Expensing Options Jude Wanniski June 9, 2003

When the stock market turned suddenly last Friday from way up to down, especially at NASDAQ, we of course went to work to figure out what it could have been to cause the discouraging decline, which continues today. The most likely culprit is the almost certain announcement any day now that the Federal Accounting Standards Board (FASB) will require that all corporations expense stock options. It was last July that Congress almost mandated this move, which has the unintended consequence of burdening entrepreneurial capitalists with the inability of motivating workers with stock options instead of taxable salaries. When the amendment by Sen. Carl Levin [D-MI] to require this expensing was defeated on the Senate floor, the DJIA immediately rallied a few hundred points. As usual, nobody else made the connection but Polyconomics. We had warned that the Enron scandal would lead Congress to do many stupid things to protect the American people from capitalist excesses, in the process aborting new enterprise. Warren Buffett, a longtime foe of entrepreneurial capitalism (and supply-side economics) was in the lead in pushing for options expensing.

What Congress did instead was to give FASB, a private organ, the congressional authority to mandate what would otherwise be optional requirements. On the surface, this was played as a stricture on corporate fat cats who were cashing in on stock options while leading their companies to perdition. In reality, the effect would be to snuff out high-tech IPO's before they got off the drawing board. What we now hear is that FASB will most definitely announce the new rule and Chairman Michael Oxley of the House Financial Services Committee is saying there is nothing can be done about it. I`d have to at least assume there would be a court challenge to the congressional grant of effective taxing power to a private outfit. The reason the ruling seems popular is that it does not cause problems for the mature corporations, where stock options are a trivial consideration in the overall scheme of things. The Old Guard is naturally inclined to oppose competition from the Young Turks, although it is a terrible thing for the overall economic system.

Coca-Cola was among the first last year to grandly announce that it would expense options. At the time I wrote: "Coke is probably the best example of a major corporation that always loses money when it tries something new and makes money when it sticks to its hundred-year old formula. Then there is Warren Buffett, the most successful investor in Old Guard corporations in our time, a fierce opponent of any changes that might benefit entrepreneurial America, including supply-side Reaganomics. Oh yes, The Washington Post Company has bravely stepped forward to announce its support for expensing of options."

If you check back, you will find that on July 5 last year the DJIA was at 9400. Congress then got back to town and in two weeks knocked 1000 points off that level. It would have been a worse sell off if the Levin amendment had passed, but that is now coming back to haunt us.

There is a bill in the House by Rep. David Dreier [R-CA] to simply require corporations to make public their stock options and have a committee conduct a three-year study of the issue. It is not going anywhere, apparently. Here is a recent report on the CFO website: http://www.cfo.com/Article?article=9644.

Note that Senator Shelby of Alabama said that he did not think Congress should "interfere" with FASB rulings.

The sell-off that began Friday and continues today has bludgeoned all the major indices, but NASDAQ has taken the bigger bop. Just when you think there may be smooth sailing for the foreseeable future, the Forces of Darkness reappear.

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