Wednesday, June 24, 2009
A Breakthrough With The Independent Editorial
In October of 1998 a prominent British publication, the Independent newspaper, published a lead editorial, citing my study and concurring that Microsoft had erected a financial pyramid scheme in which employees were prepaying their own wages and the retirement system was being plundered. I can still remember the editor's voice who interviewed me and his startled realization that the study was credible. The study results and follow-up work were then sent to The Economist and several leading business publications here in the US, more than a dozen times, in addition to regularly calling once a month and leaving detailed messages. Another breakthrough could have occurred when CNBC scheduled a panel discussion on World Business Review with Caspar Weinberger yet the show was canceled due to the controversial nature of the content.
The Original Purpose of The Study
In the summer of 1998 the rapid movement of global capital flows began to have a crushing effect on developing countries. While everyone was analyzing the speed at which capital moved, no one was trying to answer the basic question, where did it end up? A closer look revealed that a primary contributor to global economic instability was an elaborate financial pyramid scheme being utilized by the Microsoft Corporation, which others are now rapidly seeking to emulate. Frankly, I was astonished myself and contacted Steve Ballmer's assistant several times along with other Microsoft representatives, including the editor of their Slate magazine, before publishing the results of my study in a press release on PR Newswire. The Independent, a major UK Newspaper, based their story on this study and shocked many readers. The study also included projecting that Microsoft would begin issuing "watered stock" in an effort to disguise and diffuse the pyramid.
Two Historical Perspectives - Samuel Insull and Charles Keating
Two other situations this century involving similar techniques include those of Charles Keating, who first destabilized and then later plundered the Savings and Loan system and Samuel Insull who was President of Edison Electric, the great technology company of the 1920's. Insull was a national hero in the 20's yet came to be recognized as a symbol for what caused the great depression in the 1930's. Sadly, his good intentions and significant charitable and civic causes did not include ensuring the financial integrity of his company. He died of a heart attack in 1938, penniless, in a Paris subway station, exhausted from years of fighting lawsuits for fraud. Interestingly, he was never convicted.
Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. Today many now fear a similar stock market crash but in reality the economy is very strong and, if we can reform this pyramid at Microsoft, the overall market should not need to correct more than 20 percent. What is most likely to occur is a structural shift within the S&P 500, not unlike what occurred with HMO's, in which Microsoft and a small group of large tech stocks grossly misreporting their earnings decline while other companies in the index increase. Another more recent example might be Waste Management, another monopoly that used pyramid like accounting techniques only to be forced to restate several years of earnings. Key to both these situations are estimating techniques that grossly underreported debt pyramids and operating costs.
Most unusual about Microsoft's situation is that they pride themselves in being a leader in setting "conservative" accounting standards. It is also noteworthy that the previous CFO, Mike Brown, was aggressive in setting accounting standards and also simultaneously Chairman of the Board of the Nasdaq stock exchange while CFO at Microsoft. It is hard to imagine a more direct conflict of interest given that Microsoft is the largest listing on the exchange.
Mr. Brown also hired his former boss from Deloitte and Touche to be internal auditor at Microsoft. When this respected former partner of Deloitte told Mike that what they were doing was illegal and constituted securities fraud he was given the option to resign or be fired, according to an ABC News Story. He later was awarded $4 million under the Federal Whistleblowers Act.
Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. Today many now fear a similar stock market crash but in reality the economy is very strong and, if we can reform this pyramid at Microsoft, the overall market should not need to correct more than 20 percent. What is most likely to occur is a structural shift within the S&P 500, not unlike what occurred with HMO's, in which Microsoft and a small group of large tech stocks grossly misreporting their earnings decline while other companies in the index increase. Another more recent example might be Waste Management, another monopoly that used pyramid like accounting techniques only to be forced to restate several years of earnings. Key to both these situations are estimating techniques that grossly underreported debt pyramids and operating costs.
Most unusual about Microsoft's situation is that they pride themselves in being a leader in setting "conservative" accounting standards. It is also noteworthy that the previous CFO, Mike Brown, was aggressive in setting accounting standards and also simultaneously Chairman of the Board of the Nasdaq stock exchange while CFO at Microsoft. It is hard to imagine a more direct conflict of interest given that Microsoft is the largest listing on the exchange.
Mr. Brown also hired his former boss from Deloitte and Touche to be internal auditor at Microsoft. When this respected former partner of Deloitte told Mike that what they were doing was illegal and constituted securities fraud he was given the option to resign or be fired, according to an ABC News Story. He later was awarded $4 million under the Federal Whistleblowers Act.
The Financial Pyramid At Microsoft Is Now Accelerating
One need only examine the State Teachers Retirement System of California to see the impact. This one system now owns more than 16 million Microsoft shares with a current market value of $1.4 billion due to its commitment of indexing based upon the S&P 500. If 80 percent of this value is the result of a pyramid scheme, based upon manipulating a breakdown in the accounting rules, that would imply a future loss of $1.1 billion to the teachers of California. It is unfortunate that teachers will bear this loss when they are already struggling to keep pace with inflation. To confirm this amount one need only contact James Wollman, CEO of the California State Teachers Retirement System. This is just one public retirement plan in one state.
