CLINTON/BUSH era brought corporations starting to give employees 'stake' in these corporations expanding overseas to make those employees less nervous about US corporations leaving US to operate in Foreign Economic Zones. That first decade or so saw financial gains for those employees----we benefited from UPS employee stock options. What happened during Bush and soared during Obama----and it was indeed planned----was soaring CORPORATE BOND DEBT.......along with our US TREASURY and municipal bond debt. We KNEW a decade ago that those employees having bought stock in their own corporations were heading under the bus.
We discussed how with the CONSOLIDATED MEDIA merging of TRIBUNE with SINCLAIR that the TRIBUNE employees called 'OWNERS' had no control as shareholders and they were left big losers because of TIERED TRANCHES placing all but those global investment firms as CREDITORS in bankruptcies. This article shows a few of those global corporations heavy on employee stock options heading for bankruptcy killing those lower-tier stock holders.
So, these US corporations knowing they were fly-by-night loaded their employees with the stock options these global 1% players would stick with all the corporate loses going into bankruptcy-----coming out of bankruptcy with a clean record enfolded into a global corporation. THE WORKERS LOSE ALL STOCK WEALTH.
These 10 Companies Are Generous with Stock Options
With stock awards and options, equity compensation programs can serve as additional ways to pay workers beyond wages or salaries. They supplement base pay to provide competitive compensation, can act as a recognition tool to award employees for satisfactory work, and they help ensure that employees’ interests are aligned with shareholders. These 10 employers from Fortune‘s 100 Best Companies to Work For list understand the importance of those three objectives and offer their employees ample equity programs. Here’s a look at what the best employers in the U.S. are doing to retain their highest-performing employees.
100 Best Companies rank:
At Genentech all exempt employees and hourly workers who put in at least 20 hours per week are eligible for the company’s Long Term Incentive program and receive the grants as part of their overall compensation package. About two-thirds of an employee’s annual award is received in stock-settled stock appreciation rights and the remaining third in restricted stock units (RSUs). In 2014, over 97% of the company’s employees received long-term incentive benefits, which are awarded based on their performance. In addition to the equity programs themselves, Genentech also offers financial counseling sessions to ensure that workers understand their benefits and take advantage of them.
100 Best Companies rank:
GoDaddy (gddy, +1.29%), which was founded just under 20 years ago, made it back onto Fortune’s 100 Best Companies list this year for the second time. When it went public in April of last year, GoDaddy offered its employees non-qualified stock options. The initial six-month lock up period following its IPO ended this past October, at which point they were allowed to begin trading their shares, though a majority chose to hold onto them. The technology provider also offers a stock purchase plan that offers employees the opportunity to buy and sell stock every six months at a discounted rate of 15%.
100 Best Companies rank:
This Michigan-based medical technology company provides employees with investment opportunities, offering stock options and restricted stock units as a way to “attract, motivate, and retain the most talented people.” These grants generally begin to vest after a period of one year. Stryker (syk, +0.83%), which had a global revenue of over $9 billion last year, also offers an employee stock purchase plan which, similar to other companies on the list, lets employees purchase shares at a discounted price. That option could become even more appealing if its recent acquisition of Physio-Control International proves to be a good investment.
4. The Cheesecake Factory
100 Best Companies rank:
The Cheesecake Factory (cake, +1.16%) tells Fortune that it was the first restaurant company to allow management team members to become shareholders, and it remains one of the few. The upscale casual chain restaurant was founded in 1978 and employs upwards of 35,000 people. It uses stock awards in the form of stock options and RSUs as a retention tool for general managers and executive kitchen managers. These options vest over a period of five years, and vesting becoming more desirable with each subsequent grant. The retention strategy appears to be working as 94% of employees say that the company offers great rewards and 97% say they’re proud to work there.
100 Best Companies rank:
Though Aflac (afl, +0.98%) keeps the details of its equity programs private, we do know that the company provides stock options and other incentives to demonstrate its appreciation for its employees and ensure that they have a vested interest in the company’s work. Though Aflac may be best known for its amusing duck mascot, the supplemental health and life insurance provider is a giant in its industry. It reported over $22 billion in worldwide revenue last year and its CEO, Daniel Amos, has been heading the company for over a quarter of a century.
100 Best Companies rank:
A large majority of the Cadence’s (cdns, +0.20%) employees are currently shareholders. Though stock options are offered exclusively to members of the executive team, 44% of employees were granted restricted stock units last year. That includes the majority of new hires who received stock compensation as well as seasoned, high performing employees. Cadence also offers an employee stock purchase program that not only gives workers a 15% discount, but also offers a 6-month look-back. Since current president and CEO Lip-Bu Tan took over in 2009, the electronic company’s stock has gone up by 400%.
100 Best Companies rank:
Every Intuit (intu, +0.51%) employee is eligible for some kind of equity grant, whether it be stock option or restricted stock units. Those in vice president positions or higher receive non-qualified stock options upon being hired, while those in lower positions are offered RSUs. Either way, the equity grant vests over a period of three years. The information technology company also offers an employee stock purchase plan. Workers have the option to contribute between up to 15% of their eligible pay to purchase stock at a discount of at least 15%, and option that more than two-thirds of employees choose to take advantage of.
100 Best Companies rank:
Fashion specialty retailer Nordstrom (jwn, +1.56%) was founded in 1901, employs nearly 70,000 people worldwide, and has 333 U.S. locations—soon to be 334 as it gears up to open a second Manhattan department store. The company offers stock options as part of its Total Rewards program. Eligible leaders are granted stock awards each year, which are generally split evenly between non-qualified stock options and RSUs. While stock awards are granted to only the highest performing salespeople, other Nordstrom workers can take part in the company’s employee stock purchase plan.
9. Whole Foods Market
100 Best Companies rank:
Every employee at Whole Foods Market (wfm, +0.00%) is eligible for stock option grants after working their first 6,000 hours, which works out to about three years of full-time employment. A worker’s level of employment determines which options he or she is eligible for. Team members receive service hour stock options, employees in certain leadership positions receive leadership stock, and board members and executive officers receive RSUs. The organic food retailer tells Fortune that, since its 1992 inception, about 94% of its equity awards have been granted to team members rather than C-Suite employees.
10. FactSet Research Systems
100 Best Companies rank:
The financial services company based in Norwalk, Conn. has an employee stock purchase plan that provides its workers with a 15% discount. FactSet (fds, -0.80%) offers the option on a quarterly basis, at which point employees can invest between 1% and 10% of their after-tax base pay. Though there are certain restrictions, such as annual limits and holding periods, employees can join the plan on their very first day, and over half of U.S. employees choose to participate. The company also offers an equity awards program with regular stock options, performance-based stock options, and RSUs. Every year between 20% and 25% of U.S. employees receive an equity grant, either as part of their compensation package or as performance recognition.
We are told today only two US corporations have a AAA RATING -----MICROSOFT AND EXXON ----all others are loaded with corporate bond debt. No doubt those corporations have employees owning their corporate stock and these are those US citizens counted as stock holders gaining some wealth outside the global 1% and their 2%. Only, this decade of extreme corporate bond debt----those employee stock options have produced little wealth --and indeed came in NEGATIVE WEALTH.
We of course do NOT believe MOODY'S ratings of AAA -----but we do know MICROSOFT----tied to GATES RACE TO THE TOP education reform pushing nothing but computerized lessons, lap tops galore must be earning profits. Those dividends of course killing our strong US public K-12----but that was last week's policy discussion.
NOBODY CARES-----means of course all those FEDERAL FINANCIAL MARKET REGULATORS----that's the US FED and Clinton/Bush/Obama US Treasury officials-----no, they don't care----they are orchestrating this fleecing of 99% of WE THE PEOPLE not only in pensions but here we see as STOCK HOLDING EMPLOYEES.
