In Defense of Gambling with Borrowed Chips, Part II

My recommendations, in Gambling with Borrowed Chips, are as follows:

1)      That  the U.S. government must repeal its legal tender laws, allowing Americans to find our own money.

2)      That there ought to be a simple and complete abolition of the Federal Reserve System

3)      That we must learn to let failures fail, without Greenspan or Bernanke “puts” and, finally,

4)      That “we need as a people to accept an important cultural change – we need to learn greater respect for the profession of accounting and for its independence.”

That’s the list as I presented it in my conclusion and as Gravelle considers it. In this blog, I propose to reverse the order. Starting with number 4 then, my reviewer plainly thinks this the runt of the litter. She isn’t “sure what Faille specifically proposes” in this line, so she won’t comment on it.

Well, perhaps in the PowerPoint sense I don’t “specifically propose” anything. It is hard to reduce a critical cultural shift to a list of specific proposals. It isn’t a matter for departmental white papers.  It is a matter of focus.

But I’ll dwell on this point today because recent newspaper accounts of JPMorgan and its billions of dollars lost on portfolio hedges tell a story that may assist with the needed cultural shift if anything can. These losses have stiffened the resolve of advocates of the “Volcker rule,” and of a stern construal thereof, and have at the same time confused those who have been trying to rejigger that rule to allow some flexibility, so this incident may end up having a lot to do with the future of investment banking in the US.  

JPM’s CEO, James Dimon, has said that "affiliated but asymmetric accounting" may have contributed.

Does this bore you, dear reader?  Are you saying, “oh, no, a discussion of accounting.” I suggest you resist the impulse to say that. That is all I “specifically propose” in such matters.

The problem in this case may have been that (a) derivatives on credit default swaps are marked to market – their value is constantly re-adjusted under existing accounting principles, but (b) the value of a bank’s outstanding loans are not marked to market – they are carried at original value, and adverse market condition are acknowledged through the creation of a reserve. If derivatives are used to hedge risks inherent in the loan portfolio then, as the “Heard on the Street” column in the Wall Street Journal has recently noted, the derivative can distort apparent earnings, and distort the bank’s own managerial processes.

I would certainly hope that bankers will correct this asymmetry by marking loans to market, and that the professional (private sector) bodies that maintain accounting standards will press toward this end. Prospects for that are not good at the moment, for reasons that were foreshadowed by the discussion in chapter eight of my book.  The leaders of the standards-setting bodies have been spineless and various politicians have introduced demagogy into accountancy issues over the years, cowing the spineless into indecision when the bases for sensible decisions were fairly clear.

If the politicians were to stand back, the accounting profession would hash out its own issues. And if the public were informed, if there was a general cultural acceptance of the importance of independent integral accounting standards, the leaders of that profession might exhibit the necessary backbone. Then we wouldn’t need a Volcker rule to do their work for them.

Channel Stuffing

From my ms.

There are innumerable grounds on which securities-fraud lawsuits can be and are brought.   I will offer no survey of that field here.   But it does help our cause -- it helps us set the stage for the overly dramatic events of 2007-08, if we consider one such lawsuit, one that arose out of allegations of accounting chicanery.

In 2000, investors who had bought Coca-Cola stock subsequent to October 21, 1999, filed a lawsuit claiming that beginning on or about that date Coke was overstating its revenues through an accounting practice known as channel-stuffing.   Wherever there is a channel between the manufacturer of a product and the ultimate buyer, there may arise a temptation on the part of the manufacture to push more product into that channel than there is any good reason to believe the ultimate consumers will accept.   The whole of the amount shipped to wholesalers, and then perhaps on to retailers, may then be booked, by the manufacturer, as accounts receivable, and thus as revenue.

Why would a seller do that?   Because by boosting receivables in this way it pretties up its books, at least for a specific quarter, making itself appear more attractive to prospective investors than a more truthful accounting would, helping it sell more securities if it is inclined to do so, or boosting the value of those already in the marketplace.