Right-click to download a Simplified Spreadsheet (Excel 95 format), with supporting data and charts. If you download using Netscape and can't open the spreadsheet, send e-mail to bill@billparish.com requesting it as a file attachment.
In July I met SEC Chairman Arthur Levitt here in Portland, Oregon, and provided him a complete summary of findings. This summary has also been provided to Robert Parry and Alan Greenspan of the Federal Reserve, Treasury Secretary Summers, Secretary of Labor Alexis Herman and both Joel Klein and Phil Malone of the Department of Justice. In addition, the largest public pension funds, their investment advisors, state budget officers and representatives from leading bond rating agencies, including Duff and Phelps, now have the report. These pension managers were specifically asked to remove Microsoft from their indexed portfolios based upon the S&P 500 as a step toward demonstrating their fiduciary responsibility to plan participants.
Right-click to download a Simplified Spreadsheet (Excel 95 format), with supporting data and charts. If you download using Netscape and can't open the spreadsheet, send e-mail to bill@billparish.com requesting it as a file attachment.
In July I met SEC Chairman Arthur Levitt here in Portland, Oregon, and provided him a complete summary of findings. This summary has also been provided to Robert Parry and Alan Greenspan of the Federal Reserve, Treasury Secretary Summers, Secretary of Labor Alexis Herman and both Joel Klein and Phil Malone of the Department of Justice. In addition, the largest public pension funds, their investment advisors, state budget officers and representatives from leading bond rating agencies, including Duff and Phelps, now have the report. These pension managers were specifically asked to remove Microsoft from their indexed portfolios based upon the S&P 500 as a step toward demonstrating their fiduciary responsibility to plan participants.
Two Historical Perspectives - Samuel Insull and Charles Keating
Two other situations this century involving similar techniques include those of Charles Keating, who first destabilized and then later plundered the Savings and Loan system and Samuel Insull who was President of Edison Electric, the great technology company of the 1920's. Insull was a national hero in the 20's yet came to be recognized as a symbol for what caused the great depression in the 1930's. Sadly, his good intentions and significant charitable and civic causes did not include ensuring the financial integrity of his company. He died of a heart attack in 1938, penniless, in a Paris subway station, exhausted from years of fighting lawsuits for fraud. Interestingly, he was never convicted.
Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. Today many now fear a similar stock market crash but in reality the economy is very strong and, if we can reform this pyramid at Microsoft, the overall market should not need to correct more than 20 percent. What is most likely to occur is a structural shift within the S&P 500, not unlike what occurred with HMO's, in which Microsoft and a small group of large tech stocks grossly misreporting their earnings decline while other companies in the index increase. Another more recent example might be Waste Management, another monopoly that used pyramid like accounting techniques only to be forced to restate several years of earnings. Key to both these situations are estimating techniques that grossly underreported debt pyramids and operating costs.
Most unusual about Microsoft's situation is that they pride themselves in being a leader in setting "conservative" accounting standards. It is also noteworthy that the previous CFO, Mike Brown, was aggressive in setting accounting standards and also simultaneously Chairman of the Board of the Nasdaq stock exchange while CFO at Microsoft. It is hard to imagine a more direct conflict of interest given that Microsoft is the largest listing on the exchange.
Mr. Brown also hired his former boss from Deloitte and Touche to be internal auditor at Microsoft. When this respected former partner of Deloitte told Mike that what they were doing was illegal and constituted securities fraud he was given the option to resign or be fired, according to an ABC News Story. He later was awarded $4 million under the Federal Whistleblowers Act.
Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. Today many now fear a similar stock market crash but in reality the economy is very strong and, if we can reform this pyramid at Microsoft, the overall market should not need to correct more than 20 percent. What is most likely to occur is a structural shift within the S&P 500, not unlike what occurred with HMO's, in which Microsoft and a small group of large tech stocks grossly misreporting their earnings decline while other companies in the index increase. Another more recent example might be Waste Management, another monopoly that used pyramid like accounting techniques only to be forced to restate several years of earnings. Key to both these situations are estimating techniques that grossly underreported debt pyramids and operating costs.
Most unusual about Microsoft's situation is that they pride themselves in being a leader in setting "conservative" accounting standards. It is also noteworthy that the previous CFO, Mike Brown, was aggressive in setting accounting standards and also simultaneously Chairman of the Board of the Nasdaq stock exchange while CFO at Microsoft. It is hard to imagine a more direct conflict of interest given that Microsoft is the largest listing on the exchange.
Mr. Brown also hired his former boss from Deloitte and Touche to be internal auditor at Microsoft. When this respected former partner of Deloitte told Mike that what they were doing was illegal and constituted securities fraud he was given the option to resign or be fired, according to an ABC News Story. He later was awarded $4 million under the Federal Whistleblowers Act.