This is happening because the US FED and CLINTON/BUSH/OBAMA work for global 1% banking----OLD WORLD MERCHANTS OF VENICE global 1% FREEMASONRY....you know-----HAMILTON'S FEDERAL RESERVE. Our elected officials, regulated banking would of course not allow these criminal banking actions to occur if we had 99% ELECTED OFFICIALS and not installed global banking mafia pols.
Published on March 17 2017
A Corporate Debt Crisis Is Underway… And Nobody Cares
Investors no longer give a damn.
That might sound harsh, but when things are this backwards, you have to tell it like it is.
You see, I read something recently that disturbed me. I had to pinch myself to make sure I wasn’t dreaming.
It was an article I recently stumbled upon in Bloomberg. In it, the author explained how U.S. companies are issuing debt at breakneck speed. You see, U.S. companies have already issued more than $360 billion worth of investment-grade bonds just this year.
Corporate America is now on pace to issue the most investment-grade debt in the first quarter since 1999. I don’t have to remind you how that ended…
But here’s the really crazy part… Investors are lining up around the block to buy these bonds.
If you read yesterday’s Dispatch, you know where I’m going with this.
In short, the bond market is unraveling. This isn’t some conspiracy theory. It’s a fact.
And yet, investors are buying bonds by the fistful.
These people don’t understand how much danger they’re in. Hell, they don’t even know what they’re buying anymore.
I’ll explain why in a second. But first, let’s be clear about what “investment-grade” means.
• Investment-grade bonds are bonds issued by companies with good credit…
They’re the best corporate bonds money can buy.
Investors like them because they’re supposedly “safe.” Conventional wisdom says you can own them and sleep well at night.
At least, that’s how things used to be. These days, “investment-grade” doesn’t necessarily mean “safe.” This is because so many blue-chip companies are now leveraged to the gills.
Take a close look at the chart below.
It shows the gross leverage ratio for U.S. companies with investment-grade credit ratings. This ratio measures a company’s ability to pay its lenders.
When this ratio is climbing, it means companies are taking on more debt.
You can see that this key ratio has jumped 41% since 2011. It’s now at the highest level since 2002.
That’s a major red flag. But I’m not surprised one bit.
• After all, the Federal Reserve has been holding interest rates near zero for nearly a decade…
This has made it incredibly cheap to borrow money.
When companies can borrow money for next to nothing, they leverage up…just like we’ve seen.
Since 2009, U.S. corporations have borrowed more than $9.5 trillion in the bond market. That’s 62% more than they borrowed in the eight years leading up to the 2008–2009 financial crisis.
Now, there’s nothing wrong with borrowing money. Debt can help companies develop new projects, hire more workers, and build more factories.
In other words, debt can be good…but only if companies can pay their lenders.
We’re not so sure many companies will be able to do that in the near future.
During the FAKE Congressional and Obama HOLDING BANKS ACCOUNTABLE and DODD FRANK FINANCIAL REFORM much was made of making BIG BANK EXECUTIVES accountable for their banks doing well----ergo, they were tied to Bank STOCK dividends and not CASH. So, too were those 99% bank employees.
Of course there was lots of growth overseas during this US TREASURY BOND FRAUD ----we are sure those bank employees and executives saw dividends this decade-----but guess what? It's time for those Big Bank executives to jump out of windows.
BANK OF AMERICA, CITIBANK are of course tied to those GLOBAL BANKING 1% tied to US FED pushing hard to become attached to ONE WORLD WORLD CENTRAL BANK. This coming economic crash will of course push these BIG BANKS into a merger with global CENTRAL BANKS.
The US FED bailed out BIG BANKS in 2008------it ran trillions of dollars from US to bail out global central banks behind pushing all that subprime mortgage loan fraud-----when we shout that only the global 1% and their 2% are WINNING in these stock and bond casinos-----the inner circle of global banks are filled with only those global 1% and their 2%. Our 99% of BANK EMPLOYEES executives or staff-----will be LOSERS.
Why The Big Bank Dividend Growth Story Is Far From Over
Dec. 7, 2016 4:14 PM ET
JPMorgan CEO Jamie Dimon recently talked about the potential for special dividends and the dividend payout ratio.
The logic and possibility of a higher payout ratio is not far away, in my view.
This article demonstrates why the dividend growth story of large banks is far from over.
Recently I laid out the case for what a special dividend might look like from JPMorgan (NYSE:JPM). As a result of the material increase in the company's share price this year, CEO Jamie Dimon mentioned that at some point he might prefer a special payout instead of buying out past partners at a higher and higher valuation. This idea was shared in his comments at the Goldman Sachs US Financial Services Conference.
Also included were his thoughts on the dividend payout ratio. An analyst asked if Dimon thought the ratio could get up to 40% or 50% of profits, and his answer was, "I do." Dimon went on to detail that holding a payout ratio artificially low effectively forces share repurchases, which may not always be an optimal form of capital management (like when the share price increases nearly 50% in less than a year); hence the reference to the potential for special dividends.
Where did the US FED Bernanke take the US those several years of Obama------MOVING FORWARD TOWARDS THE GREATEST DEPRESSION
'During the Depression, most shares of stock were not worth the paper on which the stock certificates were printed'.
Cash dividend or stock dividend: Which is better?
By Investopedia Staff | Updated January 8, 2018 — 1:41 PM EST
What Is a Stock Dividend?
A stock dividend, on the other hand, is an increase in the amount of shares of a company with the new shares being given to shareholders. Companies may decide to distribute this type of dividend to shareholders of record if the company's availability of liquid cash is in short supply.
For example, if a company were to issue a 5% stock dividend, it would increase the amount of shares by 5% (1 share for every 20 owned). If there are 1 million shares in a company, this would translate into an additional 50,000 shares. If you owned 100 shares in the company, you'd receive five additional shares.
This, however, like the cash dividend, does not increase the value of the company. If the company was priced at $10 per share, the value of the company would be $10 million. After the stock dividend, the value will remain the same, but the share price will decrease to $9.52 to adjust for the dividend payout.
One key benefit of a stock dividend is choice. The shareholder can either keep the shares and hope that the company will be able to use the money not paid out in a cash dividend to earn a better rate of return, or the shareholder could also sell some of the new shares to create his or her own cash dividend. The biggest benefit of a stock dividend is that shareholders do not generally have to pay taxes on the value. Taxes do need to be paid, however, if a stock dividend has a cash-dividend option, even if the shares are kept instead of the cash.
Cash vs. Stock Dividends
For stock investors seeking instant gratification as a reward for having placed their funds in profitable companies, it would seem that receiving a cash dividend is always the better option. However, this is not necessarily true.
In many ways, it can be better for both the company and the shareholder to pay and receive a stock dividend at the end of a profitable fiscal year. This type of dividend is as good as cash, with the added benefit that no taxes have to be paid when receiving the same.
For example, one hundred shares of Microsoft bought at $21 per share in 1986 ballooned to 28,800 shares after 25 years. This turned Bill Gates into the richest man in the world. Many of Microsoft’s shareholders and employees who got shares of stock in the company's early years also turned into multi-millionaires.
One of the best reasons for giving a stock dividend instead of a cash dividend may be that in giving a stock dividend, a company and its shareholders forge psychologically stronger links, with the investor owning more of the company with the additional shares.
Stock dividends are thought to be superior to cash dividends as long as they are not accompanied with a cash option. Companies that pay stock dividends are giving their shareholders the choice of keeping their profit or turning it to cash whenever they so desire; with a cash dividend, no other option is given.
