10% of American Business Elites Routinely Steal Money

I put up a post on Lieberman getting lots of contributions from CEOs, and though I didn't write that this meant anything in itself, commenters were quick to defend big business as an institution and say that CEOs have the right to donate money, just like anyone else.  I find that technically true, but laughably naive.

What Barry Ritholz blogged about the other day (from the Wall Street Journal) shows that  CEOs and top executives are not like anyone else.  They routinely steal huge sums of money from their shareholders and get away with it.  

A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. A review of Standard & Poor's ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.

10% of the top 1800 companies in America ripped off shareholders in the wake of 9/11.  Economic populism works when business and political elites are corrupt.  That is the case right now.  CEOs and top executives are not to be trusted, they have a basic greedy mindset that has nothing to do with capitalism and everything to do with selfish betrayal of the free market.

Oh, and as an aside, let me point out that the idea that Democratic consultants couldn't compete if they had 'real accountability' and had corporate clients is flawed.  Most of them do have corporate clients, a lot of corporate clients in fact.  And there's no accountability there either.

It's not just the American political system that is rotten, my friends.

Tags: Business (all tags)



Re: 10% of American Business Elites Routinely Stea
People have to start to understand it's not government that is guilty of "waste, fraud, and abuse." It's corporate America that is guilty of that and worse.  How does such a small % of our population control such vast amounts of our wealth?  (I'm too lazy to look up exact figures but you know the #'s)  How could it not have happened other than outright thievery made legal by a corrupt set of laws allowing them to do so.  It's time the people took this country back, plain and simple.  We need to re-establish a middle class.  But someone needs to tell them. Get them to pay attention, to care.  I don't know who that is.
by fred 2006-07-16 10:19AM | 0 recs
Re: 10% of American Business Elites Routinely Stea

According to data from 1997 the gini index for the United States was 83, which is similar to most third world countries.  Over 80% of the wealth was in the hands of the top 20% of the population and 38% of the wealth was in the hands of the top 1% of the population.   We are now, my friends, in Third World territory.  Most people in the bottom half have little wealth, or negative wealth.  This is the greatest difference in wealth in U.S. history. (Look at Kevin Phillips' book "Wealth and Democracy.")  Paul Krugman recently wrote an article on the relationship between polarized wealth and polarized politics.

http://delong.typepad.com/sdj/2006/06/th at_triangulat.html

(It's behind the "Times Select" wall, but here's an excerpt.)  

by prince myshkin 2006-07-16 11:52AM | 0 recs
How it works

For the benefit of those who don't understand how it works, here's a primer.  Company XYZ grants CEO Bigbux the option to purchase 100,000 shares of company stock on 9/13/01.  (Since the Board probably didn't meet that day, it is probable the options were back-dated, another problem under investigation by the SEC.)  On the day of the grant, shares of XYZ are selling for $15.  So Bugbux has an option (good for years) to buy XYZ stock at $15 a share.  Threafter, the market recovers and the company prospers and XYZ is now trading at $35 a share.  So bigbux exercises his options.  He buys 100,000 shares at $15 for a total of $1.5 million.  Then he sells them for the current price, $35, and pockets a cool $2 million profit.  

Why is this bad for the shareholders?  Because in order to sell the stock to Bigbux, the company has to go out on the open market and buy it at $35 a share.  Spending the shareholders' money.  Alternatively, they can issue more stock.  But when they do that, the value of the company is just spread out among more shares, so each existing share loses value.  Either way, the company loses value and Bigbux makes a nice profit.  That's what's wrong with options, which came about as a way to disguise how much more top management was making than everyone else in terms of salary.

I'm surte there are other nuances that I don't understand that make it even more lucrative, possibly including tax treatment of the sale (long or short term gain?).

by Mimikatz 2006-07-16 10:37AM | 0 recs
Re: How it works

Yeah, I'd say your argument lacks nuance.  For one thing, it's sheer ignorance to think that stock options are only paid to executives.  Practically all of the 7000 employees of Google have stock options on GOOG, and that's just one example.  Every company in Silicon Valley and the Bay Area which is traded or someday hopes to be traded pays their employees partly in options.  Rather than being a sop to Mr. Bigbux, this is actually a nice windfall for the rank and file, and a great incentive to build value in the company.

