Stock option news.
>>The recently introduced Senate Bill 1940 is well-named: It should have been introduced in 1940, or 1490, or at some point before corporations began getting away with today's double-deception of using stock options to inflate profits and slash taxes at the same time.
Under current accounting regulations, companies under most circumstances do not take the cost of stock options as an expense. But when employees exercise those options, the company gets a huge tax windfall.
Senate Bill 1940, being pushed most heavily by Sen. Carl Levin, D-Mich., and John McCain, R-Ariz., would effectively force corporations to deduct the cost of options from their reported earnings if they deduct these costs for tax purposes.
Levin has been fighting stock option abuses since the early 1990s, says former San Diegan Graef Crystal, the nation's leading expert on stock options, who is a columnist for Bloomberg News.
In the 1992-1993 period, "the Silicon Valley crowd did the most massive lobbying campaign in history," says Crystal. The Financial Accounting Standards Board wanted reform, "and Congress threatened FASB with its very existence."
Reformers, including Crystal and Omaha billionaire Warren Buffett, lost the battle. Stock options would not be expensed. The one concession to reality was that companies were required to state what their earnings would have been if they had expensed stock options.
"At first, there was hardly any gap between the reported earnings and what was reported in the footnotes," says Crystal. But over the years, as companies gave out options promiscuously, and more of them matured, the gap widened. "Now you can look at the reported earnings and the footnotes and drive a truck through them."
The March 4 issue of Business Week magazine has some startling numbers. In the 1996-2000 period, the earnings of AOL Time Warner would have been reduced 75 percent if the company had been forced to expense options. For Viacom, earnings would have gone down 66 percent in the period. Others: Nvidia 40 percent and Baker Hughes 35 percent.
Meanwhile, stock options provided a $2 billion tax windfall for Microsoft in 2000, says Business Week. For Cisco, the savings were $1.4 billion, and for Lucent $1 billion.
Enron saved $390 million in 2000, and according to ZDNet News, took $600 million in stock option tax deductions during four of the last five years. It paid no taxes in those four years despite reporting that it earned $1.8 billion.
The biggest options abusers are the high techs. Their price-earnings multiples are also the most outrageous. Even though their stocks have had a horripilating haircut since early 2000, they are still high.
The bill's backers concede that earnings will suffer in the short run, and so might the market, but free markets require honest information, something they have not been getting for years.
Actually, support for the bill should come from investors, particularly the large institutional investors. According to ZDNet News, the Association for Investment Management and Research, a trade group for analysts, portfolio managers and investment advisers, recently surveyed almost 2,000 members, and 80 percent said stock options should be recognized as an expense on income statements, rather than tucked away in a footnote.
Groups are fighting the legislation. One trade group says, "the legislation makes the confusing case that tax and accounting treatment of stock options share the same goal."
Sounds like an argument in favor of a company keeping two sets of books – one for shareholders and another for the Internal Revenue Service.
Crystal says there is a "reasonable chance" that Senate Bill 1940 will get through, although it won't be as powerful as what's now proposed. "It will be a fight. My guess is that it will lose one last time," and reform will come later, says Crystal.
Maybe it will take some Enrons. Have patience. They are coming.
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