But this does not mean that cash dividends are bad, they just lack choice. However, a shareholder could still reinvest the proceeds from the cash dividend back into the company through a dividend reinvestment plan.
Opting for stock dividends is not always better than taking the cash due to the sometimes unpredictable nature of the stock market. Oct. 24, 1929 will forever be remembered as the start of the Great Depression, the first day of a stock market collapse that crippled the United States for the next several years. Just days before, the Dow Jones appeared rock solid. During the Depression, most shares of stock were not worth the paper on which the stock certificates were printed.
We keep reading in national news there is a growing gap between US citizens with a smaller percentage receiving LOTS OF MONEY and a growing percentage being LEFT BEHIND. These are the people we always call ----THE MERELY RICH-----they are being played in thinking they are to receive all kinds of options with that initial million dollar salary but what is REALLY happening ----the newly merged corporation is HIDING DEBT by tying their mid-level executives to what will be wealth-LOSING stock options.
Here we see a typical 'WINNER' falling into that MERELY RICH category -------these corporate executives are going nowhere fast. This is the telecom merger fast-track just as was our US bank mergers after Clinton deregulation. DENVER is labelled by stats as strongly UPPER MIDDLE-CLASS----and these are the 5% to the 1% MERELY RICH soon to be under the bus.......
Level 3 executives get millions in cash bonuses, stock options after CenturyLink acquisition Jeff Storey, who joins the new executive team, plans to stay in Broomfield
David Zalubowski, Associated Press file
In a Wednesday, Feb. 7, 2007 file photo, the company logo is displayed on the sign leading to the campus of Level 3 Communications in the northwest Denver suburb of Broomfield, Colo. CenturyLink is paying about $24 billion to buy Level 3, to expand its telecommunication services for businesses.
By Tamara Chuang | firstname.lastname@example.org | The Denver Post
November 1, 2017 at 4:05 pm
Jeff Storey, CEO of Level 3 Communications, joins CenturyLink as its president and Chief Operating Officer following Century
Link’s acquisition of Level 3, which was completed Nov. 1, 2017.Level 3 Communications CEO Jeff Storey, who became CenturyLink’s president and chief operating officer Wednesday, made sure his new Louisiana-based boss knew he was committed to Colorado. Staying in Broomfield is in his offer letter.
“Your principal work location will be Broomfield, Colorado,” reads the CenturyLink offer letter, which then goes on to say Storey, 57, will need to travel frequently to Louisiana so feel free to take the corporate jet for personal and business use.
CenturyLink completed its purchase of the Broomfield telecom on Wednesday and shared how much former Level 3 executives will make, according to a regulatory filing.
Storey, 57, will earn a base annual salary of $1.5 million with annual incentive of up to $2.6 million if he meets performance targets. He’s also eligible for a long-term incentive grant worth about $10.5 million in stock options, plus he receives a $6.6 million cash signing bonus, of which half will be paid in his first CenturyLink paycheck, and the second next Nov. 1, the anniversary of the closing.
According to Bloomberg, Storey’s base salary at Level 3 was $1.2 million. But with bonuses, his compensation last year was about $4.35 million plus about $7 million in stock options.
Below is a very boring article----it was written in 2003-----during Bush era shouting corporations are acting illegally in hiding their corporate debt with these stock option deals. Since 2003 this corporate practice has SOARED------HIDING CORPORATE DEBT just as Goldman Sachs helped Greece's PLAYER POLS hide sovereign debt to bring down that nation----now bringing down US corporations. These are simply ticking time bombs -----COMPLEX FINANCIAL INSTRUMENTS with goals of temporary businesses lasting only long enough to go to bankruptcy and merged into those global corporations.
These are the 5% to the 1% made to look like WINNERS--THE MERELY RICH-----all being staged just as our 99% labor union workers and their ties to pensions and stock options ------to lose it all. We KNOW that because of the public policies allowed to be installed during CLINTON/BUSH/OBAMA -----
Our global labor pool especially those HIGHLY SKILLED workers are as well heavily tied to these frauds --------our 99% immigrants here in US Foreign Economic Zones better know our local government is openly fraudulent and corrupt-----as are all these global banking COMPLEX FINANCIAL INSTRUMENTS tied to our workplace.
So, Bush/Obama has allowed these stock option frauds to soar----it worked perfectly in the ENRON/ARTHUR ANDERSON case they say.
For the Last Time: Stock Options Are an Expense
From the March 2003 Issue
The time has come to end the debate on accounting for stock options; the controversy has been going on far too long. In fact, the rule governing the reporting of executive stock options dates back to 1972, when the Accounting Principles Board, the predecessor to the Financial Accounting Standards Board (FASB), issued APB 25. The rule specified that the cost of options at the grant date should be measured by their intrinsic value—the difference between the current fair market value of the stock and the exercise price of the option. Under this method, no cost was assigned to options when their exercise price was set at the current market price.
The rationale for the rule was fairly simple: Because no cash changes hands when the grant is made, issuing a stock option is not an economically significant transaction. That’s what many thought at the time. What’s more, little theory or practice was available in 1972 to guide companies in determining the value of such untraded financial instruments.
APB 25 was obsolete within a year. The publication in 1973 of the Black-Scholes formula triggered a huge boom in markets for publicly traded options, a movement reinforced by the opening, also in 1973, of the Chicago Board Options Exchange. It was surely no coincidence that the growth of the traded options markets was mirrored by an increasing use of share option grants in executive and employee compensation. The National Center for Employee Ownership estimates that nearly 10 million employees received stock options in 2000; fewer than 1 million did in 1990. It soon became clear in both theory and practice that options of any kind were worth far more than the intrinsic value defined by APB 25.
FASB initiated a review of stock option accounting in 1984 and, after more than a decade of heated controversy, finally issued SFAS 123 in October 1995. It recommended—but did not require—companies to report the cost of options granted and to determine their fair market value using option-pricing models. The new standard was a compromise, reflecting intense lobbying by businesspeople and politicians against mandatory reporting. They argued that executive stock options were one of the defining components in America’s extraordinary economic renaissance, so any attempt to change the accounting rules for them was an attack on America’s hugely successful model for creating new businesses. Inevitably, most companies chose to ignore the recommendation that they opposed so vehemently and continued to record only the intrinsic value at grant date, typically zero, of their stock option grants.
Subsequently, the extraordinary boom in share prices made critics of option expensing look like spoilsports. But since the crash, the debate has returned with a vengeance. The spate of corporate accounting scandals in particular has revealed just how unreal a picture of their economic performance many companies have been painting in their financial statements. Increasingly, investors and regulators have come to recognize that option-based compensation is a major distorting factor. Had AOL Time Warner in 2001, for example, reported employee stock option expenses as recommended by SFAS 123, it would have shown an operating loss of about $1.7 billion rather than the $700 million in operating income it actually reported.
We believe that the case for expensing options is overwhelming, and in the following pages we examine and dismiss the principal claims put forward by those who continue to oppose it. We demonstrate that, contrary to these experts’ arguments, stock option grants have real cash-flow implications that need to be reported, that the way to quantify those implications is available, that footnote disclosure is not an acceptable substitute for reporting the transaction in the income statement and balance sheet, and that full recognition of option costs need not emasculate the incentives of entrepreneurial ventures. We then discuss just how firms might go about reporting the cost of options on their income statements and balance sheets.
Fallacy 1: Stock Options Do Not Represent a Real Cost
It is a basic principle of accounting that financial statements should record economically significant transactions. No one doubts that traded options meet that criterion; billions of dollars’ worth are bought and sold every day, either in the over-the-counter market or on exchanges. For many people, though, company stock option grants are a different story. These transactions are not economically significant, the argument goes, because no cash changes hands. As former American Express CEO Harvey Golub put it in an August 8, 2002, Wall Street Journal article, stock option grants “are never a cost to the company and, therefore, should never be recorded as a cost on the income statement.”