Fed funds datapoint of the day
The Taylor Rule ran smack into the zero bound back in October — and kept on falling. Now, according to the Fed’s Glenn Rudebusch, “in order to deliver a degree of future monetary stimulus that is consistent with its past behavior, the FOMC would have to reduce the funds rate to -5% by the end of this year”:
Rudebusch says that when a central bank can’t loosen monetary policy by implementing negative nominal interest rates, then that only serves to lengthen the amount of time that it is forced to keep interest rates at zero:
According to the historical policy rule and FOMC economic forecasts, the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years. The policy shortfall persists even though the economy is expected to start to grow later this year. Given the severe depth of the current recession, it will require several years of strong economic growth before most of the slack in the economy is eliminated and the recommended funds rate turns positive.
But what about all that quantitative easing? Doesn’t that have the same effect as lower nominal interest rates? Not really: it “has likely only partially offset the funds rate shortfall”, says Rudebusch, and in any case the Fed’s balance sheet is going to have to shrink as the crisis abates — which will serve to act as an effective rise in interest rates. And which will only force the Fed funds rate to stay at zero for that much longer. Maybe it’s time for Bernanke to just set rates at zero and head to the beach for the summer — monetary policy seems to be pretty clear for the foreseeable future.
Rudebusch says that when a central bank can’t loosen monetary policy by implementing negative nominal interest rates, then that only serves to lengthen the amount of time that it is forced to keep interest rates at zero:
According to the historical policy rule and FOMC economic forecasts, the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years. The policy shortfall persists even though the economy is expected to start to grow later this year. Given the severe depth of the current recession, it will require several years of strong economic growth before most of the slack in the economy is eliminated and the recommended funds rate turns positive.
But what about all that quantitative easing? Doesn’t that have the same effect as lower nominal interest rates? Not really: it “has likely only partially offset the funds rate shortfall”, says Rudebusch, and in any case the Fed’s balance sheet is going to have to shrink as the crisis abates — which will serve to act as an effective rise in interest rates. And which will only force the Fed funds rate to stay at zero for that much longer. Maybe it’s time for Bernanke to just set rates at zero and head to the beach for the summer — monetary policy seems to be pretty clear for the foreseeable future.
Official: Kazakhstan Bank Defaults Not Encouraged
ALMATY (Reuters) -- Kazakhstan will not interfere in local banks' foreign debt policies or encourage them to restructure their debt, a senior state offical has said, a day after a third Kazakh lender halted debt repayments.
State-run BTA, Kazakhstan's largest bank, and No. 4 bank Alliance defaulted on their debts last month. Astana Finance, a lender which does not accept retail deposits, also suspended debt servicing this week.
The string of announcements has prompted worries about the prospects of other banks meeting their obligations at a time when the government is keen to make sure that money is used domestically to prop up the shrinking economy.
Kairat Kelimbetov, chief executive of Kazakhstan's state welfare fund Samruk-Kazyna, which acts as the government's agent in bank bailouts, said the state was not behind those decisions.
Asked if investors should expect similar steps from other Kazakh banks, Kelimbetov said: "If the question is whether this is a systemic approach by the state, this is not true."
He said there were different reasons behind each borrower's decision to restructure. Samruk bought a 75 percent stake in BTA in February and has appointed new managers at Alliance. The state owns about 25 percent in Astana Finance.
Samruk also owns stakes of about 20 percent in Kazkommertsbank and Halyk, Kazakhstan's second- and third-largest lenders.
"The deal [with Kazkommertsbank and Halyk]...is that the policy on foreign debt servicing is decided by the management," Kelimbetov said.
He added Samruk was "snowed under" dealing with BTA, Alliance, Halyk, and Kazkommertsbank and had little time to look into problems at Astana Finance.
State-run BTA, Kazakhstan's largest bank, and No. 4 bank Alliance defaulted on their debts last month. Astana Finance, a lender which does not accept retail deposits, also suspended debt servicing this week.
The string of announcements has prompted worries about the prospects of other banks meeting their obligations at a time when the government is keen to make sure that money is used domestically to prop up the shrinking economy.
Kairat Kelimbetov, chief executive of Kazakhstan's state welfare fund Samruk-Kazyna, which acts as the government's agent in bank bailouts, said the state was not behind those decisions.
Asked if investors should expect similar steps from other Kazakh banks, Kelimbetov said: "If the question is whether this is a systemic approach by the state, this is not true."
He said there were different reasons behind each borrower's decision to restructure. Samruk bought a 75 percent stake in BTA in February and has appointed new managers at Alliance. The state owns about 25 percent in Astana Finance.
Samruk also owns stakes of about 20 percent in Kazkommertsbank and Halyk, Kazakhstan's second- and third-largest lenders.
"The deal [with Kazkommertsbank and Halyk]...is that the policy on foreign debt servicing is decided by the management," Kelimbetov said.
He added Samruk was "snowed under" dealing with BTA, Alliance, Halyk, and Kazkommertsbank and had little time to look into problems at Astana Finance.
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