Here is my take on this corporate crisis in America and it is much different from the crap being spewed on TV.

Here is what is being reported to you:

1.   Executives are getting rich at the expense of employees and shareholders.

2.   Legislators and politicians are appalled by executive behavior.

3.   The stock market is declining because of disbelief in corporate America by foreign investors.

My conclusion: 

1.   Executives make stupid mistakes and some don’t know their head from their ass.  Executives always have, always will.

2.   Executives that cheat and defraud investors should serve jail time, pay fines, lose $$$’s earned and be banned from future corporate opportunities.

3.   At the end of the day WorldCom, Enron and other recent bankruptcies would have laid people off no matter what.  Their true returns on capital and poor profit outlook would have been revealed, restructuring would have occurred, employees would have lost jobs, employees would have lost money in their 401k plans but, at the end of the day…..DRUMROLL PLEASE

4.   The corporate sleazebags that made millions by fraudulent manners wouldn’t have been able to keep their jobs, they wouldn’t have made millions of dollars through selling their stock at over inflated prices and wouldn’t have caused a huge concern about how effective capitalism is.

P.S.  Some jobs would have been saved because the solvency of these companies wouldn’t have become an issue.  Some 401k plans might have been saved because employees could have sold based on poor EPS results from the company.  Finally, investors and banks wouldn’t have given $$$ to companies that were performing so poorly and had such high levels of debt (exception maybe is global crossing because that was just greed on everyone’s part.)

  Here is the longer-version.......the supporting facts.....

Here is the way I see it.  Bear with me and read the two pages.  You have to read it all to truly understand my view.

1.   Executives shouldn’t be allowed to keep a dime they made when they committed fraudulent acts.  They should get jail time too.  If many of these individuals aren’t prosecuted soon people will start to raise hell.  Frankly, I wouldn’t be surprised if someone tried to take a shot at Enron’s Andrew Fastow and Jeff Skilling or WorldCom’s Scott Sullivan and his controller.

2.   Jail time better happen:  Most of the people I talk to, even senior executives, are appalled at the behavior they are seeing.  While many executives will admit to using GAAP to bend the numbers a bit (legally of course) they are appalled at the blatant abuse committed by these executives.  If these executives are able to keep their $$$ and get five years of jail time it doesn’t make the penalty large enough.  Going to jail for 5 years, only to come out with $500 million in the bank accounts, isn’t what most Americans regard as punishment.

3.   Executives should be barred from future positions in public companies:  This is being proposed by politicians everywhere.  Nothing for me to add.

4.   Executives are getting paid a lot.  The gap between the top and the bottom in the corporate ladder has widened substantially in the past 10 years.  It is primarily due to the apathy of shareholders and due to a widening value being placed on education. 

a.    As long as the stock market was generating huge investment returns investors looked the other way as salaries and stock option grants got larger and larger.  Now that things have turned they realize how much they are paying these people to run their companies into the ground and they don’t like it.

b.   Repricing existing stock options at the bottom is wrong because the stock options are supposed to tie management’s compensation to shareholder wealth.  In this case the shareholders get screwed as stock prices fall and the executives don’t lose anything because their options get repriced at lower prices.

c.   Workers at the bottom can be easily replaced because there is a larger supply of poorly trained / uneducated workers.  The percentage of Americans with college degrees is only 25%-30%.  Despite all the hoopla about getting an education most don’t have it or are too lazy to get one.  Not getting a college education is equivalent to declaring a lifetime of subpar earnings. 

d.   The requirements to become a top level executive are increasingly rising.  Nowadays companies increasingly give the jobs to those with MBAs and those who execute business plans.  Additionally, more people have MBAs than ever.  It is very important to recognize that all MBA degrees aren’t equivalent.  I know this because I know many people that have them, what they were taught in their programs and their aptitudes.

5.   Had the executives told the truth about corporate earnings what would have happened instead?

a.    Banks and investors wouldn’t have given these companies additional $$$.  Less $$$ would have been lost by banks and investors.

b.   Some employees would have been eliminated EARLIER due to poor profits and the necessary restructuring.  Since most of these companies took on additional debt during their financial shenanigans and already had massive debt levels the result of delaying the inevitable is that the pain is that much greater.  More workers lose their jobs because the companies’ solvency becomes an issue.  Had the executives fessed up earlier they would have been fired, profits would have already shown their truly weak nature and bankruptcy still might have been an issue for some of these companies.

c.   Stock prices would have started dropping earlier because the true numbers would have been revealed.  Investors still would have lost money.  They just wouldn’t be so “shocked” about it.  The key element here is that they would have at least known that results were poor and sold their shares while the stock was going down rather than seeing the stock go down and then get wiped out in a month time span when the truth finally came out.  

6.  Auditing and Consulting Should be Broken up - I don't care what anyone tells me.  There is a HUGE potential conflict of interests when a firm provides auditing, tax advice and professional management services to a client.  I can see it now.  Mr. Partner to another partner.  Is he "business friendly."  Will he generate fees for the partnership?  To say that such things don't happen is ludicrous and is an example of capitalism gone too far.  If investors don't have faith in the public numbers than they will demand higher returns on their money.  Or another aspect can be looked at.  If investors don't have faith in the public financial statements of corporations they will demand a higher risk premium.  This will result in cash flows being valued differently.  Higher risk premiums = lower stock prices in a discounted cash flow model.

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