Wednesday, July 26, 2006

A look around at the news

In the spirit of the old newsletter, this will have several short stories all together (out of town family (from Texas) is in town today visiting and I am not supposed to be working ;) so this is my compromise.)

  1. This would defintely be fodder for my Money and Banking classes if I were teaching that this semester!
From the BBC:
"Monopoly money will be phased out in a new version of the game in a bid to keep up with the times.

Instead players will use mock Visa debit cards to keep track of how much money they are winning or losing.

An electronic machine is provided, which allows the banker to transfer money from players and record their earnings and payments."

2. A somewhat dated (it is from 2003) piece by Nobel Prize Winner Joseph Stiglitz on Globalization in which he attacks the IMF. This would definitely be required reading were I to be teaching International (finance or economics). (thanks to MBA Depot for pointing it out!)

"What is this phenomenon of globalization that has been subject, at the same time, to such vilification and such praise? Fundamentally, it is the closer integration of the countries and peoples of the world which has been brought about by the enormous reduction in costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders...."

"If, in too many instances, the benefits of globalization have been less than its advocates claim, the price paid has been greater, as political processes have been corrupted, and the rapid pace of change has not allowed countries time for cultural adaptation. These problems are hardly new–but the increasingly vehement worldwide reaction against the policies that drive globalization is a significant change."

"By some reckonings, close to 100 countries have faced crises. Worse, many of the policies that the IMF pushed – such as premature capital market liberalization – have contributed to global instability. And once a country was in crisis, IMF programs not only failed to stabilize the situation, in many cases, they actually made
matters worse."
3. CNN on backdating of options:

"...let's dispense with the pooh-poohers, those who'd minimize the importance of this issue....At its worst, the practice is called backdating because an executive manages to move the date of a stock option back in time, presumably to when the stock price was moving back the grant date during a rising market, for example - and the option is worth even more.The scandal, however, involves far more shenanigans, and deeper nuances, than mere backdating....the system of awarding options has gone from an incentive program to an entitlement....So here's a radical proposal: Scrap the whole system."
In a related article, the SEC is investigating how to increase pay transparency.

4. Longer term and traded options to minic emplouee options? From the WSJ:
"Analysts at Wall Street's Bear Stearns Cos. have outlined a proposal for competitive pricing of employee stock options that they claim would be a better gauge of value than the models companies currently use. The idea, laid out in a recent report, calls for companies to sell 10-year options to investors to be traded alongside the stock options they grant employees."
Which would be a great idea if (and this is a giant if) there is a market for them. Looking at LEAPS, that is questionable. But 10 year options would make various investment strategies much easier to implement.

5. The SEC promised to increase regulation of hedge funds after their original regulation plans were turned down by US courts.
"The head of the US financial watchdog has vowed to continue pushing for tougher regulation of the multi-billion dollar hedge fund industry...Mr Cox told the Senate Banking Committee that he had not ruled out appealing against the June court ruling....He added that without regulation "the potential for retail investors to be harmed by hedge fund risk" was a serious concern.


Muuknd Mohan said...

I want to get your thoughts on the Adam L piece, I obviously differ from his views a significant amount and have expressed them at

I still think the media frenzy around backdating is making criminals out of most, which is uncalled for.

FinanceProfessor said...

I am not sure what to think.

On one hand I agree with you that many of these were just doing it to seemingly help employees and not to "get shareholders". BUT on the other hand, if the options were to be given on one date and they then the date was changed to get a lower price, that is just wrong.

But doing something that is bad for shareholders is not illegal and I am not sure of the law, so I will say that many of these managers probably felt they were not breaking teh law.

However, I am still opposed to the backdating. Today while biking the following idea came to me:

I help out at my family's grocery store occasionally and I would see little difference between backdating and a cashier/store manager ringing a price too low for an employee.

Our policy in that case is that it is theft from the store's shareholders. I really do not see much of a difference between this "Sweethearting" and the backdating.

THat said, I do conceed that if it was a well established practice AND disclosed (for instance: "employees will be given options with a strike price based on the lowest stock price over the preceeding 52 weeks") then there is nothing wrong with the practice.

I think less controversial is the debate for those options that were backdated for managers who had some say in when the options were supposedly granted.

Here managers were clearly looking out for themselves (or fellow managers) and (again IMO) were doing so in a way as to defeat the spirit of the initial option grants and generally in a way that was hidden from shareholders. A definite no-no in my book.

Giving options today based on today's price is ok, but looking aorund for the lowest price and then "giving" the options backdated to that date, is IMO a definite agency cost problem.

hope I didn't disagree with you too much...