In a major exposé of misused executive options, the Wall Street Journal ran a front page article on July 15, 2006, entitled:

“Executive Pay: The 9/11 Factor; As stocks sank after the attacks, scores of companies rushed to issue options to top officials. Some reaped millions.”

Wall Street Journal research showed that:

	Profit From A Tragedy?

1. From September 17, 2001 to the end of that month, 10% of leading public companies issued stock options to 511 top executives;

2. The number who received grants was 2.6 times greater than the same period of September 2000, and more than twice as many as in the like period in any other year between 1999 and 2003.

3. Almost half of the companies issuing options during this period, did not normally issue stock options in September.

4. Most grants were concentrated around September 21st, when the market reached its post-attack low.

The Wall Street Journal went on to say:

There’s nothing illegal about granting options after the market plunges. But acting so quickly after a national tragedy drove down stocks shows the eagerness of some companies to increase their executives’ potential wealth.

Stock options were originally designed to align executives’ incentives with the goals of shareholders, encouraging recipients to work hard to improve their companies’ stock price. When these options are granted at favorable prices, executives get some of their gain free — that is, they are buying at an unusual dip below the price most investors have paid.

More »

I   confess that I might not have noticed the stir caused by Warren Buffett’s remarks in the 2005 Berkshire-Hathaway annual report in which he attacked buyback-option schemes if it were not for an unusual event.

That ‘event’ was a reporter from USA Today calling me to ask my opinion on what Mr. Buffet had said.

Really, a journalist from a newspaper that is known mainly for reporting the weather, sporting events, and the doings of television personalities called me showing interest in Federal Reserve flow of funds accounts and Capital Flow Analysis, discussing these arcane matters for almost half an hour — I was very surprised indeed!

Ben Graham Also Attacked Stock Buybacks

Now I’m not surprised that Warren Buffett does not favor stock buyback-option schemes.

His famous mentor, Benjamin Graham, three generations earlier, drew a very sharp ethical line against stock buybacks in any form, for any reason, even when a company’s stock traded below intrinsic value.

But Warren Buffett himself had waffled about stock buybacks over the years, not adopting the hard line of Benjamin Graham.

A Signal of Shifting Opinion?

The fact that Warren Buffett choose to come out against buybacks in the much-read Berkshire-Hathaway annual report, in a year when stock buybacks-option schemes had soared to absurd levels, may signal the beginning of a shift in the sociology of the U.S. stock market.

If stock-option buyback schemes fall into disfavor, one of the two pillars that support stock prices will collapse.

The other pillar, the Common Stock Legend, is already being questioned by none other than Professor Jeremy Siegel, one of its most famous proponents. (See earlier article.)

More »

In a rather remarkable article published by Wall Street Week and Fortune Magazine, “Why I’m Not Buying the U.S. Dollar“, Warren Buffett, the Sage of Omaha, claims that the trade deficit will lead to foreigners taking over the United States and that this is a very, very bad thing.

He sees the country’s “net worth” as being “transferred overseas” at an alarming rate and that this will lead to “major trouble”. He predicts that Americans will have to work “extra hours” to service the foreign debt. He sees the trade deficit as “a problem that will test all our abilities to find a solution”.

He foresees that eventually foreigners will “sell most of [the U.S. debt they hold] to Squanderville [i.e., American] residents for Squanderbucks [i.e., U.S. dollars] and use the proceeds to buy Squanderville [i.e., U.S.] land. And eventually the [foreigners will] own all of Squanderville [i.e., the United States].

More »