That position defies economic logic, not to mention common sense, in several respects. For a start, transfers of value do not have to involve transfers of cash. While a transaction involving a cash receipt or payment is sufficient to generate a recordable transaction, it is not necessary. Events such as exchanging stock for assets, signing a lease, providing future pension or vacation benefits for current-period employment, or acquiring materials on credit all trigger accounting transactions because they involve transfers of value, even though no cash changes hands at the time the transaction occurs.
Even if no cash changes hands, issuing stock options to employees incurs a sacrifice of cash, an opportunity cost, which needs to be accounted for. If a company were to grant stock, rather than options, to employees, everyone would agree that the company’s cost for this transaction would be the cash it otherwise would have received if it had sold the shares at the current market price to investors. It is exactly the same with stock options. When a company grants options to employees, it forgoes the opportunity to receive cash from underwriters who could take these same options and sell them in a competitive options market to investors. Warren Buffett made this point graphically in an April 9, 2002, Washington Post column when he stated: “Berkshire [Hathaway] will be happy to receive options in lieu of cash for many of the goods and services that we sell corporate America.” Granting options to employees rather than selling them to suppliers or investors via underwriters involves an actual loss of cash to the firm.
It can, of course, be more reasonably argued that the cash forgone by issuing options to employees, rather than selling them to investors, is offset by the cash the company conserves by paying its employees less cash. As two widely respected economists, Burton G. Malkiel and William J. Baumol, noted in an April 4, 2002, Wall Street Journal article: “A new, entrepreneurial firm may not be able to provide the cash compensation needed to attract outstanding workers. Instead, it can offer stock options.” But Malkiel and Baumol, unfortunately, do not follow their observation to its logical conclusion. For if the cost of stock options is not universally incorporated into the measurement of net income, companies that grant options will underreport compensation costs, and it won’t be possible to compare their profitability, productivity, and return-on-capital measures with those of economically equivalent companies that have merely structured their compensation system in a different way. The following hypothetical illustration shows how that can happen.
Imagine two companies, KapCorp and MerBod, competing in exactly the same line of business. The two differ only in the structure of their employee compensation packages. KapCorp pays its workers $400,000 in total compensation in the form of cash during the year. At the beginning of the year, it also issues, through an underwriting, $100,000 worth of options in the capital market, which cannot be exercised for one year, and it requires its employees to use 25% of their compensation to buy the newly issued options. The net cash outflow to KapCorp is $300,000 ($400,000 in compensation expense less $100,000 from the sale of the options).
MerBod’s approach is only slightly different. It pays its workers $300,000 in cash and issues them directly $100,000 worth of options at the start of the year (with the same one-year exercise restriction). Economically, the two positions are identical. Each company has paid a total of $400,000 in compensation, each has issued $100,000 worth of options, and for each the net cash outflow totals $300,000 after the cash received from issuing the options is subtracted from the cash spent on compensation. Employees at both companies are holding the same $100,000 of options during the year, producing the same motivation, incentive, and retention effects.
How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers?
In preparing its year-end statements, KapCorp will book compensation expense of $400,000 and will show $100,000 in options on its balance sheet in a shareholder equity account. If the cost of stock options issued to employees is not recognized as an expense, however, MerBod will book a compensation expense of only $300,000 and not show any options issued on its balance sheet. Assuming otherwise identical revenues and costs, it will look as though MerBod’s earnings were $100,000 higher than KapCorp’s. MerBod will also seem to have a lower equity base than KapCorp, even though the increase in the number of shares outstanding will eventually be the same for both companies if all the options are exercised. As a result of the lower compensation expense and lower equity position, MerBod’s performance by most analytic measures will appear to be far superior to KapCorp’s. This distortion is, of course, repeated every year that the two firms choose the different forms of compensation. How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers?
Fallacy 2: The Cost of Employee Stock Options Cannot Be Estimated
Some opponents of option expensing defend their position on practical, not conceptual, grounds. Option-pricing models may work, they say, as a guide for valuing publicly traded options. But they can’t capture the value of employee stock options, which are private contracts between the company and the employee for illiquid instruments that cannot be freely sold, swapped, pledged as collateral, or hedged.
It is indeed true that, in general, an instrument’s lack of liquidity will reduce its value to the holder. But the holder’s liquidity loss makes no difference to what it costs the issuer to create the instrument unless the issuer somehow benefits from the lack of liquidity. And for stock options, the absence of a liquid market has little effect on their value to the holder. The great beauty of option-pricing models is that they are based on the characteristics of the underlying stock. That’s precisely why they have contributed to the extraordinary growth of options markets over the last 30 years. The Black-Scholes price of an option equals the value of a portfolio of stock and cash that is managed dynamically to replicate the payoffs to that option. With a completely liquid stock, an otherwise unconstrained investor could entirely hedge an option’s risk and extract its value by selling short the replicating portfolio of stock and cash. In that case, the liquidity discount on the option’s value would be minimal. And that applies even if there were no market for trading the option directly. Therefore, the liquidity—or lack thereof—of markets in stock options does not, by itself, lead to a discount in the option’s value to the holder.
Investment banks, commercial banks, and insurance companies have now gone far beyond the basic, 30-year-old Black-Scholes model to develop approaches to pricing all sorts of options: Standard ones. Exotic ones. Options traded through intermediaries, over the counter, and on exchanges. Options linked to currency fluctuations. Options embedded in complex securities such as convertible debt, preferred stock, or callable debt like mortgages with prepay features or interest rate caps and floors. A whole subindustry has developed to help individuals, companies, and money market managers buy and sell these complex securities. Current financial technology certainly permits firms to incorporate all the features of employee stock options into a pricing model. A few investment banks will even quote prices for executives looking to hedge or sell their stock options prior to vesting, if their company’s option plan allows it.
Of course, formula-based or underwriters’ estimates about the cost of employee stock options are less precise than cash payouts or share grants. But financial statements should strive to be approximately right in reflecting economic reality rather than precisely wrong. Managers routinely rely on estimates for important cost items, such as the depreciation of plant and equipment and provisions against contingent liabilities, such as future environmental cleanups and settlements from product liability suits and other litigation. When calculating the costs of employees’ pensions and other retirement benefits, for instance, managers use actuarial estimates of future interest rates, employee retention rates, employee retirement dates, the longevity of employees and their spouses, and the escalation of future medical costs. Pricing models and extensive experience make it possible to estimate the cost of stock options issued in any given period with a precision comparable to, or greater than, many of these other items that already appear on companies’ income statements and balance sheets.
Not all the objections to using Black-Scholes and other option valuation models are based on difficulties in estimating the cost of options granted. For example, John DeLong, in a June 2002 Competitive Enterprise Institute paper entitled “The Stock Options Controversy and the New Economy,” argued that “even if a value were calculated according to a model, the calculation would require adjustment to reflect the value to the employee.” He is only half right. By paying employees with its own stock or options, the company forces them to hold highly non-diversified financial portfolios, a risk further compounded by the investment of the employees’ own human capital in the company as well. Since almost all individuals are risk averse, we can expect employees to place substantially less value on their stock option package than other, better-diversified, investors would.
Estimates of the magnitude of this employee risk discount—or “deadweight cost,” as it is sometimes called—range from 20% to 50%, depending on the volatility of the underlying stock and the degree of diversification of the employee’s portfolio. The existence of this deadweight cost is sometimes used to justify the apparently huge scale of option-based remuneration handed out to top executives. A company seeking, for instance, to reward its CEO with $1 million in options that are worth $1,000 each in the market may (perhaps perversely) reason that it should issue 2,000 rather than 1,000 options because, from the CEO’s perspective, the options are worth only $500 each. (We would point out that this reasoning validates our earlier point that options are a substitute for cash.)
