"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Tuesday, June 21, 2016

Mason and Foroohar

How Should We Count Debt Owed to the Fed? by JW Mason

Why the Creative Accounting in the Microsoft-LinkedIn Deal Is So Disturbing by Rana Foroohar
Finding examples of how companies use financial engineering—instead of the realengineer—to bolster their balance sheets is like shooting fish in a barrel. The latest involves the biggest deal of the moment: Microsoft’s acquisition of LinkedIn
One of the reasons that LinkedIn many have wanted to be acquired, as Andrew Ross Sorkin explained in yesterday’s New York Times, is that it has been using a rather deceptive method of accounting that allows employee compensation paid in stock to be ignored as an expense. That makes for a bottom line that looks better than it really is. (This is especially true given that the amount of stock based-comp paid out by the company in the last two years was nearly equal to operating revenue, according to an analyst source.) 
LinkedIn isn’t alone in this sort of crafty accounting–most companies in the S&P now do it. (This piece is a great primer on how the funny math works.) But recently, Facebook started including stock comp in its reporting, and there’s a big push within corporate governance circles to get more companies to do that in order to get back to a more realistic version of earnings. After all, employee compensation, whether paid in cash or stock, is obviously an expense that should go on the balance sheet. 
It’s worth understanding just why, and how, stock-based compensation became such a huge deal to begin with. It marked a turning point toward short-term decision-making in corporate America. Key legislative changes that fueled the trend happened under Democratic president Bill Clinton, whose administration passed a 1993 provision on corporate pay. The measure limited corporate tax deductions for regular salaried income to $1 million but exempted “performance-related” pay above and beyond that—pay that was typically awarded in stock options. Joseph Stiglitz, a former head of Clinton’s Council of Economic Advisers, remembers this move as “one of the worst things that the Clinton administration did.” 
That’s because it created a tremendous incentive for companies to pay more compensation in options. This further fed the cycle of short-termism since executives would from then on be focused primarily on boosting stock prices, by any means necessary. As Stiglitz puts it, “It just opened up this huge span of bonus pay which was not for performance. I had written a lot about this before, that it was largely phony. I argued very strongly during the nineties that the whole stock option pay trend caused a lot of incentives for non-transparency, and that it was directly responsible for what I call creative accounting.” It allowed firms not just to deceive the market but also to avoid paying the taxes that they should have paid. 
Why does this matter so much now? Because it contributes to growing inequality and a lackluster economic recovery, by putting more and more tax-free compensation into the hands of the wealthy (who tend not to spend it after a certain point, which is a problem in an economy based mostly on consumer spending). What’s more, says Stiglitz, the performance exception didn’t really reward “performance” as much as any number of other factors, such as monetary policy that boosted stock prices. “If you’re really talking about performance, you should not get higher pay when your stock price goes up because the interest rate goes down,” he explains. “I mean, maybe Janet Yellen should get higher pay for that, but CEOs certainly shouldn’t.” He wrote in his searing memoir of the time, The Roaring Nineties, that “as the Clinton years came to a close, I wondered: What message had we in the end sent through the changes that had been brought about in our taxes?”

The Microsoft-LinkedIn deal brings all this to the fore once again. It’s a topic the next president should tackle head on, no matter the party.

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