One important point for understanding the 2007-08 crisis is that channel stuffing, like most examples of accounting chicanery, is a self-defeating practice.   Since (in our stipulation) the retailers can’t sell all the product sent to them, they’ll end up shipping it back up the channel again.   The manufacturer will eventually have to re-adjust its books, bursting whatever stock-price bubble the practice might have created.

Even if they don’t send it back, because they have the necessary freezer space, all that leftover Coke from the previous quarter will quench the thirst of customers in the next quarter, depressing that next quarter’s revenues for the manufacturer.

This is why the practice of channel-stuffing is often cited as an example of the short-sightedness of corporate managements, which (in this critique) often look only to their this-quarter numbers, rather than to the longer run sustainability of the company.   Short sightedness represents the temporal dimension of the agency problem.

Coca-Cola settled with these plaintiffs in July 2008.   It didn’t admit that it had done anything wrong, but it did pay the plaintiff investors, led by the Carpenters Health & Welfare Fund of Philadelphia, $137.5 million.

We should think of channel stuffing as a token of a type here, a simple case of the sort of accounting chicanery that can easily become a good deal more complicated.   Simple or complex, though, it often has this feature: a corporation meets its target numbers for one quarter or year by borrowing against the next one.

How can anyone who does not expect to die or retire within three months not see the flaw in that? Perhaps some of the executives involved in some such schemes assume that they will soon hit a good-enough year or quarter to even everything out and keeping all possible hounds at bay.

Corporate Accountability

Some thoughts toward what will eventually become chapter 8 of my book, Corporations and Accountability.

Sometimes the iffy accounting isn't the result of inflation, honest confusion, or simple self- deception.

Sometimes it is the consequence of blatant fraud -- a corporate management that in cold blood sets out to cheat investors by lying to them about the corporation's prospects.

Enron's use of "special purpose entities" that effectively turned their own stock into a company asset is an example of the blatant lying.

The fundamental equation of accounting is this: assets - liabilities = equity. That is also, not surprisingly, the format for a balance sheet.

What a company is worth to its stockholders consists of everything the company owns, minus everything it owes.

For a company to treat its own stock as one of its assets is in effect a matter of blatant double-counting. Suppose a company owns only a lot of furniture -- $7 million of furniture. Suppose it owes $6 million to various parties. Its equity is, then, $1 million. If it has one million owners with shares of equal value then one would expect the value of each share to be ... $1. Simple enough, right?

Actually, that's far too simple for a lot of reasons, and the shares if publicly traded will be worth whatever buyers agree to pay and sellers agree to receive. But in the very simple case described above, one would expect the market prices to cycle around $1.

To get to the point, though: suppose the company starts treating that $1 million equity as an asset. Aha! so it has now discovered that has assets of $8 million (because this accounting trickery doesn't affect the vaue of the furniture). Subtract $6 million from $8 million and you get ... $2 million. The effect (and most likely the point) is to trick the shareholders into thinking their shares are more valuable than they are.

Likewise, a company cannot use an increase in the value of its own equity to spruce up its income statement, wiuthout producing the same sort of nonsensical circularity.

But Enron found a way around this simple-seeming prohibition. It created special purpose entities (SPE), and supplied these off-book entities with Enron stock. Then it dealt with those entities in ways that spruced up both the balance sheet and the income statement.

The SPE's could be kept off-book, under accounting rules, so long as 3% of theiir equity belongs to someone who was neither Enron nor an Enron "related entity." The 3 percent figure may seem modest under the circumstances. But the point of it was that someone else has to be willing to put that their own investment at risk. (Recall that a defining feature of equity is that it is the residual bearer of risk.)

The ways in which Enron satisfied that 3% requirement were risible. A homosexual relationship with an executive doesn't make one a "related party" because Texas laws don't recognize such relationships, they reasoned.

Beyond such minor points, Enron sometimes entered into explicit side agreement with the parties contributing thaty 3% assuring them it would make good on any losses. So it wasn't really equity at all, and the circle is closed. [Eichenwald pp. 596-97 gives a dramatic scenario of Enron execs redicovering the crucial document, and realizing that they are 'toast'.] Early 2001, Carl Bass, a member of Artrhur Andersen's Professional Standards Group, objected to such practices by Enron and his superiors at AA removed him from that account.

