The Stock Option Hog Wallow

by Alexander Cockburn

Why did these chief executive officers, chief financial officers and boards of directors choose to burden their companies with debt? Since stock prices were going up, companies needing money could have raised funds by issuing shares, rather than borrowing money to buy shares back.

Top corporate officers stood to make vast killings on their options, and by the unstinting efforts of legislators such as Senator Joe Lieberman, they were spared the inconvenience of having to report to stockholders the cost of these same options. Enlightened legislators had also been thoughtful enough to rewrite the tax laws in such a manner that the costs of issuing stock options could be deducted from company income.

As Robert Brenner remarks in his prescient "The Boom and the Bubble" (published this spring by Verso), U.S. law "thus encourages corporations to exaggerate their earnings in public for the benefit of their stockholders, while deflating them in private for the benefit of the Internal Revenue Service."

It's fun these days to read all the jubilant punditeers who favor the Democrats now lashing Bush and Cheney for the way they made their fortunes while repining the glories of the Clinton boom when the dollar was mighty and the middle classes gazed into their 401(k) nest eggs with the devotion of Ben Jonson's Volpone eyeing his gold.

Bush and Cheney deserve the punishment. But when it comes to political parties, the seaminess is seamless. The Clinton boom was lofted in large part by the helium of bubble accountancy. Brenner cites a Bear, Stearns study reviewing all S&P 500 companies in 1999 that calculated their net income in that year would have been 6 percent lower had stock options been counted as an expense. Earnings at Yahoo, Broadcom, JDS Uniphase and others would either have been wiped out or gone deeply negative.

By the end of 1999, average annual pay of CEO's at 362 of America's largest corporations had swollen to $12.4 million, more than six times what it was in 1990. The top option payout was to Charles Wang, boss of Computer Associates International, who got $650 million in restricted shares, towering far above Ken Lay's scrawny salary of $5.4 million and shares worth $49 million. As the Nineties blew themselves out, the corporate culture applauded on a weekly basis by such bullfrogs of the bubble as Thomas Friedman saw average CEO pay at America's 362 largest companies rise to a level 475 times larger than that of the average manufacturing worker.

The executive suites of America's largest companies became a vast hog wallow. CEO's and finance officers would borrow millions from some complicit bank, using the money to drive up company stock prices, thereby inflating the value of their options. Brenner offers us the memorable figure of $1.22 trillion as the total of borrowing by non-financial corporations between 1994 and 1999, inclusive. Of that sum, corporations used just 15.3 percent for capital expenditures. They used 57 percent of it ($695.4 billion) to buy back stock and thus enrich themselves. Surely the wildest smash and grab in the history of corporate thievery.

When the bubble burst, the parachutes opened, golden in a darkening sky. Consider the packages of two departing Lucent executives, Richard McGinn and Deborah Hopkins, a CFO. Whereas the laying off of 10,500 employees was dealt with in less than a page of Lucent's quarterly report in August of 2001, it took a 15-page attachment to outline the treasures allotted to McGinn (just under $13 million after running Lucent for barely three years) and to Hopkins (at Lucent for less than a year, departing with almost $5 million).

Makes your blood boil, doesn't it? Isn't it time we had a "New Covenant for economic change that empowers people?" Aye to that! "Never again should Washington reward those who speculate in paper, instead of those who put people first." Hurrah! Whistle the tune, and memorize the words (Bill Clinton's in 1992). Prime yourself for a bout of rhetorical populism, necessary to soothe popular indignation.

There are villains in this story, an entire piranha-elite. And there are victims, the people whose pension funds were pumped dry to flood the hog wallow with loot. One great battleground of the next decade across much of the world will revolve around pensions and issues of asset-based welfare for the swelling ranks of older folk. Here in the United States, privatization of Social Security has been only staved off because Bill Clinton couldn't keep his hands off his zipper and again because George Bush is presiding over the public disgrace of corporate ethics.

But the wolves will be back, and popgun populism (a brawnier SEC, etc. etc.) won't hold them off. The Democrats will no more defend the people from the predations of capital than they can protect the Bill of Rights. It was the Democrats in the U.S. Senate in early July who rallied in defense of the accounting "principles" that permit the present deceptive treatment of stock options. Not just Joe Lieberman, the corporations' favored errand boy, but Tom Daschle of the northern plains. These are the Augean stables, and who aside from Ralph Nader has the credentials to talk seriously about cleaning them out?