Why do publicly traded companies lie about their financial positions? In most cases, to boost their stock price. Why would they want to do that? Because key employees hold many shares, that's why.
Most big, publicly traded companies have share schemes whereby employees are rewarded with shares for performance or can buy shares at discount rates. The rationale is that employees with a stake in the company will be more diligent than those just working for a pay check. This is most likely true. But the other side of the coin is that it will provide an incentive to manipulate share prices by lying about the company's financial position or prospects. Enron was the classical case. When the truth eventually comes out, like in the case of Enron, the consequences may be devastating, like in the case of Enron. It depends on how much money is involved and on the stakeholders affected.
So how can we prevent another Enron? Simple. Make it illegal for anybody working for a company to own shares in that company. What about incentives then? Financial performance bonuses have been around for a long time. Reward staff with extra holidays, a toaster, a new car, an expensive watch. The list is endless. But don't dangle the temptation to inflate the share price by lies in front of them.
Till next time.
Showing posts with label enron. Show all posts
Showing posts with label enron. Show all posts
Tuesday, December 8, 2009
Thursday, November 19, 2009
How to prevent a financial crisis and much more
A financial crisis can have more than one cause. We are mainly concerned with the current financial crisis which has fraud as its main cause - near worthless assets were created and sold off as as assets of value. As fraud is a crime, it should be prevented by the powers that be.
The first thing that should be done is that whoever sells assets should clearly and unambiguously state what underlies the asset and gives it value. In the case of these mortgages it means they should not only have stated that real estate underlies the mortgage, but that the mortgage is in the name of an unemployed, semi-literate drunk.
The next thing is that the chain of accountability should be clearly spelled out. The same goes for the consequences of contravening the law. That means the exact person in a company should know he will go to jail for so long if so much worth of dodgy assets are sold. It should be like a decision made by computer logic once the relevant facts have been fed in. No lawyer should be able to have any influence on the eventual outcome. If any company structures itself in such a way as to obfuscate the chain of accountability, it should be a crime and the CEO should go to jail.
Any company should be legally required to immediately make public knowledge any financial adversity. Again, the consequences for not doing so and the chain of accountability should be clearly spelled out. These derivatives were heading south long before anyone spoke out.
No income should be acknowledged before the money is in the bank. This requirement alone would have prevented the whole Enron saga. They claimed income which at best was years in the future and in the end did not eventuate.
Any projected income should have a solid basis and a high probability of eventuating. Enron made wild income projections that didn't have a hope in hell of coming true. Whoever issues these projections should know, as he is talking or tapping away at his keyboard, that it's either the projected income coming in right on time, or jail.
The powers that be should not make laws or issue proclamations compelling anyone to enter into unwise business transactions, like the Community Reinvestment Act in the USA. This is a prime example of an act which shouldn't exist. It is based on political correctness. Political correctness has no business in business or anywhere where reason is required.
Of course, a financial crisis can be fueled by other causes. When the share market is going up many people make money on shares. This is seen and everybody jumps in. Shares become grossly overvalued and everybody wants to convert paper gains to real gains. They sell. Needless to say, shares plummet. Ditech Networks which once (about 2000) briefly sold for $101 now (18 Nov 2009) sells for $1.40 a share. Again, needless to say, many lose out big time.
It should not be possible to make money out of creative accounting or clever manipulations of numbers. Sadly, in todays financial system it is. Many are going to make big money out of trading carbon offsets, or whatever they are called in different countries, without these carbon offsets making any difference to greenhouse gas production at all.
Yes, these things can be prevented or at least often prevented. Unfortunately Kris Kristofferson was right: "The things that they complain about are thing they could be changing, but no-one seems to care."
Next time won't have anything to do with finance.
Till next time.
The first thing that should be done is that whoever sells assets should clearly and unambiguously state what underlies the asset and gives it value. In the case of these mortgages it means they should not only have stated that real estate underlies the mortgage, but that the mortgage is in the name of an unemployed, semi-literate drunk.
The next thing is that the chain of accountability should be clearly spelled out. The same goes for the consequences of contravening the law. That means the exact person in a company should know he will go to jail for so long if so much worth of dodgy assets are sold. It should be like a decision made by computer logic once the relevant facts have been fed in. No lawyer should be able to have any influence on the eventual outcome. If any company structures itself in such a way as to obfuscate the chain of accountability, it should be a crime and the CEO should go to jail.
Any company should be legally required to immediately make public knowledge any financial adversity. Again, the consequences for not doing so and the chain of accountability should be clearly spelled out. These derivatives were heading south long before anyone spoke out.
No income should be acknowledged before the money is in the bank. This requirement alone would have prevented the whole Enron saga. They claimed income which at best was years in the future and in the end did not eventuate.
Any projected income should have a solid basis and a high probability of eventuating. Enron made wild income projections that didn't have a hope in hell of coming true. Whoever issues these projections should know, as he is talking or tapping away at his keyboard, that it's either the projected income coming in right on time, or jail.
The powers that be should not make laws or issue proclamations compelling anyone to enter into unwise business transactions, like the Community Reinvestment Act in the USA. This is a prime example of an act which shouldn't exist. It is based on political correctness. Political correctness has no business in business or anywhere where reason is required.
Of course, a financial crisis can be fueled by other causes. When the share market is going up many people make money on shares. This is seen and everybody jumps in. Shares become grossly overvalued and everybody wants to convert paper gains to real gains. They sell. Needless to say, shares plummet. Ditech Networks which once (about 2000) briefly sold for $101 now (18 Nov 2009) sells for $1.40 a share. Again, needless to say, many lose out big time.
It should not be possible to make money out of creative accounting or clever manipulations of numbers. Sadly, in todays financial system it is. Many are going to make big money out of trading carbon offsets, or whatever they are called in different countries, without these carbon offsets making any difference to greenhouse gas production at all.
Yes, these things can be prevented or at least often prevented. Unfortunately Kris Kristofferson was right: "The things that they complain about are thing they could be changing, but no-one seems to care."
Next time won't have anything to do with finance.
Till next time.
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