When Skilling testified before Congress, in 2002, he tried to justify such trickery by saying in effect that it is no worse than what you, the Congress, have allowed and in fact encouraged as to the non-expensing of stock options.

Implicit in this, "because you have allowed us to deceive ourselves, now we are entitled to deceive others."

Accounting issues

Some thoughts toward what will eventually become chapter 7 of my book, the chapter on Accounting and Valuation.

... The problem is not simply that the wrong accounting choices fool the tax authorities. The problem is not even that they fool investors. For our purposes in this book, the gravest difficulty is that the wrong accounting choice can prove a means by which management fools itself about the value of its company, its reserves of cash and other assets, and its strategic options. ["Big Oil's Accounting Methods" etc. 2006.]

Consider to understand this an accounting issue less obviously tied to inflation than the LIFO/FIFO imbroglio. Consider the question of the expensing of stock options.

In the dotcom-a-go-go years of the 1990s, neither the law nor accepted accounting principles required employers to recognize that in issuing stock options to their employees they had in effect expended enterprise wealth, i.e. stock options were not expensed.

Stock options were a critical part of the compensation package for many of the high-tech start-ups that give those years their distinctive flavor. The practices of not expensing such options allowed start-ups to show a profit sooner than otherwise would have been the case, and this in turn helped keep the original investors happy, while allowing start-ups to bring in new investors.

That was the argument -- when arguments came to be necessary -- for continuing to use stock options without calling them an expense. Yet it was also the argument for calling them an expense. For the obvious problem with the use of stock options was that they diluted the value of the company's equity. At some point some number of the options will be exercised and this increases the amount of stock outstanding -- there is a larger supply of that stock, then, capable of satisfying whatever the market demand may be.

For internal managerial purposes, too, it is important to know what is happening and what is likely to happen to the value of equity. It has a great impact on the company's ability to raise money quickly, on its ability to purchase other firms or to maintain its independence against those who would purchase it, and so forth.

Indeed, one could make an argument that the Financial Accounting Standards Board's politically motivated retreat from an expensing mandate was a signal -- something akin to a starter's pistol -- for the dotcom boom. In 1993 the FASB recommended a rule that would have installed expensing as part of the generally accepted accounting principles (GAAP) in the United States.

[My readers will want to know a bit about what the FASB is, if I have not already provided that info.]

Joe Lieberman (D-Conn.) a Senator from the state where the FASB has its headquarters, sponsored a Senate resolution declaring that the new proposed accounting standard would have "grave consequences" for entrepreneurs.

Indeed, on March 25, 1994, roughly 3,000 gathered at the San Jose Convention Center, in San Jose, California, protesting the threat posed by those distant Connecticut accountants to their beloved stock options. Kathleen Brown, the state treasurer, daughter of the once-and-future Governor Jerry Brown, addressed the crowd.

According to an account in FORTUNE, she shouted, "Give stock a chance," and the crowd loved it.

Lieberman and like-minded folks did manage to kick up enough of a fuss so that the FASB backed down, and continued to allow Silicon Valley and its favorite accountants to pretend that they were giving out something costless.

In face of political pressure, the FASB retreated. It said that in the main body of their books, companies could continue to pretend that options were, in effect, free. The retreat was not complete, though, because the FASB still required disclosure in footnotes.

This seemed like an awkward compromise to everyone, and unsurprisingly debate continued. By 1197 two analysts, Micahel L. Goldstein and Jonathan Freedman, had estimatef that the profits that corporations were showing about 5% the artifact of this rule and increased use of oiptions it encouraged.

The debates were kicked up several notches in intensity after the dotcom collapse. Heck, the debate was on The Simpsons. In an episode that aired in April 2002, ["I Am Furious (Yellow)"], Bart and Lisa were briefly employees of a dotcom company, paid in options. The company goes broke, and the siblings discover that their options are worth $0. But they have one million of them!

Bart to Lisa, "What's one million times zero?" then in a low growl he continues, "and don't tell me zero!"

My Book Proposal

Listen up publishers. Here's a book proposal.

