Saturday, May 04, 2002
The first is that a company called WorldCom loaned $430m to its CEO at a very low interest rate. I'd argue that that wouldn't be allowed in the UK (the standard restriction is relocation loans or £5,000 unless you're a bank and offer loans to them on commercial terms - it's one of those things you normally look up if it arises, and it hasn't for me yet so the details may be hazy). In any case, there's got to be pretty heavy disclosure of this sort of thing. If shareholders knew of this and had a chance to get out, then if the loan goes unperforming later (at 2.15% it's pretty much unperforming from day one), then that's their look-out. It's amazing a board agreed to the loan. But provided the rules were followed (and you've got to think the SEC would have gotten involved pretty quickly otherwise), then it's a "commercial" misjudgement. The purpose of the loan was to keep the "Great Leader" who could generate the future profitability of the company. A very poor judgement, but one that shareholders would have been informed of.
The (insanely complex) annual report for 2001 gives on page 73 a pretty full accounting of what went on, including the deposit of $198m as guarantees etc. As the title of section details, it's disclosed under the "related parties" rules, which require that transactions must be disclosed if they are with people who might have an ability to influence the company to act in their interests rather than its own. The UK version of the rules gets very arcane after a while, but basically directors, their families, their companies and their business partners are all "related parties". The reasons for the disclosures is so that shareholders can make their own judgements about whether to bail, replace directors, etc. If they don't, that's at least implicit consent to what's happening.
Anyway, the more interesting topic (for me) is Steven's dismissal of the notion of "goodwill", and, in particular, the $50bn of it on the WorldCom balance sheet (at 31/12/01, they also had various other intangibles to give a total of $58bn, with $7bn of amortisation).
As Steven puts it, ""good will" represents the amount that the company overpaid for acquisitions. For reasons which are complicated and a bit mysterious, it's considered an "asset" on the corporate spreadsheet.". The reasons are slightly complex, but they're not that mysterious.
Goodwill is, in essence, the value of a company over and above (or under and below) what's included on the balance sheet. For example, if you drew up a balance sheet for the US federal government, it'd have huge pension liabilities buried off balance sheet. These might even vastly exceed the value of its assets less its on balance sheet assets. The liabilities excluded from the balance sheet would be valued in the price someone would pay to buy the US government, and reduce the price down by the estimated value of the liabilities.
On the other hand, the US as a whole, while packing some big off balance sheet liabilities (mostly to its future self, but let's ignore that), also has some huge stock-piles of assets with no value on the balance sheet. The ingenuity of its people, for example (it also has non-valued impairments such as its reputation in some of the less savoury areas of the globe, such as Brussels). If you wanted to buy the US lock, stock and barrel, you'd probably have to pay rather more than the value of the houses, yachts and sports franchises that you'd get. The seller would be offering you a super-power as a going concern, and you'd have access to the resourcefulness of the people etc. You’d pay more than the face value of the assets to get your hands on all that, or at least you would if the seller had any smarts.
Goodwill makes an appearance on a company’s balance sheet as an attempt to reflect the value of assets in a way that gives a “true and fair” view of the company (see Auditing 101 and 102 for an explanation of “true and fair”).
Bear in mind that what we’re going to mostly talk about are consolidated groups. To reflect economic reality, if one company owns another, and therefore can direct its activities as though it was just a branch of one big company, then we consolidate the two, adding together their assets, liabilities and profits to produce one big company whose results are reported to the public in addition to the results of the individual companies. There are lots of reasons for doing this, but the main one is that there shouldn’t be a difference between a 100% owned subsidiary and a division of a company in how you view the two as an owner, except that a group of companies has a few legal advantages.
With that in mind, there are a few ways you could account for buying 100% of a company (we’ll keep things simple and look at just the wrong and “right” ways). Let’s assume that the buying company has $15m, a factory listed at $10m and debts of $5m – net assets of $20m. The company they’re buying has no cash, a factory listed at $10m and debts of $5m – net assets of $5m.. The buying company pays all $10m for the bought company because of the access to customers, quality of the employees, brand name, etc of the bought firm are worth $5m to it over and above the value of the assets of the business.
