Suppose I don't have any cash on hand, but I lust after a new Mercedes sports car, or my son needs help buying a Coop in NYC, or a family member needs support attending an Ivy League school. I can just write a check using margin interest to make the purchase - and never even worry about having to pay it back. The assets in the account are fungible. Assuming WIND stock price grows comfortably above 8.5%, the value of my assets continues to rise, hardly impacted at all by the slowly increasing margin debt. Notice also, that there are no tax consequences of my actions. (Technically, the margin interest used for this purpose is NOT tax deductible, but there was not a gain from the sale of stock either.)
Suppose a cash-less executive in WIND is faced with the same "needs". Are his options sitting in an asset account, fully accessible and usable in any way approximating what I described above? He would have to meet with a banker, prove he really does have bona fide stock options, prove that WIND really is public and has value, show what his purchase cost and tax liabilities would be if he invoked the option, document his income for purposes of repaying the loan, and finally get a loan - if the banker approves. After getting the loan, he would have to start making interest payments out of his ordinary after-tax income.
Alternatively, the cash-less executive could strive to accumulate lots of WIND stock in his asset account, too. In a way it is easy for him to do this, because he gets to purchase the stock much cheaper than I can. Nevertheless, somehow he still needs to come up with the 25% or so cost of purchase (depending on the market value of stock when the option was awarded to him), and, I believe, the taxes on current market value above the purchase price. Better just to keep the options until he intends to sell the underlying stock which provides money to cover all the costs.
If I am correct, this explains why executives view stock options as bonus income, to be converted routinely to cash. They probably think of options as a short term savings account, generally growing as the stock price increases, but to be spent for essential family needs, like the ones I mentioned above.
Allen |
