Monday, November 03, 2008

Where are the Investor Activists?

Wall Street executives will receive 10% of the $700 billion US government bail-out package in pay and bonus deals...that's $70 billion we, the taxpayers will fork over to those who have already profited beyond what most of us can imagine, as a reward for hijacking our financial system.

“We support the bill, but we are opposed to provisions on executive pay,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a trade group. “It is not appropriate for government to be setting the salaries of executives.”

Where is the remorse? Well, apparently, remorse is not written into their "contract", in fact, it's not part of the Wall Street vernacular at all. The words, accountability, merit, responsibility, ethics, morality, etc. are also excluded. Compensation consultant committees under the supervision of the board of directors determine what CEOs and top executives earn. Earning almost 600 times what the average worker takes home, these lucky men constantly receive pay increases and bonuses whether or not they do their job or not, because their raises depend not on how they perform, but on what their peers earn.

When compensation is paid out in the form of stock options, the temptation is to raise the stock price. Companies often apply special financial engineering to inflate profits and deflate losses on their Profits & Loss statement (P&L). The pressure is on to grow, merge or do anything to blur the numbers ...just bring in those returns!

Performance measurements are half the problem. Stock price is not a reliable gauge of a company's value simply because it's too easy to manipulate.

This week, Dupont, the chemical giant, slashed employee pension benefits by two-thirds. Furthermore, new Dupont workers won't get a guaranteed pension at all -- and no health care after retirement. It's part of Dupont's new "Die Young" program, I hear. Dupont is not in financial straits. Rather, the slash attack on its workers' pensions was aimed at adding a crucial three cents a share to company earnings, from $3.11 per share to $3.14. -- Greg Palast, September, 3 2006
So, what are better performance measurements? According to John Bogle, cash flow, dividend growth, operating earnings (earnings from the business rather than reported earnings which are earnings after the writeoffs) earnings per share, book value, etc are much more accurate.

Consider this. 65% of all company mergers do not work out, causing their book value to take a dive, however, there are no requirements to include that information in their P&L. So, if 65% of mergers fail, why do we have so many mergers? Because not only are most of us ignorant of this information, mergers are a great way to fudge the numbers, making it much harder to assess which companies are good for investing over the long run...the reason most of us invest to begin with.

Where are the investor activists and why aren't they protesting?

At one time, not too long ago, almost all the stock in America was owned by individuals and only 8% of stock owned by financial institutions. Now, 75% of stock is owned by institutions, yet institutions act much more like speculators rather than investors. So, why should they care... they "invest" short term and more than likely will not hold the same stock the following year.
We no longer have an ownership society. We have an agency society where agents or financial intermediaries are holding most of the stock, certainly the lion share of stock in the nation. The agents are not adequately representing their principles. We have corporate trustees and mutual fund managers who are acting too much in their own interests and not in the interest of the underlying pension beneficiaries and the fund shareholders. - John Bogle
In the end, Wall Street takes 75% of the return, over the lifetime of an investment, and put up ZERO percent of the capital and take ZERO percent of the risk, meanwhile, investors who put up 100% of the capital and take ALL the risk take home 25% of the return!

Now that half of all Americans are invested in the market, we can't afford to let this con game continue. As long as we stay within the Constitutional framework of our country, we the people can make up and enforce the rules that serve us. We can start by following the same procedures we use to rid our pets of ticks, and rid our financial system of the greedy parasites who have been given full permission to leech off we the taxpaying public.

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