Post-Enron regulations may hamper growth

[undergroundrailroad]

By Shihoko Goto
UPI Senior Business Correspondent
Published 7/8/2003 4:45 PM

WASHINGTON, July 8 (UPI) -- By now, the spectacular collapse of Enron Corp. is only too well known, and the principal actors in the drama have become familiar household names. But as the energy giant's former executives await trial, there is growing concern that not enough has been done to prevent similar corporate scandals from erupting again.

The problem is, however, that government officials including Federal Reserve Chairman Alan Greenspan and private sector analysts alike expect it only a matter of time before other companies are found to be deliberately misguiding investors and file for bankruptcy. So the questions for policymakers are not only about how to prevent corporate malfeasance occurring in the future, but also how to protect investors from them once they occur.

"There might be more Enrons out there, since many other corporations share the primary characteristics that led to the Enron collapse," noted William Niskanen, chairman of the Cato Institute which had a briefing on lessons learnt from the failure of the company Monday.

"The collapse of other major corporations has undermined the popular and political support for free market policies. This has already led to increased demands for regulation of accounting, auditing, and corporate governance and increased criticism of any proposal for privatization," Niskanen added.

Post-Enron

[Jim Sagle]

1. Horseshit.

[rapier]

2. notes

Enron and it's ilk didn't produce economic growth and they don't represent 'free markets'.

Proper accounting and disclosure is the best weapon possible to shift investment into productive avenues. It's much too late however.

[Code_Name_D]

3. But this IS growth.

By their own defenition. So say the money wizerds, so it must be. And such practices being illigel dosn't seem to mater that this is "good buisness."

This administration represents exactly that sort of growth. The kind of growth is the growth in white color crime.

[rapier]

4. anti capitalism

Inflating assets, in this case stocks, does not 'create' wealth. At best it transfers some, mostly to insiders and cynics and speculators.

IT is not a coincidence that the economy sucks big time. Real productive investment has been lagging in America, at a steadily increasing pace, for 20 years.

The last 3 months and the last two weeks especially have seen a return of the NADAQ crap stock mania as the worst companies with no real profits are being bid to the moon. This isn't investment, it is malinvestment. It is a guarantee that things will only get worse.

Until it is univerally understood that stock buying is speculation, not investment, we are doomed. This mania for stocks and financial assets is actually anti capitalist. Capitalism is being destroyed by it's self proclamed champions.

[Code_Name_D]

5. Oh sure, if you want to argue sematics.

Oh, capitlisem! Oh sure, if you want to argue sematics. :eyes:
/sarcasem

I fully agree with you rapier. Their is a siruse disconet with reality with this stock thing. I just read chapter 2 of the Divine Right of Capital, and I was litterly astonished at what I learned.

Buying stocks dosn't invest. In fact, it would seem that a compnay would lose money by issuing stocks. With more money flowing out to the stock holders, than comes in through investments and sales.

This bares repeating. Throw the issues and sales of stocks, a compnay will lose more money, than what it takes in by selling the stocks and genral sales.

In fact, acording to this book, the more agreget stocks their are out in the market, the faster the money flowes out of the compnay. Hemroging money, any one?

Now this shocked the hell out of me. Becase until this point, I thought a stock was used to fiance a companyes operations. But I could never get this model to logicly work in my head. Where dose the money come from? Now I know that it dosn't come from any where.

And yet, its not just me that is fooled. The whole of Wallstreet relishes in this fantisy. And so long as the fanticy remains undesterbed, they will contiue to beleive in it.

This re-inforces my feelings that a majore market crash is now more inebitable than ever. Becase it is the only alternitive to the fantisy.

[rapier]

6. Disinvestment 101

I'm too damn lazy to corect my spelling/typing usually.

Stocks sales only benefit a company when they are first issued. None of our great corporations, great as in giant and successfull, has ever needed the cash from their initial stock offerings to grow. Think IBM, GE, GM, Ford, Microsoft, DuPont, and on and on. Large sucessful companies always grew from exess cash flow.

The advantages of being a public corporation flow not from the money the stock sales generate but from the legal/structural ones inherent in incorporation.

I have a hard time believing that the costs of stock issuance is larger than the return. Traditionally the largest cost has been the payment of dividends. In the 80's however dividends became a dirty word and most established companies divedend yields fell and the new companies, the dot coms and telecoms and biotech and all the flotsam and jetsom of the mania didn't pay any dividends at all. No dividend, no cost. Well there are other costs I'm sure and I'll not argue the point. The main point is below.