But while it might arguably be reasonable to take deadweight cost into account when deciding how much equity-based compensation (such as options) to include in an executive’s pay packet, it is certainly not reasonable to let dead-weight cost influence the way companies record the costs of the packets. Financial statements reflect the economic perspective of the company, not the entities (including employees) with which it transacts. When a company sells a product to a customer, for example, it does not have to verify what the product is worth to that individual. It counts the expected cash payment in the transaction as its revenue. Similarly, when the company purchases a product or service from a supplier, it does not examine whether the price paid was greater or less than the supplier’s cost or what the supplier could have received had it sold the product or service elsewhere. The company records the purchase price as the cash or cash equivalent it sacrificed to acquire the good or service.
Suppose a clothing manufacturer were to build a fitness center for its employees. The company would not do so to compete with fitness clubs. It would build the center to generate higher revenues from increased productivity and creativity of healthier, happier employees and to reduce costs arising from employee turnover and illness. The cost to the company is clearly the cost of building and maintaining the facility, not the value that the individual employees might place on it. The cost of the fitness center is recorded as a periodic expense, loosely matched to the expected revenue increase and reductions in employee-related costs.
The only reasonable justification we have seen for costing executive options below their market value stems from the observation that many options are forfeited when employees leave, or are exercised too early because of employees’ risk aversion. In these cases, existing shareholders’ equity is diluted less than it would otherwise be, or not at all, consequently reducing the company’s compensation cost. While we agree with the basic logic of this argument, the impact of forfeiture and early exercise on theoretical values may be grossly exaggerated. (See “The Real Impact of Forfeiture and Early Exercise” at the end of this article.)
The Real Impact of Forfeiture and Early ExerciseUnlike cash salary, stock options cannot be transferred from the individual granted them to anyone else. Nontransferability has two effects that combine to make employee options less valuable than conventional options traded in the market.
First, employees forfeit their options if they leave the company before the options have vested. Second, employees tend to reduce their risk by exercising vested stock options much earlier than a well-diversified investor would, thereby reducing the potential for a much higher payoff had they held the options to maturity. Employees with vested options that are in the money will also exercise them when they quit, since most companies require employees to use or lose their options upon departure. In both cases, the economic impact on the company of issuing the options is reduced, since the value and relative size of existing shareholders’ stakes are diluted less than they could have been, or not at all.
Recognizing the increasing probability that companies will be required to expense stock options, some opponents are fighting a rearguard action by trying to persuade standard setters to significantly reduce the reported cost of those options, discounting their value from that measured by financial models to reflect the strong likelihood of forfeiture and early exercise. Current proposals put forth by these people to FASB and IASB would allow companies to estimate the percentage of options forfeited during the vesting period and reduce the cost of option grants by this amount. Also, rather than use the expiration date for the option life in an option-pricing model, the proposals seek to allow companies to use an expected life for the option to reflect the likelihood of early exercise. Using an expected life (which companies may estimate at close to the vesting period, say, four years) instead of the contractual period of, say, ten years, would significantly reduce the estimated cost of the option.
Some adjustment should be made for forfeiture and early exercise. But the proposed method significantly overstates the cost reduction since it neglects the circumstances under which options are most likely to be forfeited or exercised early. When these circumstances are taken into account, the reduction in employee option costs is likely to be much smaller.
First, consider forfeiture. Using a flat percentage for forfeitures based on historical or prospective employee turnover is valid only if forfeiture is a random event, like a lottery, independent of the stock price. In reality, however, the likelihood of forfeiture is negatively related to the value of the options forfeited and, hence, to the stock price itself. People are more likely to leave a company and forfeit options when the stock price has declined and the options are worth little. But if the firm has done well and the stock price has increased significantly since grant date, the options will have become much more valuable, and employees will be much less likely to leave. If employee turnover and forfeiture are more likely when the options are least valuable, then little of the options’ total cost at grant date is reduced because of the probability of forfeiture.
The argument for early exercise is similar. It also depends on the future stock price. Employees will tend to exercise early if most of their wealth is bound up in the company, they need to diversify, and they have no other way to reduce their risk exposure to the company’s stock price. Senior executives, however, with the largest option holdings, are unlikely to exercise early and destroy option value when the stock price has risen substantially. Often they own unrestricted stock, which they can sell as a more efficient means to reduce their risk exposure. Or they have enough at stake to contract with an investment bank to hedge their option positions without exercising prematurely. As with the forfeiture feature, the calculation of an expected option life without regard to the magnitude of the holdings of employees who exercise early, or to their ability to hedge their risk through other means, would significantly underestimate the cost of options granted.
Option-pricing models can be modified to incorporate the influence of stock prices and the magnitude of employees’ option and stock holdings on the probabilities of forfeiture and early exercise. (See, for example, Mark Rubinstein’s Fall 1995 article in the Journal of Derivatives, “On the Accounting Valuation of Employee Stock Options.”) The actual magnitude of these adjustments needs to be based on specific company data, such as stock price appreciation and distribution of option grants among employees. The adjustments, properly assessed, could turn out to be significantly smaller than the proposed calculations (apparently endorsed by FASB and IASB) would produce. Indeed, for some companies, a calculation that ignores forfeiture and early exercise altogether could come closer to the true cost of options than one that entirely ignores the factors that influence employees’ forfeiture and early exercise decisions.
Fallacy 3: Stock Option Costs Are Already Adequately Disclosed
Another argument in defense of the existing approach is that companies already disclose information about the cost of option grants in the footnotes to the financial statements. Investors and analysts who wish to adjust income statements for the cost of options, therefore, have the necessary data readily available. We find that argument hard to swallow. As we have pointed out, it is a fundamental principle of accounting that the income statement and balance sheet should portray a company’s underlying economics. Relegating an item of such major economic significance as employee option grants to the footnotes would systematically distort those reports.
But even if we were to accept the principle that footnote disclosure is sufficient, in reality we would find it a poor substitute for recognizing the expense directly on the primary statements. For a start, investment analysts, lawyers, and regulators now use electronic databases to calculate profitability ratios based on the numbers in companies’ audited income statements and balance sheets. An analyst following an individual company, or even a small group of companies, could make adjustments for information disclosed in footnotes. But that would be difficult and costly to do for a large group of companies that had put different sorts of data in various nonstandard formats into footnotes. Clearly, it is much easier to compare companies on a level playing field, where all compensation expenses have been incorporated into the income numbers.
What’s more, numbers divulged in footnotes can be less reliable than those disclosed in the primary financial statements. For one thing, executives and auditors typically review supplementary footnotes last and devote less time to them than they do to the numbers in the primary statements. As just one example, the footnote in eBay’s FY 2000 annual report reveals a “weighted average grant-date fair value of options granted during 1999 of $105.03” for a year in which the weighted average exercise price of shares granted was $64.59. Just how the value of options granted can be 63% more than the value of the underlying stock is not obvious. In FY 2000, the same effect was reported: a fair value of options granted of $103.79 with an average exercise price of $62.69. Apparently, this error was finally detected, since the FY 2001 report retroactively adjusted the 1999 and 2000 average grant-date fair values to $40.45 and $41.40, respectively. We believe executives and auditors will exert greater diligence and care in obtaining reliable estimates of the cost of stock options if these figures are included in companies’ income statements than they currently do for footnote disclosure.
