Originally Posted by
CornersWell
ISO compensation is not the crux of the problem. ISO compensation was used more heavily in response to government taxation of executive compensation. If you remember, years ago, the Federal Government wanted to put a surcharge on compensation over $1MM. The market end-ran it with ISOs. However, the dual purpose is to align executive interest with that of shareholders. So, when shh make $, the executives make money. And, vice versa. That said, you're correct in that accounting issues crept into the mix, as executives sought to pump up and get their bonuses. So, who's fault is that? And, all executive compensation has a current cash portion and a longer-term equity portion, for the most part, now. This is specifically designed to reduce the problem of short-term money-grabbing. Does it work? Not perfectly, but the managing executives do have limitations on and windows when they can sell.
However, and here's the flaw in your logic (if there is one), they're not omniscient. They don't know when the market will crater or take off like a rocket. While they may have a better sense than the average investor on the street, no one can time the market perfectly. So, they have a considerable amount of their net worth tied up in the shares of the company the work for and are generally under-diversified. They will sell when 1) they can and 2) they think things are turning down. They can buy anytime. So, it's always useful to watch the insider activity.
As far as what was reported over the last three years, GAAP was generally fine, even though management could "manipulate" and "smooth" earnings to some extent, UNTIL SarbOx turned up in response to Enron, Worldcom and other fiascos. Now, with mark-to-market FASB 157, the swings are more pronounced. And, in the context of what's gone down due to 157 mark-downs, it's also true that when things improve (note, I didn't say if), there will be lots of 157 mark-ups.
And, specifically, you seem to focus on one industry, although perhaps you were making a general observation and comment. The market is not perfectly efficient. The market will never be. It's true that the regulatory gaps in the home loan origination and securitization markets were taken advantage of. But, while it may take two to tango, in this instance I think it took 20. It took borrowers who knew they were borrowing too much, it took loan originators to lend too much, it took banks to over-participate, it took Ibanks to make it happen, and it took government to create a political atmosphere that encouraged irresponsible lending and failed to rein it in. Lots of culpable parties. And, each one took what they could. So, it's kind of unfair to try to pin it on just a couple of players. That said, I certainly wish they had been more strict with lending. Everyone involved, that is.
And, it's true that most investors have taken a bath. For now. If you're paying attention, for the year, we're back in the black. So, we're scratching our way back. It won't be quick, though, and there are some real issues that I don't think we've addressed, yet. It will be unfortunate for those who bought high and sold low for whatever reasons, because they won't participate in a recovery whenever it might happen. Structurally, though, I have issues with the way brokers are compensated. I think they ALL suck. And, I'm in VC and PE work. Even these guys are crooks on some level.
Naked shorts are great, if you have the risk tolerance for them. I'm happy for you that you've done well with them. Many simply can't afford the losses if they turn bad on them. Moreover, again, it's a timing issue. Since you can't time the market perfectly, you have to have the war chest to cover any losses if and when you get out. Your war chest may run out before you're proven right and the market goes down. I struggled with Google. I KNEW their share price was just off the charts and unjustified. However, to short them was to go against the market. And, going against other investor's perceptions.
Anyway, I wasn't actually addressing the comment about patronizing sporting events to you, in particular. Just in general.
CW
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