Creation of Wealth and Stock Options 101

Dear mouse,

While I was watching the DVD about how the smart guys of ENRON “created” wealth at the expense of the stockholders, stock investors and consumers, I came across this statement which I so loved that I totally abandoned the dvd watching.

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, acknowledged last night that it was tempting to oppose a bailout and “stick a finger in the eye of the bankers and the tycoons whose greed brought us to this crisis.”

I emphasized the word creation because there is one trying-hard-economist-blogger-who-never-generated-traffic-in-his-website-
so-he-shamelessly-promotes-it-in-several forums who is trying to lecture the Ca t as to the use of the word– create.

He thought there is no such thing as banks creating money. Rolleyes.
HAHAHAHA.

What this blogger who commented that financial crisis is just a weather-weather thing was the fact that this creation of wealth from out of nothing is exactly the cause of the collapse of the financial institutions.. Thru their twisted ingenuity and fancy accounting system, they were able to suck dry the financial system.

The big change — one that many compensation experts and shareholder advocates point to as a turning point that led to the obscene CEO paychecks we’re dealing with today — came in 1993 with tax code provision 162(m) that limited tax deductibility for executive pay at $1 million. The exception to the rule was for pay that was considered “performance-based” compensation, like, you guessed it, stock options.

“As a result, stock options have gone crazy,” says Mel Fugate, assistant management professor at the Cox School of Business at Southern Methodist University. Under the rule, for example, a CEO could get $1 million in base pay and $400 million in stock options.

Stock options and how do they work.

Stock options are rights to buy a specific number of shares from the company at the market price given to executives as part of compensation package.

Since the options can not be exercised for some time, the executives and the employees who exercise their options can wait for the price of the shares to go up.

What if the prices do not go up because the profitability of the company is going down?

Since bonuses are based on company’s profitability and growth revenues;

1. The CEOs gambled in risky business like the subprime loans where profits were boosted even though the long term solvency of the company is compromised.

2. the CEOs deferred the reportage of losses by reporting them in accruals thereby overstating the profits and causing an increase in the stock price.

And this was the time when greedy/crooked CEOs make money…create their own wealth at the expense of other stockholders , lowly-paid workers, consumers, creditors and government. They exercise their options and sell the shares of stock at ARTIFICIAL PRICES . Some even go to the extent of doctoring the books by backdating the stock options.

The “gains” they made from this transaction are not taxable as ordinary income and therefore are subject to lower taxes.

The Ca t