Our colleague William Sahlman in his December 2002 HBR article, “Expensing Options Solves Nothing,” has expressed concern that the wealth of useful information contained in the footnotes about the stock options granted would be lost if options were expensed. But surely recognizing the cost of options in the income statement does not preclude continuing to provide a footnote that explains the underlying distribution of grants and the methodology and parameter inputs used to calculate the cost of the stock options.
Some critics of stock option expensing argue, as venture capitalist John Doerr and FedEx CEO Frederick Smith did in an April 5, 2002, New York Times column, that “if expensing were … required, the impact of options would be counted twice in the earnings per share: first as a potential dilution of the earnings, by increasing the shares outstanding, and second as a charge against reported earnings. The result would be inaccurate and misleading earnings per share.”
We have several difficulties with this argument. First, option costs only enter into a (GAAP-based) diluted earnings-per-share calculation when the current market price exceeds the option exercise price. Thus, fully diluted EPS numbers still ignore all the costs of options that are nearly in the money or could become in the money if the stock price increased significantly in the near term.
Second, relegating the determination of the economic impact of stock option grants solely to an EPS calculation greatly distorts the measurement of reported income, would not be adjusted to reflect the economic impact of option costs. These measures are more significant summaries of the change in economic value of a company than the prorated distribution of this income to individual shareholders revealed in the EPS measure. This becomes eminently clear when taken to its logical absurdity: Suppose companies were to compensate all their suppliers—of materials, labor, energy, and purchased services—with stock options rather than with cash and avoid all expense recognition in their income statement. Their income and their profitability measures would all be so grossly inflated as to be useless for analytic purposes; only the EPS number would pick up any economic effect from the option grants.
Our biggest objection to this spurious claim, however, is that even a calculation of fully diluted EPS does not fully reflect the economic impact of stock option grants. The following hypothetical example illustrates the problems, though for purposes of simplicity we will use grants of shares instead of options. The reasoning is exactly the same for both cases.
Let’s say that each of our two hypothetical companies, KapCorp and MerBod, has 8,000 shares outstanding, no debt, and annual revenue this year of $100,000. KapCorp decides to pay its employees and suppliers $90,000 in cash and has no other expenses. MerBod, however, compensates its employees and suppliers with $80,000 in cash and 2,000 shares of stock, at an average market price of $5 per share. The cost to each company is the same: $90,000. But their net income and EPS numbers are very different. KapCorp’s net income before taxes is $10,000, or $1.25 per share. By contrast, MerBod’s reported net income (which ignores the cost of the equity granted to employees and suppliers) is $20,000, and its EPS is $2.00 (which takes into account the new shares issued).
Of course, the two companies now have different cash balances and numbers of shares outstanding with a claim on them. But KapCorp can eliminate that discrepancy by issuing 2,000 shares of stock in the market during the year at an average selling price of $5 per share. Now both companies have closing cash balances of $20,000 and 10,000 shares outstanding. Under current accounting rules, however, this transaction only exacerbates the gap between the EPS numbers. KapCorp’s reported income remains $10,000, since the additional $10,000 value gained from the sale of the shares is not reported in net income, but its EPS denominator has increased from 8,000 to 10,000. Consequently, KapCorp now reports an EPS of $1.00 to MerBod’s $2.00, even though their economic positions are identical: 10,000 shares outstanding and increased cash balances of $20,000. The people claiming that options expensing creates a double-counting problem are themselves creating a smoke screen to hide the income-distorting effects of stock option grants.
The people claiming that options expensing creates a double-counting problem are themselves creating a smoke screen to hide the income-distorting effects of stock option grants.
Indeed, if we say that the fully diluted EPS figure is the right way to disclose the impact of share options, then we should immediately change the current accounting rules for situations when companies issue common stock, convertible preferred stock, or convertible bonds to pay for services or assets. At present, when these transactions occur, the cost is measured by the fair market value of the consideration involved. Why should options be treated differently?
Fallacy 4: Expensing Stock Options Will Hurt Young Businesses
Opponents of expensing options also claim that doing so will be a hardship for entrepreneurial high-tech firms that do not have the cash to attract and retain the engineers and executives who translate entrepreneurial ideas into profitable, long-term growth.
This argument is flawed on a number of levels. For a start, the people who claim that option expensing will harm entrepreneurial incentives are often the same people who claim that current disclosure is adequate for communicating the economics of stock option grants. The two positions are clearly contradictory. If current disclosure is sufficient, then moving the cost from a footnote to the balance sheet and income statement will have no market effect. But to argue that proper costing of stock options would have a significant adverse impact on companies that make extensive use of them is to admit that the economics of stock options, as currently disclosed in footnotes, are not fully reflected in companies’ market prices.
More seriously, however, the claim simply ignores the fact that a lack of cash need not be a barrier to compensating executives. Rather than issuing options directly to employees, companies can always issue them to underwriters and then pay their employees out of the money received for those options. Considering that the market systematically puts a higher value on options than employees do, companies are likely to end up with more cash from the sale of externally issued options (which carry with them no deadweight costs) than they would by granting options to employees in lieu of higher salaries.
Even privately held companies that raise funds through angel and venture capital investors can take this approach. The same procedures used to place a value on a privately held company can be used to estimate the value of its options, enabling external investors to provide cash for options about as readily as they provide cash for stock.
That’s not to say, of course, that entrepreneurs should never get option grants. Venture capital investors will always want employees to be compensated with some stock options in lieu of cash to be assured that the employees have some “skin in the game” and so are more likely to be honest when they tout their company’s prospects to providers of new capital. But that does not preclude also raising cash by selling options externally to pay a large part of the cash compensation to employees.
We certainly recognize the vitality and wealth that entrepreneurial ventures, particularly those in the high-tech sector, bring to the U.S. economy. A strong case can be made for creating public policies that actively assist these companies in their early stages, or even in their more established stages. The nation should definitely consider a regulation that makes entrepreneurial, job-creating companies healthier and more competitive by changing something as simple as an accounting journal entry.
But we have to question the effectiveness of the current rule, which essentially makes the benefits from a deliberate accounting distortion proportional to companies’ use of one particular form of employee compensation. After all, some entrepreneurial, job-creating companies might benefit from picking other forms of incentive compensation that arguably do a better job of aligning executive and shareholder interests than conventional stock options do. Indexed or performance options, for example, ensure that management is not rewarded just for being in the right place at the right time or penalized just for being in the wrong place at the wrong time. A strong case can also be made for the superiority of properly designed restricted stock grants and deferred cash payments. Yet current accounting standards require that these, and virtually all other compensation alternatives, be expensed. Are companies that choose those alternatives any less deserving of an accounting subsidy than Microsoft, which, having granted 300 million options in 2001 alone, is by far the largest issuer of stock options?
A less distorting approach for delivering an accounting subsidy to entrepreneurial ventures would simply be to allow them to defer some percentage of their total employee compensation for some number of years, which could be indefinitely—just as companies granting stock options do now. That way, companies could get the supposed accounting benefits from not having to report a portion of their compensation costs no matter what form that compensation might take.
What Will Expensing Involve?
Although the economic arguments in favor of reporting stock option grants on the principal financial statements seem to us to be overwhelming, we do recognize that expensing poses challenges. For a start, the benefits accruing to the company from issuing stock options occur in future periods, in the form of increased cash flows generated by its option motivated and retained employees. The fundamental matching principle of accounting requires that the costs of generating those higher revenues be recognized at the same time the revenues are recorded. This is why companies match the cost of multiperiod assets such as plant and equipment with the revenues these assets produce over their economic lives.