I'd like you to bid on rights to my not-yet-complete manuscript, Gambling With Borrowed Chips: The Role of Leverage, Speculation, and Regulation in a Modern Economy.

I am willing to accept millions, though hundreds of millions would be nice.

When complete, this will be a scholarly ms of approximately 76,000 words, with approx. 30 figures in the text, and extensive endnotes for each chapter, an index, and a bibliography.

As I complete outlines of each chapter in subsequent posts, I'll use the chapter titles here as links, for convenient navigation.

Synopsis

Speculation performs at least three indirect but valuable roles that assist a broader society in the wise allocation of resources: it allows commercial parties to hedge their positions; it uncovers the real value of assets; and it creates accountability for corporate managers, who in the absence of active speculators are better positioned to entrench themselves.

Speculative activity can become excessive and abusive -- the best check upon this, though, is not through regulation, much less criminalization -- the best check is the systemic one of a hard money policy.

The events of recent years -- as they have been popularly misunderstod -- have delegitimized this valuable activity, and that has given rise to a lot of real and threatened policy consequences that have done or would do more harm than good. Or, to be more precise, a very old stigma of the speculator as an anti-social parasite has re-emerged.

Outline

Introduction

Part One: The Value of Speculation
Chapters
1. The old stigma: speculators as parasites
2. From Florence to Houston
3. Equity and Prop Desks
4. The Crisis of 2008
5. Commodities and Their Derivatives
6. Betting on Foreign Exchange
7. Accounting and Valuation
8. Corporations and Accountability.

Part Two: Important Abstractions
Chapters
9. Efficient Capital Markets, A Tidy Theory.
10. ECMH, The Much Sloppier Practice.
11. On Greed and Money.
12. A World Without a Monetary Superpower

Part Three: Some Policy Consequences
Chapters
13. Bankruptcies and Rescues.
14. Public and Private Pensions.
15. Home Ownership.
16. Energy.
17. Conclusion.

Reality is fractal

Mandelbrot was right. Reality is fractal. Just when you think you've discovered s straight line from A to B, you zoom in a bit and discover the zig-zags and the swirls.

Then you think, aha! within those swirls I've discovered a lower-level A and B, and between these two, anyway, there is a simple straight line. But when you make another zoom, you find it isn't so.

This truth pressed itself upon me recently when, for the sake of a quick paycheck, I agree to write a brief essay on "Accounting for Software Licenses." Can't be too complicated, right? So ... how does one account for software licenses?

Turns out there are swirls. First, do we want to talk about the accounting of the leesor or the lessee? From the point of view of the lessee, the payments it has to make on a regular basis (yearly? quarterly?) are treated, one might naturally suspect, as a liability on its balance sheet.

But maybe not. Is this a "capital lease" or an "operating lease"? If the former, then in general the lease is a liability for the borrower, and an asset for the lender. If it is an operating lease, though, it can be kept off-balance sheet which (many biz management types seem to think) is re-assuring to actual and potential investors. Are they right? Is it really re-assuring, or does the rational expectations theory rightly presume that the market sees through mere formalities?

Never mind all those squiggles and squirrels! What about the lessor's POV? Can't we at least achieve some clarity, some sort of straight line, there? No. Have I mentioned that reality is fractal?

In general, how a lessor treats a productive asset that it has lent out for the use of another will depend on whether the asset is classified as "direct financing" or as a "multiple-element arrangement." (There is a grey zone in between those two possibilities, and further swirls, but for my brief essay I ignored that zone.)

If a financing company buys software for me and lends it to me, and if that is the only thing it does -- if it doesn't promise any upgrades or trouble-shooting services, and it doesn't deliver same -- if in the words of one authority the lessor "has no involvement with the software that is inconsistent with being a lender" -- in that case, the lease is a loan, and my lease payments are a matter of paying off that loan. The accounting proceeds accordingly, with a "Lease Receivable" item on the vendor/lendor's balance sheet.

