The Blame Game

by Edgar J. Steele

July 18, 2002

The secret to success is knowing
who to blame for your failures.
     - unknown

I know blame.  Blame and I are old friends.  

You see, I was the youngest, by six years, of three boys.  I got blamed for everything.  

"Who broke the lamp?"  "Eddie did it."

"Who ate the cookies?"  "Eddie did it."  

"Who painted the cat?"  "Eddie did it."

My standard response:  "Huh?"

I always said that's why I became a lawyer - so that people couldn't take advantage of me any more.  Little did I know that the real reason (deep psychological conditioning, perhaps) was because I wanted to keep on taking the blame.  After all, now even I say that lawyers deserve everything bad said about us.  Why, I even collect lawyer jokes.  How telling.

America is engaged in yet another national witch hunt, with only the specific identities of the scapegoats du jour to be determined.  But, we know where they live.  We know where we're gonna deliver the blame.

For what?  Why, for all the money we've lost in the stock market, of course.  After all, we've all lost a bunch, so it must be somebody's fault.  Huh?  

Well, yes, but maybe not who we think.  Bear with me and, remember, don't try this at home.  I'm a trained professional...blamee, that is.

Blame the Accountants.  The Arthur Andersen public accounting firm keeps turning up as having been the auditor on these much-publicized debacles like Enron and Global Crossing, where the stock price goes from a zillion to zero overnight, so they must be asleep at the switch.  If they were doing their job, then we'd know not to invest in those dogs, right?  Wrong.  

They get to use the tried-and-true Lt. William Calley defense:  "We wuz only following orders."  Er, principles, actually - Generally Accepted Accounting Principles (GAAP).  

Now, don't get this confused with having principles, because in the business world the two concepts are usually diametrically opposed.  

And I call it the Lt. Calley defense because it leaves the landscape littered with the corpses of innocent victims, many of them widows and children.

Managing reported earnings via off-balance-sheet stock options, capitalized-expense reserves, nested subsidiaries, often overseas, and interlocking intercompany sales is a time-honored practice in the business world, blessed by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA), the supposed watchdogs of the accounting profession.  I know because I used to be one.

Blame the CEOs.  Okay.  Must be the guys who took home $700 million last year, while laying off half their blue-collar work force.  Just a coincidence that they and Martha  dumped their stock the day before it tanked...and only then because the bodies piled up so high that even Wall Street could no longer ignore them.  Right.  

Well, these guys do deserve your contempt, to be sure.  But, they're just folks, you know.  Exceptionally smart, talented, loathsome and greedy, to be sure, but just like you and I, otherwise.  They're simply taking advantage of the system that has been in place for as long as I remember, certainly since the early seventies, when I first became steeped in the mysteries of corporate high finance.  "We wuz only following orders."

Blame the Accounting.   Well, yes, and that's just what Alan Greenspan is suggesting to Congress this week.  And, chances are pretty good that the FASB will finally get around to requiring that stock options be expensed in full on the date granted, at the market price then extant.  

Until now, you see, somebody like Kenneth Lay would get the option from his company to buy, say, a million shares of Enron at some ridiculously low price (something similar to Enron's stock price today, for example), and he would pay nothing for that privilege.   Then, when he decided to exercise the option, he also almost certainly had a broker lined up to sell the stock at the market price on the date he exercised the option.  

So, he got, say, a million times the $666 per-share price.  The company simply handed over the shares, by printing the certificates (notice that this is the exact same way the Fed operates).  So, the company's book value becomes diluted by the million shares, because they get added to the pool of outstanding stock, but the company gets nothing in return.

Of course, nobody would ever connect this transaction up to the one a month later, where Mr. Lay has Enron buy one million shares of its own stock at market price out of retained earnings (no income statement effect, you see) and add them to something called Treasury Stock or, perhaps, simply retire those shares.  Then, the dilution of book value never shows up, does it?  What's more, total equity never changes, either.  Nothing up my sleeves, ladies and gentlemen.

Can it be that easy?  As Gallagher says of the Sledgeomatic:  "Yes, IT CAN BE JUST THAT EASY!"  

No mess to clean up, and nobody's the wiser.  Except the company's executives, the entire accounting profession and every single one of the stock analysts and fund managers on Wall Street, of course.  But, they're all busy making a ton of money on your investment, so nobody's going to blow the whistle.

The usage of capitalized-expense reserves, nested subsidiaries and interlocking intercompany sales is just as devious and just as legitimate...er, principled, allowed by those principles I mentioned above.  Once again, "We wuz only following orders."

Blame the Evildoers.  Well, yeah, that's what we did just after the World Trade Center got dusted.  The stock market was in the process of crashing then, just like now, though everybody seems to have forgotten.  Now, we're all bored with this "Where's Waldo" game, starring Bin Laden.  Send in more Christians for the lions, Cassius.

Blame Solar Flares.  Makes as much sense as many things.  Some have actually suggested this lately, since there has been record solar activity of late.  Rationale is that it influences the earth's magnetic fields, which in turn affects you and me - perhaps by causing little tidal waves in our cerebrospinal fluid?

But, Never Blame the Investors.  After all, how should we know any better?  How should we know that the stock market might crash or that any individual company might go bankrupt?  

In these days of no personal accountability and victim mentality, how could we possibly think any other way?  

I'm waiting for someone to file a lawsuit against the MGM Grand in Vegas because they couldn't have been expected to know that the little roulette ball might not always land on red.

And, never blame the Fed.  Huh?  Why, for pumping record amounts of liquidity into the market.  By printing money.  Actually, by futzing with interest and discount rates such that banks printed that money with their computers by posting little credits to accounts, credits that never existed before.  

Talk about leaving the keys in the ignition.

The excuse?  Well, there's no inflation, so it's okay.  (You see, more money chasing the same assets leads to a bidding up of the price, and we call that inflation.)   Well, just what do you call the NASDAQ index going from 400 to over 5,000, Mr. Greenspan?  If that's not inflation, then I don't know what is.

And, never ever blame the Government.  After all, they've been conditioning us to be totally dependent upon them and never question their motives or methods.  They're gonna make it right.  Sue them bad old CEOs and accounting firms.  Make them give the money back....to the government, of course, just like those tobacco lawsuits, yet another exercise in the unbridled lack of personal accountability.

Never mind that the government could put the Fed out of business and print money the way it is supposed to, backed by something real for a change.  (Yes, Virginia, the Federal Reserve bank is a private business, with no governmental ownership or oversight.)

And, hey, don't blame me.  I'm just the messenger.

Copyright ) Edgar J. Steele, 2002

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