In some cases, the match can be based on estimates of the future cash flows. In expensing capitalized software-development costs, for instance, managers match the costs against a predicted pattern of benefits accrued from selling the software. In the case of options, however, managers would have to estimate an equivalent pattern of benefits arising from their own decisions and activities. That would likely introduce significant measurement error and provide opportunities for managers to bias their estimates. We therefore believe that using a standard straight-line amortization formula will reduce measurement error and management bias despite some loss of accuracy. The obvious period for the amortization is the useful economic life of the granted option, probably best measured by the vesting period. Thus, for an option vesting in four years, 1/48 of the cost of the option would be expensed through the income statement in each month until the option vests. This would treat employee option compensation costs the same way the costs of plant and equipment or inventory are treated when they are acquired through equity instruments, such as in an acquisition.
In addition to being reported on the income statement, the option grant should also appear on the balance sheet. In our opinion, the cost of options issued represents an increase in shareholders’ equity at the time of grant and should be reported as paid-in capital. Some experts argue that stock options are more like contingent liability than equity transactions since their ultimate cost to the company cannot be determined until employees either exercise or forfeit their options. This argument, of course, ignores the considerable economic value the company has sacrificed at time of grant. What’s more, a contingent liability is usually recognized as an expense when it is possible to estimate its value and the liability is likely to be incurred. At time of grant, both these conditions are met. The value transfer is not just probable; it is certain. The company has granted employees an equity security that could have been issued to investors and suppliers who would have given cash, goods, and services in return. The amount sacrificed can also be estimated, using option-pricing models or independent estimates from investment banks.
There has to be, of course, an offsetting entry on the asset side of the balance sheet. FASB, in its exposure draft on stock option accounting in 1994, proposed that at time of grant an asset called “prepaid compensation expense” be recognized, a recommendation we endorse. FASB, however, subsequently retracted its proposal in the face of criticism that since employees can quit at any time, treating their deferred compensation as an asset would violate the principle that a company must always have legal control over the assets it reports. We feel that FASB capitulated too easily to this argument. The firm does have an asset because of the option grant—presumably a loyal, motivated employee. Even though the firm does not control the asset in a legal sense, it does capture the benefits. FASB’s concession on this issue subverted substance to form.
Finally, there is the issue of whether to allow companies to revise the income number they’ve reported after the grants have been issued. Some commentators argue that any recorded stock option compensation expense should be reversed if employees forfeit the options by leaving the company before vesting or if their options expire unexercised. But if companies were to mark compensation expense downward when employees forfeit their options, should they not also mark it up when the share price rises, thereby increasing the market value of the options? Clearly, this can get complicated, and it comes as no surprise that neither FASB nor IASB recommends any kind of postgrant accounting revisions, since that would open up the question of whether to use mark-to-market accounting for all types of assets and liabilities, not just share options. At this time, we don’t have strong feelings about whether the benefits from mark-to-market accounting for stock options exceed the costs. But we would point out that people who object to estimating the cost of options granted at time of issue should be even less enthusiastic about reestimating their options’ cost each quarter.• • •
We recognize that options are a powerful incentive, and we believe that all companies should consider them in deciding how to attract and retain talent and align the interests of managers and owners. But we also believe that failing to record a transaction that creates such powerful effects is economically indefensible and encourages companies to favor options over alternative compensation methods. It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others. Companies should choose compensation methods according to their economic benefits—not the way they are reported.
It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others.
A version of this article appeared in the March 2003 issue of Harvard Business Review.
'In fact, the rule governing the reporting of executive stock options 'dates back to 1972, when the Accounting Principles Board, the predecessor to the Financial Accounting Standards Board (FASB), issued APB 25'.
We always use the term ILLEGAL COMPLEX FINANCIAL INSTRUMENT because the US has ACCOUNTING PRINCIPLES----tied to CORPORATE FINANCIAL OFFICERS ----CFOs-----and the CEO ----requiring these accounting principles designed for honest assessment of corporate value and actions needed by investors -----to be assured. Many US citizens remember the ENRON ENERGY frauds in TEXAS---tied to BUSH. As much as right wing global banking 1% pols PRETEND they hated seeing ARTHUR ANDERSON brought to bankruptcy for their accounting involvement in HIDING FRAUD----
THESE ARTHUR ANDERSON employees almost all tied to ARTHUR ANDERSON STOCK OPTIONS -----not only lost jobs but all their investments---and it was all deliberate. ENRON was of course steeped in fraudulent dealings the global 1% ready to throw it under the bus.
Arthur Andersen Indicted in Enron Case
- By ABC News
The U.S. Justice Department today announced the indictment of embattled accounting firm Arthur Andersen on one count of obstruction of justice relating to the collapse of former energy giant Enron Corp.
A federal grand jury actually filed the indictment on March 7, but it was unsealed today.
"The firm sought to undermine our justice system by destroying evidence," said Deputy Attorney General Larry Thompson at an afternoon news conference, saying the firm has intentionally disposed of "tons" of evidence after a government inquiry began last October.
He added: "At the time, Andersen knew full well that these documents were relevant."
Andersen, however, has made it clear it will not plead guilty to the charge, having already rejected a plea bargain deal with the government.
The company released a vigorous response to the announcement this afternoon, calling the Justice Department's actions "without precedent and an extraordinary abuse of prosecutorial discretion," and "a gross abuse of government power."
Charge Based on Shredding
The obstruction charge is based on claims that Andersen employees shredded important documents about Enron's finances, even though they knew the Securities and Exchange Commission was formally looking into Enron. The Justice Department also alleges Andersen employees deleted relevant computer files.
Andersen's basic line of defense is that the shredding was conducted in the company's Houston office under the supervision of David Duncan, the firm's lead partner in charge of Enron's audits, and was not ordered by executives at Andersen headquarters in Chicago.
An Andersen internal report, written by two law firms and obtained today by ABCNEWS, emphasizes this point.
At the time of the shredding in October, says the report, "Duncan and the other partners on the Enron engagement knew that the SEC had made an informal request to Enron for documents and information relating to partnerships involving Enron's former CFO, Andrew Fastow, and that private civil lawsuits had also been filed."
But the indictment charges the document destruction was widespread and involved employees at multiple locations, including Andersen's London office.
"The obstruction effort was not just confined to a few isolated individuals or documents," said Thompson. "This was a substantial undertaking over an extended period of time with a very wide scope."
Duncan's lawyers released a statement this afternoon saying that he "continues to cooperate with all of the ongoing investigations" and would not comment on Andersen's indictment.
On Jan. 10, Andersen acknowledged it had destroyed thousands of Enron-related documents and e-mails last fall, as investigations into the events that ultimately led to the company's bankruptcy were under way. Enron, after filing the largest-ever U.S. bankruptcy on Dec. 2, fired Andersen on Jan. 17.
The maximum potential punishment for the charge is a five-year probation term for Arthur Andersen and a $500,000 fine.
Multiple Reasons for Indictment
In another letter released Wednesday night by Andersen, the firm defends itself and strongly criticizes the Justice Department's line of inquiry into the Enron matter.
"The Department has refused to allow the firm to tell its story to the grand jury, in violation of both Department policy and the basic precepts of fundamental fairness," reads the letter from the Washington, D.C., law firm of Mayer, Brown, Rowe & Maw. "The Department proposes an action that could destroy the firm, taking the livelihoods of thousands of innocent Andersen employees and retirees."
However, sources close to the investigation have told ABCNEWS that Justice Department officials concluded that the entire company should be criminally charged for a number of reasons, including:
That a senior management official, Duncan, allegedly oversaw a large portion of the document destruction.
The sheer volume of the documents that were destroyed, estimated at 32 trunks worth of material by one Andersen employee. In addition, the destruction of the documents would have helped to mask Enron's financial difficulties and the financial advice given by Andersen.
Those actions could have conceivably helped Enron remain viable as a paying customer to Andersen.