But if it does promise and deliver upgrades and the like, then this lease contract is a "mutliple-element arrangement," more akin to a sale than to a loan. It becomes necessary to distinguish and value the different elements of the deal. This is true, too, of the loan of tangible equipment (you might lease me a backhoe with servicing promises). But distinguishing the separate elements in a software contract is apparently especially tricky, and auditors will require vendor-specific objective evidence (VSOE) of the value of the different components.

Zoom in further, and try to grapple with what VSOE means, and what are the consequences when VSOE can't be produced, and you get yet further Mandelbrotian swirls within swirls.

And there is the additional complication that software often comes embedded in hardware -- the "appliance" model. So the question of distinguishing among the elements of the arrangement may include the complexity of distinguishing the valuing of the dance and the dancer.

Two years ago

It was two years ago this week that the bigwigs of Wall Street and Washington were scrambling to answer the question, "What do we do about Bear Stearns," in a hectic prelude to the even graver crises of that autumn.

It was also on March 18, 2008, that Lehman Brothers put out an optimistic press release, reporting quarterly earnings of $489 million, or 81 cents per share. Investors loved that number. Lehman's shares went up $14.74 that day, to close at $46.49. Michael Hecht, an analyst with Banc of America Securities, called the quarterly results "all in all solid."

The commonality? The bad news on the Bear side was overstated (the $2 a share the Bear shareholders thought they'd be getting two years ago today was, in few days later, quintupled -- still, a devastating loss, but $10 per share was a mite better than $2.)

The good news on the Lehman side was also overstated. Indeed, "overstated" is kind. Hence the now notorious Examiner's Report to the bankruptcy court.

That's our brief anniversary lesson on the oldest of subjects: the difference between reality and appearance.

Of course, two years ago this week we were also learning -- at least New Yorkers interested in the goings-on in Albany were learning, about the world's oldest profession, at least the high-level variant of that profession patronized by the Spitzers of the world.

Incoherent Strategy

The economic strategy of the Obama team is fundamentally incoherent. Yes, the team hasn't been in place long -- parts of it are not in place even yet. But we know enough already to know that there are real problems with some of its pillars.

I was no fan of the previous administration, you should recall. I don't regret the change. But how much mileage are they supposed to get out of that? I have to call things as I see them.

What does the Obama crowd think the banks are supposed to do with the TARP money, for example? It has re-affirmed the essence of the TARP strategy decreed by the Bushies. But ... what is the point? Should the banks keep their new cash on the balance sheets to build up capital reserves so they will be and remain fundamentall sound? or at least so they'll look sound? Or should they lend it out, thereby emphatically NOT building up reserves and taking further risks?

A key Congressional ally of the administration is Congressman Gary Peters of Michigan. Speaking recently of his expectation that the banks will and SHOULD take a bullet for the protection of the auto industry, he said: “We hope they [the bankers] will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs.”

Well, that’s the problem. First, what was given them was in the crudest individualistic sense precisely “for their benefit.” The bankers kept their jobs, and thanks to Chris Dodd, who says he was working on behest of the admninistration in this bit of draftsmanship, they also kept their bonuses.

Second, what was given them was also supposed to be for their benefit in a less crude, more institutional, sense too. Those balance sheets. Making the toxic assets (um, legacy assets? or whatever the latest buzzword is?) less toxic.

A separate set of measures, the “stimulus” stuff, is supposed to be doing the separate job of “getting the economy moving again.” Or is it? This administration has no clue.

The interaction of PPIP with the mark-to-market changes gives us another form of the same logical incoherence.

Under a good deal of pressure from the administration and its friends on Capitol Hill, the FASB gave in on mark-to-market, allowing for certain assets to be kept on the bank’s books at higher nominal value than previously. Not unsurprisingly, this has reduced the incentives of the same banks to sell those assets to the public-private hedge funds the administration is trying to create.

Hold them or fold them? You can demand of a card player that he do one or the other. But you can’t coherently demand that he do both at the same time.

On the bailout bill's passage

That was a sad spectacle. I cheered when the back-bencher's rebellion wrecked the "leadership's bipartisan compromise."

Likewise, I mourn now that the "leadership" has put down the rebellion.

"Ah," you say, "but they had to be practical. Wall Street tanked after the bill failed Monday."

