, inspire workers, and set a shining example of moral clarity for all.

Oh wait...

Frontline "Bigger Than Enron"

[revscat]

The PBS series "Frontline" did a show called "Bigger Than Enron" that has an excellent website to go along with the show. It contains interviews with many of the key players here, including former SEC Chairman Arthur Levitt, current chairman Arthur Pitt, and others.

It's acutally more robust than the B2.0 article, and goes into some detail about how politicians and businesspeople push for the SEC to have less power than it needs. At one point Levitt describes how the heads of different congressioinal committees were threating to pull funding entirely from the SEC if Levitt didn't quit pushing for accounting reforms, the exact reforms that turned out to be so necessary. This was in April of 2000, just before the all the shit started to hit the fan.

Coming on in conjunction with today's announcement by the Bush Administration that they don't want to give the SEC too much money, it's certainly not too much of a stretch to see a pattern develop.

This has nothing to do with making money...

[revscat]

...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.

Re:This has nothing to do with making money...

[0x0d0a]

The only thing he said was "unethical". There was no express mention of "fraud".

And consider your own words. Just as the "it's bad because it's rich" dogma has a lot of issues, so too does the "it's good because it's rich", which you've gone at least as far in emphasizing.

On top of that, it seems that you guys skipped economics in college and can't tell that those rich people do far more for the opportunities available to poor people than any government program ever has

Sort of an apples-to-oranges comparison, but I don't necessarily buy into it anyway.

Unless you were an investor in or employee of Enron, Worldcom etc, you have no right to complain because their fraud has not affected you.

You make this bold statement a few sentences after telling the original poster that he skipped economics? The ripple effects of an organization as large as either of the above two going under is *enormous*, affecting almost everyone.

Heck, with Worldcom *alone* and ignoring indirect effects, a hell of a lot of my packets get routed through UUNET.

There have been major changes to law, a lot of "earnings revisions" from companies that have been claiming bullshit (which drives down the market more). There have been companies going out of business that are vendors to the companies in trouble.

Again: pure socialist systems tend to have issues. That doesn't mean that pure capitalist (i.e. without government regulation) systems are useful. For example, in the real world you can end up with monopolies...

It's hard to say why someone "deserves" money, so I'm not going to make claims in that area. I, personally, think that companies that give their top officers that much money are *stupid*, though. Does a CEO *really* have skills that are 1000 times harder to obtain than an engineer, justifying a 1000x pay ratio to the engineer? (Okay, maybe a bit less, since we can factor in a lack of job security.)

Re:jump

[scoove]

Seriously, what exactly does the CEO do anyway that makes him worth so much?

I'll bite.

I'm one. Of a considerably smaller ship, but one nontheless (I provide broadband to about eight counties in a "fly over country" state and run a regional network for voice, IP and private line).

I created my company. Worked my ass off for several years living in a crappy part of town in a small house. Leveraged everything. Risked everything. Signed on the line for every loan, pledged my house, farm and income for years to come to make it happen. Worked for 12 months with no fscking paycheck (actually, you get to pay to play in this club... attorneys, accountants, routers, systems, offices all cost bucks. Guess where it comes from?)

While my geek friends were sneaking out at 4:30 on Friday to go drink and hit the hockey games, I was working till midnight and both weekend days. Vacation? 1998 was the last time I saw free time. Fund the company? Build routers? Climb towers? Carry out the trash? Whatever it took.

Meanwhile, my competition (incumbant/monopoly phone companies in small towns) was run by Junior (second or third generation or more of family-run operations). While Junior made a cushy income, drove his flashy car, golfed at the country club and enjoyed that nice $5 million company home in Vail, I froze my ass off on grain elevators and windmills at 4AM, making small town customers happy.

So now I'm taking Junior's business. Bringing broadband to his town. Making the people happy. Junior's been horrified, learning that my annoying, trivial little company is now taking his core business. He's yesterday. Obsolete. To Junior, I'm a barbarian, but to the community I'm a saint. Even Junior's senator hangs around my office for photo ops.

So why shouldn't I be paid for what I did? You want progress? Don't expect it from Junior. If you want it from me, it comes on my terms. If I get greedy (like the dot-com assholes who lost were in it only for the $10 million homes - learn about these losers and you'll see they're nothing but upper class daddy's boys anyways. They didn't earn it), then I'll join Junior and let some efficient young fsck replace me.

So, do you really want to eliminate my incentive? Sure hope you like Junior...

*scoove*

Re:jump

[wmspringer]

That's certainly a valid answer. You started with nothing and built up a great business, and you're entitled to whatever you can get out of it.

What I meant was, these companies that hire someone to come in and run the place - not create it, not stay up til 3 in the morning to keep it running, just make the decisions and collect stock options, like Junior - what do they do?

I'd be happy to hear that they're worth every penny of the money; I'm honestly curious.

BTW, somebody mod the parent +1 interesting..

Look at their budget!

[smiff]

From that article:

SEC's budget last year: $438 million
Budget under new law: $776 million
Budget after Bush cut: $568 million

So my question is, what does the SEC need so much money for?

Two months ago, the commission received an increase of $30 million over its $438 million budget from last year, which was widely considered inadequate, to begin hiring another 100 staff members to join its 3,100 current employees.

$30 million / 100 new employees = $300,000 per new employee.
$438 million / 3,100 employees = $141,000 per employee.

