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Monday, August 21, 2006

The WSJ: The New White Collar Crime Column

I think I've figured it out. Since June 21, 2006, the Wall Street Journal has published a bizarre series of columns which basically claimed that the practice of backdating option grants for highly compensated executives is not only harmless but a sign of corporate boards actively looking out for shareholders by actively managing incentive compensation. At first, the editorials might have been explained by hallucinogenic compounds being added to Holman Jenkins' water cooler since the first three columns were all penned by him. The August 21, 2006 edition seems to indicate the WSJ editorial staff is on to something even bigger...

A recurring op-ed column on white collar crime…

…written by actual or alleged white collar criminals!


The 8/21 edition has an op-ed piece written by Maurice (Hank) Greenberg on the "culture" of over-regulation in American business and the stifling affects it is having on major US corporations and the economy.

I'll give you a minute to really read that last sentence and savor the irony like a fine Bordeaux.

Greenberg headed AIG for 38 years and resigned in 2005 after Eliot Spitzer uncovered a pattern of transactions undertaken by AIG that appeared to inflate revenue using sham transactions with General Re, deliberately mis-categorized losses to improve evaluations of its insurance exposure, or otherwise improve the appearance of the quality of earnings of the firm. (#1).

IN HIS DEFENSE, no criminal charges were filed in the end by Spitzer and Greenberg has been convicted of no criminal offense, and the civil lawsuit of Greenberg by Spitzer has not been resolved. (#2) HOWEVER,

* AIG itself has admitted to many of the practices alleged by Spitzer's complaint
* AIG has restated its results for the periods involved in the incidences alleged by Spitzer's complaint
* AIG itself is cooperating by providing evidence to Spitzer
* Berkshire Hathaway's legal counsel actually spotted suspicious payments between AIG and BRK's General Re subsidiary and provided the information to Spitzer's office, granted as part of a deal on an unrelated legal investigation (#3)

In his column, Greenberg cites the fact that only 1 of the 25 largest IPOs of the year 2005 involved a US company. Horrible, isn't it? The dearth of IPOs might be related to the desire of companies to avoid public accounting standards due to SOX, true. However, could it also be due to a normal boom / bust cycle in IPOs? A cycle that inevitably results when investment bankers can't make an easy profit pumping and dumping overpriced shares of unproven, unprofitable new companies because individual investors have already lost their shirts on fine IPO stocks like VA Linux, WebVan, CommerceOne, Ariba or any of the other must-have stocks of 1999?

Of course, the dearth of IPOs might also be due to a complete collapse of confidence on the part of individual investors (suckers, as they're referred to on Sand Hill Road and the mahogany suites of Wall Street) in the transparency of financial data presented by banks and auditors of ANY company, much less those trying to sell IPO shares. The continual stream of stories of abuses at the top at the expense of individual stockholders isn't likely to improve Main Street's willingness to trust Wall Street any time soon.

Greenberg's column was entitled Regulation, Yes. Strangulation, No. In it, he suggests a review of reporting requirements under Sarbanes-Oxley is warranted in a world where American companies must compete globally for capital to grow. I've commented previously (#4) that whatever flaws might exist with SOX, we'll never know its true value because you'll never hear about the multi-billion dollar fraud averted because stricter SOX reporting within the company stopped it from beginning or mushrooming. SOX may yet turn out to be the cheapest form of macroeconomic mal-practice insurance America could ever buy. I just wish we would impose the same accounting transparency on the government's books.

In the mean time, I can't wait for the next column in the series. Maybe a getting started primer on selecting the perfect nude ice sculpture for a $2 million dollar birthday party by Dennis Kozlowski? Or a refresher course in debits and credits by Bernie Ebbers?


(#1) http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BB3D95392-C93A-42DB-A893-5E6835FAE3A6%7D&siteId=mktw

(#2) http://www.businessweek.com/magazine/content/05_24/b3937038_mz011.htm

(#3) http://www.badfaithinsurance.org/reference/General/0188a.htm

(#4) http://watchingtheherd.blogspot.com/2006/05/is-sarbanes-oxley-really-problem.html