So, what did Wall Street do after the bill's passage Friday? See the above graph.

The Dow Jones was up for the day by about 1% of total value when voting began. It fell immediately (this is the 1:12 peak and drop on that chart) when the early numbers on the C-Span screens showed that the bill was heading to passage.

As the process dragged on, the index recovered, returning almost to the earlier intra-day high, by about 1:25 in the afternoon.

Then the finality of it, realization the mess HAD passed, and the index dropped dramatically. And kept dropping, so that it was in negative territory for the day by 2:30.

And well I'm on the subject, can we please retire the use of "Main Street" as a metonym for "the broader economy"? I'm tired of it, I suspect you dear reader are tired of it, and even the people who keep using it are likely tired of it.

As far as the broader economy is concerned, the bailout likely substitutes the scary prospect of a brief sharp panic (followed, as such a panic was in the period 2001-03, by a prompt recovery) for the scarier prospect of a very long period in the doldrums. A lost decade or more.

After all, what has the bill done? Will this money recapitalize and de-leverage the banks? No. As I read it, it will simply allow them to jigger their numbers and pretend that they've been recapitalized.

But pretending that they're making loans will be more difficult. Pretending that the loans are going to productive borrowers will be trickier still. The experience of Japan throughout the 1990s seems dispositive here.

Get ready for a brief and malaise-plagued Obama presidency, followed by the rise of a new hyper-conservative reaction. Get ready, in short, for President Huckabee after 2012.

FOB and the accountants

There's nothing my readers love more than a good accounting question, eh? Sex, drugs, and accountancy -- the three crucial ingredients of a party.

Oh, and somebody should put on some music too.

Anyway, here's a simple one. If a company accepts prepayment for some service, can it immediately book the cash as "revenue"?

Answer: no. From the point of view of financial accounting, the cash is just cash. It becomes "revenue" only when and as it's earned.

Suppose company X gets its money in September for work it will do in October then? When does it receive the revenue for the purpose of its books? Answer: in the fourth quarter, not in the third.

Suppose the work consists of delivering a product to a customer? Suppose that the customer is far away, and the product can be delivered there only by a truck that will take more than a day to get from company X's warehouse to the customer? And suppose this delivery takes place right on the cusp of a new quarter?

Then we might have to interpret contracts between company X and its trucker to know our answer. If our company loaded the goods onto the truck on September 30, and they received their destination on October 2: third quarter or fourth?

What do the initials "FOB" stand for anyway, and what does that have to do with the above?

Some few cognoscenti will recognize the real-life story I've just stylized. But for most of you, this just sounds like a rather random train of thought. And there I will leave it. My mind just keeps on trucking, whatever fiscal quarter we're in, and whether it ever makes a point, or a delivery, is best left to the judgment of the medical profession.

Revisiting the Enron Docket

Everyone who cares, knows: Ken Lay, the long-time chairman and some time chief executive of defunct energy trading concern Enron, was found guilty of securities fraud and related matters in May 2006, but died before he could be sentenced.

Jeffrey Skilling, the long-time chief operating officer and some time chief executive of the same company, was also convicted. He was sentenced that autumn, and is now serving time in a federal facility in Minnesota.

Criminal litigation continues in regard to less well known figures in the Enron matter. In the matter of Kevin Howard, for example, the prosecutors have recently received a setback at the hands of the fifth circuit court of appeals.

Here, too, it is possible that everyone who cares (a much smaller circle) already knows. Still, I'll bend your cyber-ear about it, because it is possible that prosecutors over-reached.

Kevin Howard was the CFO of an Enron subsidiary, Enron Broadband Services (EBS).

EBS' mission, in partnership with Blockbuster (which had by the late 1990s figured out that the brick-and-mortar model of movie rentals itself would become obsolete in due course) had a plan to stream movies into the desktop computers of Blockbuster customers.

Enron, though, wasn't all that interested in actual execution on such a plan. Their modus vivendi by that time had become: draw up an ambitious plan, book it as if the dream had come true and all the revenue was on the books, let somebody else (like the folks at Blockbuster) sweat the details and move on to something else. Clearly, not a great attitude, but the flaws in such a business model don't by themselves make the case that Mr. Howard should be in prison.

