Several items making uncommonly good sense in financial matters caught my eye on the final day of the year.
First, Don Boudreaux noticed the following letter to the Financial Times from Larry Ribstein’s colleague at the University of Illinois College of Law, Andrew P. Morriss. Professor Morriss was responding to this earlier article:
Sir,
Bono is following up on his hug of German Prime Minister Angela Merkel at Davos last January and with a visit to Germany to launch ìa series of debates with German thinkers on African development and the role of the west.î (ìGeldof and Bono take G8 campaign to Germany,î Dec. 27). What is to debate? Only entertainers and politicians could be unaware of the straightforward starting points for solving Africa’s many problems: free trade and governments that neither murder their citizens nor steal their property. The role of the west in implementing these solutions is equally clear: cut tariffs and other barriers to trade with Africa and eliminate official toleration (including foreign aid, official recognition, arms sales, etc.) of murderous regimes like Sudan’s and kleptocratic ones like Zimbabweís.
Andrew P. Morriss
H. Ross & Helen Workman Professor of Law
University of Illinois, College of Law
Meanwhile, the Wall Street Journal editors provided this timely editorial in which they point out that it is no coincidence that the current growth and relative stability in financial markets has coincided with the enormous growth in the use of financial innovations such as securitizations and derivatives:
One of the things that has changed over the past 30 years is the extraordinary extent of financial innovation. When it comes to the decline of risk premiums and financial stability, securitization and the use of derivatives have both played an unsung role. [. . .]
The sum of a myriad of these transactions over the economy means that everything moves a little faster. Credit becomes marginally cheaper and more plentiful. Risk is dispersed to those who feel they can better afford it. Thus does the supposedly non-productive financial sector of the economy provide fuel for future growth. Seemingly obscure transactions lower the cost of capital to businesses and consumers and spread risk in a way that decreases the danger of catastrophic financial accidents.
None of which means financial accidents won’t happen. Market players sometimes bet wrong–there are always two sides to a transaction, and one party can always miscalculate its ability to withstand an adverse event. . . [. . .]
But these are not reasons to fear derivatives and other financial innovations. Risk is still out there. But as we leave a successful financial year and enter a new one, take comfort in the fact that all that buying, selling, swapping, trading and securitization of risk has actually made the financial system less risky.
Good point, which makes the WSJ’s support of the lynching of one of the men responsible for a substantial amount of that financial innovation all the more troubling.
Finally, not to be outdone, Professor Ribstein analyzes the latest ongoing media rationalizations regarding Steve Jobs’ involvement in backdating options at Apple:
Appleís internal investigators, including directors Al Gore and Jerome York, ignored the funny odor and expressed ìcomplete confidence in Steve Jobs and the senior management team.î
But NYUís David Yermack says: ìThey have pretty much admitted that [Jobs] was directly involved in a fraud. If he had directly participated in altering depreciation schedules, or booking revenue that wasnít yet earned, would they have full confidence in him?î
Terrific question Professor Yermack. Suppose, for example, weíre talking about Bernie Ebbers or Jeff Skilling? At least, with Al Gore on the case, we wonít be hearing, as we did with Enron, about Steve Jobsí Republican friends.
It looks like former GC Nancy Heinen, who may have participated in the improper documentation, might take the fall. Meanwhile, Gregory Reyes of Brocade, who did not receive any backdated options, is facing criminal charges. Appleís story seems to be that Jobs, possibly unlike Reyes and Heinen, didnít ìappreciate the accounting implications.î
Just to summarize the emerging blackletter law: It’s ok to commit ìfraudî (which is what we are repeatedly told backdating is) if (1) you are a media darling who produces fancy products that everybody loves; (2) you can get Al Gore to sign off (I guess this particular truth isn’t too inconvenient); and (3) you can get somebody else in your company to do the dirty work.
There’s also an anecdote here about actual effect of backdating on companies: Appleís stock sank 5% after it looked like Job’s job might be on the line, but then rose the same amount when the board committee made it clear he wasnít going to be fired. Does this mean that the market doesnít care about the fraud, but just about the governance turmoil the media frenzy wreaks on companies?
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Malcolm Gladwell, he of Tipping Point fame, has authored this must-read New Yorker article on the demise of Enron. Although Gladwell gets a couple of things wrong, his article provides a refreshingly candid and objective view of what happened to Enron and highlights several aspects of the company’s demise that makes criminalization of the affair so troubling. Reading Gladwell’s account along side this earlier post on the case against Jeff Skilling, is there really any meaningful doubt that an enormous injustice has occurred in regard to the conviction and sentencing of Skilling to 24 years in prison?