Yes, backdating your option grant is theft.  No, regular incentive stock options are not theft.

by jwb 2006-07-16 12:20PM | 0 recs
Re: How it works

Right, I forgot to mention the most glaring inconsistency in your post.  The shareholders of XYZ are not going to give a flying fuck regaring Bigbux $2m windfall, since the value of their holdings more than doubled in your scenario.

by jwb 2006-07-16 12:23PM | 0 recs
Re: How it works

The company still loses the difference between the value of the option grant and the value of the stock on the day the options are exercised.  And maybe the shareholders feel great when the stock is at $35, but what about when it falls back to $20?  Or $2?  

Many companies do widely give options, sometimes in lieu of salary, and some peoople have made a lot of money as a result.  But many people in Silicon Valley start-ups ended up with nothing as a result, when the dot-coms went bust.  And they give much, much more to the top people, while cushioning them with salaries and parachutes.

by Mimikatz 2006-07-16 02:16PM | 0 recs
How it works -REALLY

Actually, your assertion is not correct.  The company can take options positions too, to cover the grants given to any of its employees, including the CEO.  Rarely does the company hold the other end of the options contract.  Options are publically traded investment vehicles.  A company doesn't usually take on market risk with its options grants because they are trying to incent the CEO and management to take actions that will increase the price of the stock.  Second, even if the company did hold the other end of the options contract, they would not be going out on the open market to buy the shares.  Most companies have authorized shares retained and could issue the stock directly from their holdings.  AND, if even if by some strange reason they did go out on the market to buy the shares, they would be paying a shareholder cash to obtain those shares.  This sort of compensation is not detremental to shareholders.

I agree with you that CEO compensation for the most part is out of control, but also realize they don't determine what their compensation package is, the board of directors of the company does (as elected by the share holders).  The suggestion that this is theft is not very fitting or wise.  

The bigger issue out there isn't that CEOs are getting stock options, but rather making poor management decisions to prop up the stock price in the short-term at the expense of the long-term.

by Nick A 2006-07-16 07:48PM | 0 recs
Re: How it works -REALLY

They frequently just issue more stock to cover their options.  When they do this they forgo selling the stock at market so they miss out on the difference.  At the same time they dilute the value of existing shares.

by pipe 2006-07-17 10:02AM | 0 recs
How it really works

Based on its fundamentals (P/E) stock in the ZYB Corp is trading at $20. Terror attack occurs, stock market reacts by dropping ZYB to $15. Board grants executive suite options at $15. When the artificial shock wears off and stock resets to fundamentals at $19.95 executive suite exercises options, makes bundle, leaving other stockholders minorly under water.

That is the scenario we are talking about. Executives getting a windfall for doing fuck all but waiting for an almost ineviatable corrrection while doing nothing for stockholders at large.

by Bruce Webb 2006-07-17 01:01AM | 0 recs
Matt goes over the top again...

commenters were quick to defend big business as an institution and say that CEOs have the right to donate money, just like anyone else.  I find that technically true, but laughably naive.

Matt being brittle and world-weary - Noel Coward, eat your heart out!

But it would carry a tad more conviction if he adopted a similarly jaundiced view about stories he likes.

The blog he links for his stock options story - an interesting one deserving of more publicity - plays it pretty much straight. A little hyperbole, perhaps; but no sweeping and implausible conclusions.

Matt, however, decides to make 2 +2 = several squillion:

10% of American Business Elites Routinely Steal Money

I don't know what his evidence for this Coulteresque claim might be. It's certainly not the blog piece he cites.

Just read the quote from that piece that follows Matt's

They routinely steal huge sums of money from their shareholders and get away with it.  

and try fairly to derive Matt's extravagant conclusion from the quote. Or anything else in the blog piece.

Can't be done.

When he says

CEOs and top executives are not to be trusted

it seems a shame to point out that nobody does trust them! (Not sensible grown-ups, anyway.) That's one of the many reasons why we have the SEC!

Not perfect, of course. But, as Mr Google's return of 5.1 million items on sec "stock options" suggests, they do have a certain history in investigating misfeasance in this area.

(Whereas Matt's piece suggests we're living in a pre-Lochnerian commercial state of nature, in which robber barons do their dastardly deeds unchecked.)

