A recent paper by two economists reminded me that I haven't read the always-entertaining Annals of Improbable Research in a while.
A London-based think tank recently issued the report, "Learning Unethical Practices from a Co-Worker: The Peer Effect of Jose Canseco" by Eric Gould from the Hebrew University of Jerusalem and Todd Kaplan from the University of Exeter. Combing through years of baseball statistics, the academics conclude that the erstwhile Oakland A's slugger, "had an unusual influence on the productivity of his peers." Of course, Canseco claims in his 2005 book Juiced that he encouraged steroids use among his teammates, in some cases administering the drugs himself.
The research takes a somewhat improbable leap when the professors suggest that the Canseco case offers important lessons for corporate executives, particularly when it comes to accounting practices. "Workers not only learn productive skills from their co-workers, but sometimes those skills may derive from unethical practices," the academics note. "These findings may be relevant to many workplaces where competitive pressures create incentives to adopt unethical means to boost productivity and profits."
Though the professors use Canseco to make a broader metaphorical point about peer pressure and corporate ethics, I wonder if there are any performance-enhancing substances out there that executives can foist on colleagues in finance to boost "productivity and profits." Red Bull in the water cooler?
A handful of Valium might be more appropriate. That was my reaction when a non-U.S. regulator suggested to me that we wouldn't need coffee to stay awake.
We had just heard a barrage of alarming economic news at the International Foundation of Accountants' World Accountancy Forum on Tuesday. Particularly dour were the remarks of Laurence Kotlikoff, a Boston University economics professor. Finance executives who think the government might be in a position to assume some of their health care or pension costs have another think coming, the professor's speech suggested.
Kotlikoff cited recent accounting by two economists, Jagadeesh Gokhale and Kent Smetters, that suggested that, in present-value terms, more than $70 trillion divides projected future U.S. federal spending from projected federal receipts. "This fiscal gap is enormous and indicates that our nation is, quite literally, facing bankruptcy," the professor intoned.
After he used the "b" word, you could have heard a pin drop. "Bankruptcy is a strong term," he allowed. What bankruptcy would mean in a government context, he said, is "defaulting on creditors—all those expecting to receive government healthcare, pension, welfare, and other benefits as well as all those expecting to be employed by the federal government. Government bankruptcy also means jacking up tax rates and printing money to 'pay' for what the government spends."
A proponent of "generational accounting"—which aims to show how fiscal policy affects people of different ages—Kotlikoff attributed what he sees as the dire state of U.S. economic affairs not to federal spending but to household consumption. And the biggest consumers in the house are the elderly, he says. "Since 1960 average consumption per oldster has roughly doubled relative to average consumption per youngster," he said, adding that "Uncle Sam has been cutting taxes on the elderly, which has also permitted them to consume a lot more."
Other speakers, including U.S. Comptroller General David Walker, felt that although the situation was threatening, the government wasn't on the verge of filing for Chapter 11 yet. Still, if prominent economists are talking about the possibility of major government defaults, senior finance execs might well start running off some scenarios to think about what they'd do if the government demanded more benefit payments from them or hiked their taxes considerably.
Debates about converging U.S. and international accounting standards sometimes boil down to language issues. Case in point: the word "probable." At Wednesday's Financial Accounting Standards Board meeting, members briefly debated the difference in meaning of probable as it pertains to deferred tax assets (DTA).
Currently, FAS 109, Accounting for Income Taxes, requires that DTA be reduced by a valuation allowance if, based on available evidence, it is more likely than not (more than 50 percent sure) that some or all of the assets will not be realized. The related international standard, IAS 12, says something slightly different: DTA is not recognized unless it is probable that the asset would be realized.
In the spirit of convergence, IASB has asked FASB to change the wording of FAS 109 so the standards jibe from a consistency perspective. Nothing substantive would change. In the spirit of simplicity, however, the FASB staff recommended keeping the FAS 109 wording the same, and the board agreed.
Changing the wording of a 20-year-old rule, and explaining that no real change had been made, would just be "confusing," asserted one FASB staffer. Further, semantics are a big deal to precision-driven standard setters, and with good reason. Probable has a higher threshold in the U.S., under the venerable FAS 5, for example, whereas IASB uses the word to mean more likely than not.
Nit-picky? Indeed, but this isn't the first time the English language has been misconstrued by transatlantic colleagues. Luckily, CFO.com is owned by the London-based Economist Group, and I've learned over the years that a flat doesn't ruin a Sunday drive; a lift isn't something you give a hitchhiker; and that you can swallow your shorts in a UK pub. Solicitors, however, tend to be bothersome on both sides of the Atlantic.
In the award category for transparently biased commentary this week, Bill Gross of Pimco Funds wins by a nose. Karl Rove's love letter to Barack Obama in the Financial Times" ("How to Beat Hillary") was amusing for its obvious intent to get a weaker Democratic candidate nominated. But I find Gross's assertion that the Federal Reserve may have to cut the funds rate to 3% to bring liquidity back into the financial markets even more self-interested — and off the mark — than usual.
In case you missed it, a central point of Gross's reasoning for a stronger interest rate cut than the half point already priced into the futures market is this: to prevent the "shadow banking system" from imploding. This is the same shadow banking system that created CDOs and SIVs and was built on leverage and cheap financing, and that Gross claims is leading to a breakdown of our modern banking system.
How is the Federal Reserve lowering the funds rate drastically, to the 3% Gross says is needed, going to: a) influence banks to lend to each other; b) reverse the mistakes bankers, investors, and even state-run investment pools made by investing in extremely risky assets; c) prevent a repricing of risk (which would be a mistake anyway); or even d) restore the confidence of investors in markets like structured finance?
Gross doesn't have an answer to that, and I doubt anyone else does either, because aggressive cuts will not accomplish any of it. What they might do is stimulate the bond market, to a point. And isn't that where Gross's interests lie anyway? Gross is a smart guy — smart enough not to bite the hand that feeds him.
Posted by Vincent Ryan | December 06, 2007 09:36am
Stung by its exposure to the home mortgage market, Citigroup is trying to capitalize on its strength in commercial real estate: trophy office buildings. Citigroup clinched a $1.575 billion deal to sell two of its Manhattan office properties, 388 and 390 Greenwich Street, according to the buyer, SL Green Realty Corp. Citigroup no doubt will make a tidy profit on these buildings, which it inherited through its 1998 merger with Travelers Group.
Not a bad strategy to offset some of its losses. As I reported in this month's cover story, rising real estate prices are a hindrance to office tenants, but represent a boon to office owners — or even would-be owners, as was the case with Infosonics CFO Jeff Klausner.
Indeed, Klausner helped his company pocket $2 million earlier this year by exercising a fixed-price option to buy the single-tenant building Infosonics was leasing — and then immediately turned it over to a REIT, which paid a market rate for it. The deal hinged on the fact that the building value had nearly doubled, Klausner told CFO, making it worth his while to broker the exchange. (See "Coming to Terms" sidebar of the December cover story for a list of deal tips to keep rent-hungry landlords at bay.)
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