Monthly Archives: July 2006

What You See Is What You Get

Back to the discussion of understandable accounting.

So, it is 1933. You are Congress. You want to give investors all of the information that they need to make informed decisions on buying and selling securities. What material would you require companies to make public? Obviously their locations, goods and services sold, brands, management, history, and the like. But, in the end, everything comes down to numbers. The investor has to decide what is a fair price in dollars for a stock or bond. So, investors must have financial information in dollars.

Which raises the question of what financial information is relevant to investors’ — and therefore to the markets’ — pricing decisions. This is the fundamental question of corporate finance: what is value? More below.

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$145 Billion

Sorry, but I am going on another tangent because I actually was a bit player in a drama that made the headlines today: Engle, the $145 billion judgment against the big 5 cigarette companies, which was overturned today by the Florida Supreme Court — essentially on procedural grounds, as discussed below. But, by the way, the Court upheld the jury’s findings that the tobacco companies behaved wrongfully and are liable to Florida smokers!!!!!

I was one of two finance experts for the plaintiff class (Florida smokers). My involvement began very late in the trial in 2000. I testified before the jury that the companies’ ability to pay punitive damages should be measured by the companies’ ability to generate cash. The $145 billion was near the upper bound on the present values of the companies’ discounted cash flow generating potential.

Rather than respond to this analysis, the tobacco companies called their CEOS, mostly marketing guys, to testify. The CEOs said that they can only pay their accounting balance sheet value. This “book” value shows no value for the companies’ brands (except for RJR) and is a tiny fraction of the market value of the companies. (The key economic resource of a tobacco company is its brands.) Not surprisingly, the jury rejected this self-interested testimony.

In this posture, the $145 billion judgment was completely reasonable. The tobacco companies gambled and lost. While this aspect of the our trial system is disconcerting, it is the law. If the tobacco companies had won, they would have laughed all the way to the bank.

Which gets us to today’s decision by the Florida Supreme Court. Down under….

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An American July 4th

My holiday, which began yesterday, has not started well. The last of the last-minute pre-departure things on my list was to bring in the wooden rocking bench that usually sits on my front porch. I have to bring it in because it could be a danger in the event of a hurricane while we are away. So I remove the cushion on the rocker, and reveal … a whole lot of bugs. It’s termite swarming season in Florida, and I have a sick suspicion I know what these are. So I call the bug people, and … they’re closed for July 4. But I’m not taking that in the house.

But it gets worse.

We were scheduled to leave Miami on American airlines on a flight to Boston with a tight but tolerable connection to a flight to Manchester, UK.

A few minutes after the Miami flight was due to start boarding, the gate staff announced that there was an air traffic hold in Boston and that we’d be so late there was no point boarding. Probably very late. There, I thought, went the connection. But a minute later they countermanded that and said we should board after all — the pilot had accepted an alternate route.

So we boarded, pushed back a little late, the pilot came on and said that the new route would delay us about 20 minutes, we’d be 40 minutes late in all. That meant a sprint in the airport, but it was do-able. And we did it.

We boarded the second flight, taxied out to the runway….and the pilot came on to say there was a problem with the temperature sensor on the engine, and we’d have to go back for repairs. So we limped back to the gate. And waited for the ground crew. Then waited for them to report.

And after an hour or so, they did: we weren’t going anywhere. So we all exited into the terminal. By now it was well after 9pm, so Boston airport was basically closed. There were no open concessions. There were no more flights out of Boston to anywhere. There were only a few gate staff there to rebook and hotel us all. And I’m traveling with two tired (but so far well-behaved) kids.

By about 11pm I had made it to the head of the line. And I’d started only about a third of the way into it. I’d had the sense to book new seats by phone, so I’d gotten three of the last seats on July 5th’s flight to Manchester — 24 hours later. We got our hotel vouchers, $45 in meals which were supposed to feed three people for three meals. And we went to claim our luggage, which had been offloaded from the plane.

Two of our bags were there. One was not. No explanation as to why. No one authorized to go hunting for the missing bag (mine, not the kids). So after a dispiriting search and queuing for surly baggage service — did you know only supervisors are empowered to give you a toothbrush? — we made it to the airport hotel around midnight. Only be told they only had smoking rooms.

The kids’ room wasn’t that bad. Mine smelled like the inside of a cigar. I didn’t sleep much, and I’m still having nasal flashbacks.

The next morning we go back to the airport to hunt for the missing bag. In due course — without setting any land speed records — the day crew admits they might have an idea where in the bowels of the airport it is hiding, and go off to find it. And they do. So now I have to take this bag back to the hotel to join its brethren, and then the kids and I can play tourist in Boston for half a day.

Which we do, and which isn’t bad, but would be a lot more fun if any of us had any energy, or if the kids didn’t feel they were losing a day with their grandparents. The kids are being great, but it can’t be easy for them. I did manage to contact the bug company, and they’re going to survey us for termite infestations. They did say that even if there are termites on the bench, those guys won’t move to the house any time soon, as they’ll have plenty to eat. I guess that’s reassuring, in a way.

And now I’m back at the Boston airport, posting this, ready to try again. The folks at check-in assure me it’s a different plane, so maybe we’ll actually get there this time. If I don’t post for a while, that’s a sign we made it.

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(Re)Born Free

Glad that I am pretty much done with dissing Enron — out of respect for the late Mr. Lay.

Monday, I suggested that it is troubling that the average investor could not understand Enron’s accounting. Later, I will talk at whether it is possible to have accountings for new economy businesses that the average individual investor can understand. (Enron pretended that it was all new economy. It really was just another energy trader.) But, a little background seems helpful.

After the amazing business scandals, even by Enron standards, of the late 1920s and early 1930s, Congress had to do something about the public securities markets. Public faith was nigh zero. The question on the table was what to do. One answer would have been to have a government agency that really regulated public capital. For example, a government agency could look over the shoulder of corporate managements and second-guess the stock and bond markets. Congress instead decided to put their faith in, among others, the accounting industry. Really! Laff, laff! More below the fold….

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Lieberman + Bad Accounting = BFF

With all of the media attention given this week to Joe Lieberman’s waivering loyalty to the Democratic Party, I decided to go on a slight tangent and discuss how, more than anybody else in America, Joe Lieberman is responsible for some of the worst corporate abuses during the recent tech bubble and for the current growing options backdating scandal. The Connecticut media has noted this, but not the national media, and it is real important. In short, in 1993, Lieberman saved amazingly bad accounting for when a company pays an executive with stock options instead of cash. This caused options to flourish. Options make an executive more concerned with short-term fluctuations in her company’s stock price than in running the company well. Disaster resulted. Details below the fold. Back on track tomorrow.

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Happy July 4, 2006 (II)

A veteran arrested for having a cup of coffee in a VA facility while wearing a “Veterans For Peace” T-shirt asks, Has This Country Gone Completely Insane? (via Ann Bartow)

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