Once the stock is initially sold, the direct benefit to the company ends. A stock price of $1 or $1000 doesn't directy affect a company at all. Buying and trading stocks thus is not an investment. It's a speculation. (Companies do benefit because they hold some of their own stock and it makes borrowing money easier and other things too but all of that is indirect) Paying $100 for EBAY is called investing everyday on the cable channels, in newpapers, on the local news, by your 401K plan and Wall St. and EVERYONE. And what does that $100 buy? NOTHING. It's money down the rathole, unless your lucky enough to unload it to someone else for even more.

The emperor has no clothes. The mania for stock 'investing' has resulted in a relentless flood of disinvestment. I am not against pubic corporations or the stock market don't get me wrong. Everything must be kept in some perspective however and the table has tilted so far in this stock mania that it is destroying our economy.

To carry this into too broad an area I will say that the stock mania is all a part of what is sometimes called corpratism. Corporations are possibly the most successful organizational scheme in history. They are fast superceding or co opting government itself. In a sense the mania for stocks is built on a recongniton of this. On the corporate insider major holder side this relentless empowerment of corporations is welcomed. From this springs the relentless media messages encouraging the trend.

I'll say it again, and again. Stocks are a speculation, not an investment.

[jafap]

7. that's not entirely true

Most corporations issue new stock every year. In a sense they are diluting the ownership of everyone who already owns stock when they do so, but I think the logic is that the value of the company is growing, so owning a smaller part of a bigger whole leaves the stock owner with no net loss.
The amount of stock a company can issue is regulated by the SEC, so they cannot crank out infinite amounts of new stock. So the stock price does matter in that it allows the company to issue fewer shares of stock and raise the same amount of revenue.
Thus there is some chance that if I place a bet in the national casino that my money will goto the company itself and not one of the other bettors.

[Code_Name_D]

8. What about the stock by backs?

This is taken directly from The Divine Right of Capital (Page 33, last paragraph)

Yet this leaves out a crucial piece, stock buybacks, which in the aggregate are important. We must figure these in, just as a retail store must look at sales minus returns. Luckily the Federal Reserve has done the heavy lifting. It Publishes a figure for new equity issues (new issues minus buybacks) each year. For1998, the figure was a negative $267 billion (Reference is given.) Thus equity issues were ultimately a negative source of funding for corporations. The stock market, in reality, is not 1% or 7% (In reference to two other performances of the stock markets which do not take into account the stock buybacks) if it less than 0 percent productive. (See chart) And that's not even including dividends, which in 1998 extracted an additional $238 billion from corporations. (Reference given.)

The chart given on the next page, in that light, is astounding. According to this chart, in 1980, productivity (the accumulative new equity issues, or new stock issues) was listed at $101B, but the buy backs (listed as Gains) were listed at $1,349B, meaning net loss to the tune of $1,248B. (A loss 13 times more than the investment.) Yikes. But hold on to your hats folks, the chart moves on from there. The last figure given, at about 1999, new issues was listed at $-1,162B , while gains was listed as $11,645B. :wow: And still trending.

[jafap]

9. I sit corrected

Still the ownership of billions of shares of stock gives them a vested interest in its price. It also sounds like major insider trading. Do you suppose they bailed before the big slide? They are in a unique position to buy low and sell high. Also helps them to win proxy votes (buy lots of shares just before the annual meeting)

[rapier]

10. Investment follies

Companies don't routinely make new issues. Well, let me amend that. They don't routinely make new PUBLIC issues. The dirtiest of the dirty secrets about stock options is that most granted stocks do not come out of company held stock but rather are new issues. In other words they print up a new stock and give it to the exec. A suprising number of companies actually issued as many or more new stocks in this way than they bought back over the last decade. Incredible.

Code D's point is well taken however. Stock buybacks on their face represent a big loss, but that is looking at it simply. As an accounting issue the money taken on the initial offering and the subsequent buy back have nothing to do with each other.

Spinning off again. Traditionally dividends were the biggest cost to companies. Conversely dividends were a large component of those historical stock return stories you always hear as in "stocks return 10% a year, blah blah blah." The dividend yield on the S&P is now something less than 2% I think. This is silly. There is only one legit way to measure what a stock is worth. THat being what it pays you. It is impossible to say what anything is worth if it does not pay you a return, on a strictly logical basis. If you buy a rental property or some bussiness you have an idea of its return. That has to be the basis of any investment, all else is speculation.

THe new tax law favoring dividends might make some difference in the long term but dividends are still held in contempt by most, as evidenced by the silly NASDAQ rally currently under way where the most trashy money losing no divident companies are being bid to the moon. (Not that I think dividends need to be tax advantaged)

All of which is to show that what is now called investment has nothing to do with investment, at least as would be recongized by Adam Smith or any economic conservative dating from about 1600 till about 1982 and the advent of the cult of 'shareholder value'.