The gist of the criminal case is the government's contention that EBS, inclusive of Mr. Howard, lied to Enron's outside accountant in order to try to book these unrealized profits.

I'm trying not to get bogged down in details here, so simply take my word for it that the "honest services" theory was one of five counts of the indictment against Howard, and the only one to survive previous rounds of appeal-court inquiry. The notion is that if you've been hired to do a job, you've been hired to give your empoyer (Enron's investors in this case) the benefit of your honest services. That "honest service," is , then, one of the forms of value of which you can be found to have fraudulently deprived them.

The problem is that the "honest services" charge would have to stand on its own. The jury was instructed on conspiracyt theories (related to other counts) and the usual instruction is that if Howard was part of a conspiracy then he is responsible for what everybody else who was part of it did. So if any of them deprived Enron of THEIR honest services, and he conspired with them, the jury might well have found h im guilty of the fifth count onthat basis.

Yet with the other counts vacated, the honest services count now has to be understood to require that Howard stole the value of HIS OWN honest services. There's no reason to believe the jury found that. Given the way the prosecution phrased its summation, it didn't clearly ask them to find that.

Here is a link to the write-up on the White Collar Crime blog. From there, you can follow another prominent link to get to the opinion itself.

So Howard will either walk free, or the government will re-try him on count five.

I'm hoping he walks free, so he can direct a movie about the whole ordeal. Assuming he's related in some way to Ron Howard.

Maybe not.

Transparency

I encountered recently a quotation attributed to J.P. Morgan: the elder of the father-son financiers with that illustrious name. One has to give him credit for a neat turn of phrase here:

"The time is coming when all business will have to be conducted with glass pockets."

Morgan apparently said this in a spirit of weariness or frustration. The whole idea of public scrutiny of what he was doing was repugnant to him, but he was practical enough to make some adjustments in that direction, and to prophecy that his heirs would have to go further.

The idea of business transparency has made some headway in the ninety-six years since the elder Morgan died. But then, by the standards of most earthly projects, that's a long time. Morgan barely lived long enough to see the inauguration of Woodrow Wilson.

These thoughts come to my mind this morning because the world is moving closer toward one prerequisite of transparency -- a single global system of accounting standards. The fact that different countries and regions have long had different standards can itself make balance sheets and income statements confusing or (in terms of our guiding metaphor here) opaque.

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071119/REG/711190318/1016/ECONOMY

Return of the Trojan Horse

God bless us every one. David Stockman is in the news again. Best remembered as Ronald Reagan's budget director, as the man who said that the Laffer Curve was a "Trojan horse," Stockman is now in trouble private sector budgetary shenanigans.

Collins and Aikman, an auto parts company, has been in chapter 11 since May 2005. Its efforts to re-organize having failed, C/O is now in the process of liquidating. Stockman was the chairman of its board of directors from August 2002 until the time of the bankruptcy filing. He was the company's chief executive, too, for most of that time.

This week, C/O filed a lawsuit (with an 80-page complaint) in a federal court in Delaware in which Stockman is the first-named of several defendants said to have failed in their fiduciary duties.

Stockman was recently indicted on accounting-fraud charges, and the civil complaint echoes those charges, although coached in the language of breach of fiduciary duties. On his own behalf, he has contended that the prosecution is trying to criminalize optimism. There's a grim irony here. It appears that Stockman was once again using an unrealistically optimistic Trojan horse projection to lead a large entity (not as large as the US government this time, thank heavens) deep into the realm of red ink.

Optimism, schmoptimism. Here's a graf from the complaint that gives the gist of the whole.

"By early 2002 [various negative factors] were dramatically depressing the Company's financial results and the Company was increasingly finding itself locked into long-term contracts with little upside earnings potential. Unfortunately for [C/O] ... instead of dealing with the issues facing the Company in an open and legal manner, Defendants concealed the true financial results of operations and condition of the Company, embarking on a fraudulent accounting scheme which hastened the demise of the Company and left it unable to right itself."