Okay, so it has been a while since I posted anything. However, there is so much going on, that I have to start with an essay that is slightly more technical than most of what I have written in the past.
This essay is in direct response to questions that I have received about “Mark-to-Market” accounting, and CEO compensation. If you are not interested in the technical section, you can stop after the CEO pay section.
In my humble opinion, there is enough blame to go around. I would blame the current failures of financial institutions on:
1. 3 years ago, Sen. Barney Frank opposed legislation to restructure Fannie and Sallie.
2. Irresponsible lending by banks.
3. Irresponsible borrowing by mortgage holders
4. The Community Reinvestment Act
5. Faulty corporate structure, ie. same person serving as Chairman/CEO
I would like to start of by addressing the last issue; that of the faulty corporate structure in the USA, which I think Sarbanes-Oxley should be expanded to address.
In April of 2006, many complained about the $400 Million retirement package received by Lee Raymond, former CEO/Chairman of Exxon Mobil. Despite the media fuss, I do not know of a single employee or shareholder of Exxon Mobil that complained. The company had just posted record annual profits of $36 Billion in 2005, while accumulating a first quarter tax bill of almost $26 Billion, and distributing a total of $7 Billion to its shareholders. Now, in this instance, I have no problems with a CEO leaving with $400 Million retirement package, especially after 40 years with the comnpany.
Now, when do I have problems? When do I call the corporate structure into question? When Bob Nardelli (formerly of Home Depot) get $210 Million for sucking at his job; when a temp CEO, Alan Fishman (WaMu) gets paid $19.1 Million for sitting in his office while the feds take over his bank. Doing this, is simply rewarding failure. Many of my acquaintances believe that I am for paying the big guys. Well, I am; but only when they perform like Lee Raymond, and Jack Welch. I believe in rewarding success, and punishing failure.
MARK TO MARKET
FASB statement no. 157, Fair Value Measurements, came about as a result of the S&L nightmares of the 1980s. SFAS No. 157 was passed, historical cost was an accepted, yet unreliable means of asset valuation. Businesses were not taking factors like obsolence, and ability to realize the claimed value of the asset into account.
Eg 1. Prior to the war you paid $20 for a bag of rice. During the war, you could buy a bag of rice for US$200. In this instance, what is the true value of the bag of rice?
Eg 2. Before the war, you paid $300 for a VCR player. During the war, you needed food, and therefore sold your VCR for 2 cups of rice. Did your vcr still have a $300 value?
These are simplified examples of the problems that historical costs led to.
SOX has been very effective in curbing aggressive/criminal accounting. There is no perfect system, as people will always find ways around them. That is why these regulations come along with certain ethical responsibilities. Ethical responsibilities that have to be taken seriously by those that have been entrusted to advocate the interests of the public, the big shots, as well as the common man.
This essay is in direct response to questions that I have received about “Mark-to-Market” accounting, and CEO compensation. If you are not interested in the technical section, you can stop after the CEO pay section.
In my humble opinion, there is enough blame to go around. I would blame the current failures of financial institutions on:
1. 3 years ago, Sen. Barney Frank opposed legislation to restructure Fannie and Sallie.
2. Irresponsible lending by banks.
3. Irresponsible borrowing by mortgage holders
4. The Community Reinvestment Act
5. Faulty corporate structure, ie. same person serving as Chairman/CEO
I would like to start of by addressing the last issue; that of the faulty corporate structure in the USA, which I think Sarbanes-Oxley should be expanded to address.
In April of 2006, many complained about the $400 Million retirement package received by Lee Raymond, former CEO/Chairman of Exxon Mobil. Despite the media fuss, I do not know of a single employee or shareholder of Exxon Mobil that complained. The company had just posted record annual profits of $36 Billion in 2005, while accumulating a first quarter tax bill of almost $26 Billion, and distributing a total of $7 Billion to its shareholders. Now, in this instance, I have no problems with a CEO leaving with $400 Million retirement package, especially after 40 years with the comnpany.
Now, when do I have problems? When do I call the corporate structure into question? When Bob Nardelli (formerly of Home Depot) get $210 Million for sucking at his job; when a temp CEO, Alan Fishman (WaMu) gets paid $19.1 Million for sitting in his office while the feds take over his bank. Doing this, is simply rewarding failure. Many of my acquaintances believe that I am for paying the big guys. Well, I am; but only when they perform like Lee Raymond, and Jack Welch. I believe in rewarding success, and punishing failure.
MARK TO MARKET
FASB statement no. 157, Fair Value Measurements, came about as a result of the S&L nightmares of the 1980s. SFAS No. 157 was passed, historical cost was an accepted, yet unreliable means of asset valuation. Businesses were not taking factors like obsolence, and ability to realize the claimed value of the asset into account.
Eg 1. Prior to the war you paid $20 for a bag of rice. During the war, you could buy a bag of rice for US$200. In this instance, what is the true value of the bag of rice?
Eg 2. Before the war, you paid $300 for a VCR player. During the war, you needed food, and therefore sold your VCR for 2 cups of rice. Did your vcr still have a $300 value?
These are simplified examples of the problems that historical costs led to.
SOX has been very effective in curbing aggressive/criminal accounting. There is no perfect system, as people will always find ways around them. That is why these regulations come along with certain ethical responsibilities. Ethical responsibilities that have to be taken seriously by those that have been entrusted to advocate the interests of the public, the big shots, as well as the common man.
BOOM M. Wilson
October 1, 2008
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