The law calls for $102 million for raises and $108 million for better computer systems and financing for restoring the agency after the Sept. 11 attacks that destroyed its New York offices.

$102 million / 3,100 employees = $33,000 raise per employee
$108 million / 3,100 employees = $35,000 per employee for computers and 'financing' to restore the agency after losing its New York offices.

Where is all of the SEC's money going?

Re:jump

[ninewands]

I'll repeat the first question:

Seriously, what exactly does the CEO do anyway that makes him worth so much?

then quote your post:

( ... like the dot-com assholes who lost were in it only for the $10 million homes - learn about these losers and you'll see they're nothing but upper class daddy's boys anyways. ...)

then, I'll respond:

The High-level execs who were the recipients of these corporate "gifts" ARE Junior! They didn't create the company, hell, they didn't even create much in the way of shareholder wealth. In the tech sector, it was the dot-com investor feeding frenzy that created any wealth that was realized.

You, OTOH are an entrepreneur. That is a very different species from these "boardroom stars," and I would not see your incentive reduced one iota.

Now, answer the original question ...

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It's unfortunate that it's no longer legal...

[tlambert]

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

Re:Corporate America is modern Feudalism

[kraksmoka]

"For every moron who invested in some crappy dot-com, some crappy energy company, or some stupidly overvalue pet store, there is someone like myself who invests in guaranteed instruments. Savings bonds. I am going to retire a million in 40 years at the age of 61. It doesn't take much: $150 a month or so."

Look dude, i truly do find that admirable. However, i think the two of you are going to extremes.

Yes, in some distinctive ways American Business is like feudalism (i read a title i can't recall with the same theme, but talking about the 70's), with legal privelege of the few (see the music business and Duke Valenti of the RIAA). This is simply a natural consequence of market forces that tolerated the intense consolidation of American business from the early 80's through present. If Americans really didn't like lower prices for more goods, it wouldn't have worked. It did however set the stage for today's catastrophes by consolodating immense power in a proportional few.

On the other hand. The everyday investor earned more than ever before to buy goods that grew cheaper each year. The whole country went along on the drunken orgy (see above comment), and it approved so long as tommorrow morning, and the hangover (now) never came. Still, people who have faith that the USA will not become Argentina and default on our debt (which it did do in the early days) and make those savings bonds of yours worth less than enron stock (still highly unlikely today).

There is however one important idea that you, my patient, steady, long-term investing friend of mine, did not grasp.

You may have your million dollars in forty years, but it will be worth the same as 100,000 today. Meanwhile, these people of corporate privelege (like the M$ guy, or Bernie Ebbers $400 million!), who get away with it are rich with UnEarned income.

Some of my hosting clients see what I do as unearned, because i'm not sending out their html pages by hand. Meanwhile, i invest massive amounts of time improving daily. These CEOs who have on average 5.5 million dollars today and leave take the cake for the sum total of a couple of years of coasting on reputation.

In conclusion. If Feudalism is the extreme right and your anti-anti-everything rant is the left. Our country is dangerously far to the right. You may dispute this assesment, but historically, American politics today are closer to fascism than they have ever been (driven by George W). Our Senate passed a war resolution quickly to get to a far more important election. It is truly disturbing.

gs

Re:Too Bad-it's about the stock

[fermion]

The fact that Microsoft is ok proves the point. MS stock has remained high, and therefore can remain a viable company.

The problem that has been developing, and has been more or less identified as a problem for the past 3 to 5 years, is that a publicly traded company no longer manufactures and sells products, but manufactures press releases and sells stock. The important capital equipment is no longer machines, but, as has been shown by Nike and most other multi-national corporations, savvy marketing departments.

This means that if your product is stock, then as long as the stock remains relatively stable with respect to the overall market your product is doing well. To help keep you primary product, your stock, stable it is useful to have stable sales of some sort of ancillary product that your marketing department can then use to promote your primary product, stock. Most dot coms had wonderful marketing but no real sales, so, eventually, the stock became worthless or was never bought at all. Enron had sales, but when investigated, proved to be fraudulent, which wasn't a problem in itself, but nobody wants to deal with a dishonest agent. M$ has sales, cash reserves, and an excellent marketing department, so it makes lots of money. This does, not, however mean that it is fundamentally different from Enron or a dot com.

The thing to remember is that Enron set up a complex financial structure based on it's stock. True, there were many people robbing the company of millions of dollars, and there was gross accounting fraud, but the thing that brought the company down was the stock. If the stock price had not fallen and triggered certain payment which then waterfalled into audits and investigations, it may have been years before we would have known how corrupt the organization, and on reflection, the industry was.

And the same is true of M$. Stock is a profit center. M$ pays in stock options instead of cash, thus saving not only the cash but also fabricating a profit by not reporting the cost of disbursing the stock option. Also, M$ saves a lot of money in taxes by deducting the stock options from it's revenue. M$ strikes deals with traders and directs M$ employees to use those brokers to trade options. The brokers make a lot of money not only on the trades but also on the loans. There was an article a year or two ago detailing the complex stock transactions, and questioned whether M$ would be profitable without using stock as a profit center. As long the stock remains high, we expect M$ to be a successful company.

So no, the fact that M$ is making money means very little. If it is padding it books with past and future profits to meet analyst expectations, if it is using stock as a profit center, if is neglecting it's customers to meet short term investor expectation, then it has all the same problems as any other doomed company, and, if it cannot handle the web of deceit, will fall.