Guilty Plea Could Wreck Company
The 89-year-old accounting firm with 85,000 employees faces a variety of threats to its survival. Experts say a guilty plea by Andersen in the case could bar the company from carrying out audits for companies filing with the SEC.
The New York Times reported today that the SEC has secretly begun talks with the rest of the "Big Five" accounting firms on how to handle a possible collapse of Andersen. On Wednesday, two firms — Deloitte Touche Tohmatsu and Ernst & Young — announced that they were not interested in buying Andersen.
With around 2,300 publicly traded companies in the United States using Arthur Andersen as their accountant — about one-fifth of the total — the collapse of Andersen could create large-scale problems in the U.S. capital markets.
"If all of these companies are combing the streets for another accountant, there would be chaos," said Arthur Bowman, editor of accounting industry newsletter Bowman's Accounting Report.
This evening, the SEC announced temporary measures concerning Andersen, including a potential 60-day extension for clients of the firm and guidelines for Andersen's ongoing audits.
"So long as Andersen continues to be in a position to provide those assurances, the Commission will continue to accept financial statements audited by Andersen in filings," stated an SEC press release.
Both the Justice Department and SEC have been investigating the Enron collapse since last fall, when Enron announced it was worth $1.2 billion less than it had previously acknowledged in its financial reports. As Enron's auditor, Andersen was responsible for approving Enron's financial statements.
Wall Street by this time is global banking having nothing to do with US banking. The use of COMPLEX FINANCIAL INSTRUMENTS to hide debt is today hitting every sector of US MONETARY activity. The US TREASURY bond fraud is hiding the US national, state and local government debt driving it well beyond sustainability------THIS IS ILLEGAL.
So, too is this same debt scheme being used in corporate bond debt----hiding the fact US corporations are loading themselves with debt to implode them into bankruptcy with employees as stock option holders and creditors taking all that corporate debt.
WHEN 99% WE THE PEOPLE black, white, and brown citizens simply allow all these criminal actions by global banking 1% and the GLOBAL CENTRAL BANKS-----they become more and more BOLD and OPEN in creating monetary and economic structures staged for temporary BOOM AND BUST filled with fraud and corruption.
Wall St. Helped to Mask Debt Fueling Europe’s Crisis
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
Published: February 13, 2010
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling
Chris Ratcliffe/Bloomberg NewsGary D. Cohn, president of Goldman Sachs, went to Athens to pitch complex products to defer debt. Such deals let Greece continue deficit spending, like a consumer with a second mortgage.
As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
REMEMBER, Obama and Clinton neo-liberals tied these pension, 401K, stock option debt-hiding structures to our next generation of 99% working in US Foreign Economic Zones-----baby boomers losing today will be happening to 21st century workers-----until all are replaced with ROBOTS AND ARTIFICIAL INTELLIGENCE.
MASKING SOVEREIGN DEBT all during OBAMA'S terms----now Trump. We are discussing stock and bond public policy this week for our citizens and our public trusts.
11/10/2015 12:50 pm ET Updated Nov 10, 2015
The Fed Just Can’t Stop Hiring Former Goldman Sachs Bankers
This time, it’s the head of the Minneapolis Federal Reserve Bank.
Draghi Knew About Hiding Losses by Italian Banks
Blog/Banking CrisisPosted Nov 13, 2017 by Martin Armstrong
The Bank of Italy, when it was headed at the time by Mario Draghi, knew Banca Monte dei Paschi di Siena SpA hid the loss of almost half a billion dollars using derivatives two years before prosecutors were alerted to the complex transactions, according to documents revealed in a Milan court.
Mario Draghi, now president of the European Central Bank, was fully aware of how derivatives were being used to hide losses. Goldman Sachs did that for Greece, which blew up in 2010. It is now showing that Draghi was aware of the problems stemming from a 2008 trade entered into with Deutsche Bank AG which was the mirror image of an earlier deal Monte Paschi had with the same bank. The Italian bank was losing about €370 million euros on the earlier transaction, internally they called “Santorini” named after the island that blew up in a volcano. The new trade posted a gain of roughly the same amount and allowed losses to be spread out over a longer period. We use to call these tax straddles.
The report was dated September 17th, 2010, and marked “private” demonstrating that the Bank of Italy was aware that by choosing not to book the trade at fair value Monte Paschi avoided showing a loss at the time. If the bank had used a mark-to-market valuation in the fourth quarter of 2008, it would have been included in its year-end report as the credit crisis was cresting.
This is the real picture behind the curtain. Draghi has known all about using derivatives to mask-over losses and pretend they are not there. The entire Greece Crisis was caused by Goldman Sachs constructing derivatives to pretend Greece made the criteria for the Eurozone.
Greece joined the Euro in 2001 under Costas Simitis.
At the time, Greece owed about €3.4 billion euros it had borrowed. Goldman engineered a currency swap whereby the Greek debt, issued in dollars and yen, was exchanged for euros that were priced at a “historical” or entirely fictitious currency rate. Of course, swapping dollar and yen debt at nearly the low of 2000 when the euro was only 82 cents to the dollar became a nightmare. Greece’s debt doubled in real terms as the euro then rose to $1.60 by 2008. Obviously, Goldman offered no advice but structured a deal that only benefited itself by directing Greece to sell the dollar at the low. Goldman also set up an off-market interest-rate swap to repay the loan off the books, which was a currency position and therefore not technically a “loan” outside any reporting requirement as debt. The trade kept this part of the Greek debt off the books and cleverly hidden from scrutiny. This falsely created the idea that the Greek debt was moving in the right direction to meet the Maastricht rules eventually. Goldman overpriced the deal to such an extent that 12% of their $6.35 billion in trading and investment revenue for 2001 came from restructuring Greece. In total, they pocketed a premium fee of $300 million. Goldman also warned, as they typically do, Goldman would cancel the offer that if Greece shopped the deal around for a better price. Goldman further demanded that Greece pledge landing fees from Greek airports and revenue from the national lottery as part of the transaction to secure their own profits strip-mining Greece.
Within just three months of signing the deal, the bond markets took a major swing following the September 11 attack in New York during 2001. Furthermore, the dollar declined and the Euro soared. Greek officials began to realize that the deal was not going well in the least. The Greek national debt nearly doubled in size, and in real terms (currency adjusted), the debt would double by 2008 just in Euro terms nominally. Greece faced another financial crisis in 2005, which few understood. Goldman Sachs “restructured” the deal once again, but this time they were selling the interest rate swap to the National Bank of Greece under the new government that came to power in 2004 under Karamanlis. This increased the debt even further stretching-out the payments beyond 2032. Goldman managed to extract $500 million from the Greeks, according to numerous press stories (Independent Friday 10 July 2015; Greek debt crisis: Goldman Sachs could be sued for helping hide debts when it joined euro).
Goldman didn’t even blink and went to Athens to try to sell another deal. Goldman Sachs’ president Gary Cohn personally traveled there and offered to finance the country’s health care system debt, pushing that debt even further into the future. Goldman did not merely make huge fees, it even allegedly placed a bet on the economy of Greece that it would fail based upon its inside information. Goldman is known as Government Sachs and has been apparently beyond the reach of any law anywhere. Papandreou wisely declined Goldman’s 2009 deal and this is when he blew the lid off of what Goldman had done to his country.
Now Gary Cohen is in the White House orchestrating the resurrection of Glass Steagall to knock all the commercial banks out of the investment bank business leaving Goldman Sachs (Government Sachs) with just one competitor – Morgan Stanley.
Meanwhile, because the ECB will cut its bond purchases by 50% next year, Draghi will be unable to help the Italian government and rules against bailing out the banks may just explode in everyone’s face next year.