I'm not suggesting that there aren't abuses, some of them amounting to crimes, with the use of stock options by US corporations. Of course there are.

But that's a whole different thing from suggesting that

10% of American Business Elites Routinely Steal Money

As for
It's not just the American political system that is rotten, my friends.

Again, an admirably jaundiced sentiment - up to a point. I could only wish it were sufficiently low down the ladder of abstraction to connect with some actual evidence.

by skeptic06 2006-07-16 11:53AM | 0 recs

You said it!

by crazymoloch 2006-07-16 12:30PM | 0 recs
CEO's go to...

It sounds to me like you are trying to make the case that CEO's should not be allowed to donate money to candidates. How would enforce that? I am all for public financing, but telling one person they can donate while another person cannot is just undemocratic.

The real problem with CEO contributions is not their donations themselves; it would be the fundraisers they hold. It is not merely enough for a CEO to give large amounts of money by itself. It is when a CEO would make employees donate to that candidate and then raises ten or a hundred times as much that gives him a large influence over candidate.

by bblogger407 2006-07-16 01:51PM | 0 recs
Re: CEO's go to...

"It is when a CEO would make employees donate"

This is actually illegal.  Companies/bosses cannot compell employees to give to political candidates although I am sure it occurs.

by John Mills 2006-07-16 05:02PM | 0 recs
stoller talking nonsense again

Well this is a truly idiotic post.  Let me explain to you what stock options are granted for.  If the share price of a company goes up, the executive receiving options makes money.  If it tanks, the executive gets nothing.  It's performance based compensation.  Unless someone cooks the books, the only way to get paid a lot is to do well and make the stock price rise.

Now suppose the market crashes because of a terrorist attack.  Those options are now worthless, and the company has to make a HUGE gain before they have any value whatsoever.  So the options are useless as performance pay since you're not likely to get back up to the point where you can make money with them.  Hence, it makes sense to give new option grants with a lower exercise price.  That is simply good business.

I'm not saying there aren't problems with corporate governance.  But this is actually a case of good corporate governance.  If you had actually bothered to learn the facts before yapping off about it, you'd know it.

by hotshotxi 2006-07-16 06:46PM | 0 recs
Not nonsense at all

Corporations tying options back to artificial dips has nothing to do with performance and everything to do with maximizing profits for the executive suite. Since as was pointed out few companies could have actually have been having their board meetings that morning any large amount of options dated to the days immediately after 9/11 would have had to be backdated and as such represent straight out theft from stockholders.

Any grant of options where the strike price is below the market price on the day of the grant is theft. By straining logic to the maximum you could represent it as a reward for past performance. But in that case a bonus would be more appropriate than a back dated option. Of course that bonus would be taxable at the top rate which of course is the point of playing this options game to start with.

by Bruce Webb 2006-07-17 01:08AM | 0 recs
Name calling

"If you had actually bothered to learn the facts before yapping off about it, you'd know it."

If you had read the story in context you would have known it. The question is not options granted prior to a terrorist attack, whereupon your post would have had a point, it is about options granted after an attack when the stock has been artificially depressed by an overall market turndown. A simple return to the mean means a bunch of executives cashing in on what in the end is a technical correction.

by Bruce Webb 2006-07-17 01:13AM | 0 recs
no that's not how it works

First of all, you generally cannot grant options with a strike below the market price.

Second, there is no "mean reversion" in stock prices.  How do you know stocks were artificially depressed after 9/11?

by hotshotxi 2006-07-17 02:36AM | 0 recs
Unless you backdate them to a low point

http://www.post-gazette.com/pg/05315/604 987.stm


As for the dip we have this:

http://en.wikipedia.org/wiki/Dow_Jones_I ndustrial_Average

"The largest one-day percentage drop in the history of Dow Jones was on December 12, 1914, 24.39%. The largest one-day percentage drop in the last 50 years occurred on "Black Monday" in 1987 when the average fell 22.6%. The largest one-day point drop occurred on September 17, 2001, the first day of trading after the September 11, 2001 attacks, when the Dow fell 684.81 points or 7.1%. By the end of the week of September 17th, the Dow had fallen 1369.70 points, or 14.3%.

Hey it is wikipedia. On the other hand you could bring some numbers to counter that. I am thinking a 14% drop in a week had a lot more to do with externals than internals and rewarding executives for recoveries from that drop by awarding options at the suppressed strike price basically equates to stealing stockholder value.

"How do you know". Oddly I rely on this weird combination of "memory" and "Google", what do you base your judgements on?

by Bruce Webb 2006-07-17 01:57PM | 0 recs
Re: no that's not how it works

Are you serious?

Have you been paying any attention?

http://bigpicture.typepad.com/comments/2 006/07/the_apologist_f.html

by pipe 2006-07-18 05:43AM | 0 recs
Re: Not nonsense at all

You are making assertions about options that just are not true.  Options are future contracts, it is a bet on which direction the stock price will go in a certain amount of time.  The strike price of the option, rarely if ever, reflect the price of the stock on the day when the option is granted.  That is the point of an option.

As for artifical dips in the market.  The market experiences these all the time, much like the dip we have experience the last three days due to oil prices.  The market will correct.  The thing is, CEO are not the only people that can take advantage of market valuation.  These securities are publicly traded and ANYONE (with $ of course) willing to take a risk can play the game.

by Nick A 2006-07-17 04:14AM | 0 recs
Argue with the Pittsburg Post-Gazette

Nick: "The strike price of the option, rarely if ever, reflect the price of the stock on the day when the option is granted.  That is the point of an option."

http://www.post-gazette.com/pg/05315/604 987.stm
"Typically, strike prices are set at the market price of the underlying stock on the day an option is granted"

You and him can fight. I didn't make this one up.

"Rarely" or "typically".

by Bruce Webb 2006-07-17 02:12PM | 0 recs
Re: Argue with the Pittsburg Post-Gazette

While the strike price of a granted option as compensation to an employee or executive may "typically" be set at the current price of the stock on the day its issue.  Options in general are traded with a strike price different that today's market price.  Based on the spread in the strike price and the current price and the time until the option expires, a price for the option is set.  We can talk back and forth all day about the finer points of options, but my guess is it will add little value.

Regardless of what strike price the option is set at, Corporations rarely take on risk and certainly this isn't theft.

by Nick A 2006-07-17 05:14PM | 0 recs
Re: Argue with the Pittsburg Post-Gazette

Nick, this has so very little to do with actual options trading that your descriptions miss the point.

You obviously know a lot about options, but I'll trust Barry Ritholtz's analysis over yours.

http://bigpicture.typepad.com/comments/2 006/07/the_apologist_f.html

by pipe 2006-07-18 06:00AM | 0 recs
Taxation of Options

It is my understanding that people pay taxes on stock options when they exercise them and that is counted towards their income.  They also pay cap gains (although much smaller than in the old days) when they sell them so I am not sure their are big tax advantages to stock options.  However, there is a much bigger potential upside than a bonus, especially if the company does well.

I think options originally came about because they were not counted as an expense against the books and were therefore a non-cash way to reward people.  I worked at a start up and I know that was true with my worthless stock options.  The rules were changed and now options are counted as a corporate expense.

by John Mills 2006-07-17 05:18AM | 0 recs
Tax on exercise?

Maybe so, but I would have to have some more backing. As your post suggests exercising a stock option would expose you to capital gains when you sold but I am not familiar with any thing that would expose you to taxes at the point of exercise if you held and didn't sell. Tax lawyers can weigh in here, but your post suggests that people exercising options are double taxed, once at the point of exercise and the other at the point of sale. Hmm, even though I am not from Missouri I would think I would fall back on the "Show me State".

by Bruce Webb 2006-07-17 02:19PM | 0 recs
Re: Tax on exercise?

From Wikipedia confirmed by an accountant friend of mine:

"Because most employee stock options are nontransferrable, are not immediately exercisable, and have other restrictions, the IRS considers that their "fair market value" cannot be "readily determined", and therefore "no taxable event" occurs when an employee receives an option grant. Depending on the type of option granted, the employee may or may not be taxed upon exercise. Non-qualified stock options (those most often granted to employees) are taxed upon exercise. Incentive stock options are not, assuming that the employee complies with certain additional requirements. "

by John Mills 2006-07-17 04:58PM | 0 recs


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