You could just add everything they list themselves as owning to the list of everything that you own after paying for the company. Your new group has $5m left in cash (the other $10m going to the owners of the purchased firm), $20m of factories, and $10m of debt. The net worth of the company is $25m of assets, less $10m of liabilities = $15m.
However, the original buying firm originally had net assets of $20m, not $15m. If we accounted for acquisitions this way, they’d appear to destroy immense amounts of share-holder value every time. Immediately after an acquisition, a company will look like its doing terribly, and the CEO will probably be replaced. Their replacement inherits a company with assets that people would have paid a lot more for than their valuation, and can take advantage of this by selling them off or running the business at an artificially inflated profitability.
This is undesirable. Treating the acquisition in this way means that all of the costs of the purchase are incurred in the accounts in the year of the purchase, but the benefits accrue over many years. This doesn't give a true and fair impression of the company's performance.
The accepted way of accounting for acquisitions is to identify the “fair value” for the assets purchased (perhaps the factory would sell for $15m or only $5m on the open market), and then the difference between the fair value and price paid is the “goodwill arising on acquisition”. You then make a judgement of how that goodwill will be used up, and write it off to the P&L over that length of time.
So, in our example, if the bought factory really was worth $10m, then the group accounts would read: cash $5m, factories $20m, goodwill $5m, debts $10m – net assets $20m. That $20m is, of course, the value of the buying company before all this began, which is right as you wouldn’t deliberately swap $10m in cash for something worth less than $10m. Over the next 10 years, say, the $5m is written off, slowly reducing each year and hopefully being replaced by real assets earnt because of the “intangibles” of the company.
[complex part –
If it’s judged that the benefits of buying the company as a going concern will last for 20 years (the standard time to amortise goodwill over), then each year 5% of $5m will be written off. If the decision to buy the company was the correct one, and the price was right, then the extra profits from buying a going concern will be $100,000 a year, which will be precisely cancelled out by the write-off of goodwill, leaving everything priced “right”. ]
So, that’s goodwill and why it shows up – it exists to spread the costs and benefits of purchases of companies over the length of time the buyer will enjoy those benefits, giving a more realistic picture of the management and progress of a business.
[A further wrinkle – there are lots of ways you can deal with goodwill once you’ve got it. The main way is to identify a number of years the advantage is likely to last and depreciate over a straight-line for that length of time. It’s also possible not to amortise goodwill by assuming that it’ll last forever. If you do that, you need to conduct impairment reviews every year to make sure that its not been damaged in some way (e.g. a brand discovered to use sweat-shop labour). WorldCom shifted on the first of January 2002 to treating goodwill as having an unlimited useful economic life per a new accounting rule in the US.
They previously used a 5 to 40 year lifespan for goodwill. That would make for a $2.5 - 5bn charge a year on $45bn of goodwill. That’s a saving to their profits, and a pretty big one. The trade-off is a need to do impairment reviews. The effect of the impairment review, likely to be completed in the second quarter of 2002, will be a write-off of $15-20bn, according to their SEC filing. That’s not a very smart shift in accounting policy, IMHO….]
This is basically because current accounting says that you report a "smoothed" version of your pension fund's figures, based on actuarial estimates. Alter those estimates, and you alter the reported performance of the pension fund. Up to a point this makes sense - the position of the pension fund is a long-term concern, and a loss in any one year doesn't affect things in the long-term.
However, this can arguably be misleading to investors:
"A study by Milliman USA, a benefits consulting firm, found that in 2001 the reported results of 50 large companies included $54.4 billion of profits from pension fund investments. In fact, the pension funds lost $35.8 billion from investments last year."
The New York Times suggests new accounting rules to improve disclosure. In the UK we just got them: they're called FRS17 and they're very unpopular as in a time of poor stock performance the pension fund takes a hit and companies look bad. The figures aren't included in the balance sheet and P&L as yet, however, though if more contributions are needed these will have a P&L impact. There's a lot of sense behind the rule, but it would be a tough sell.
Why have Saudi perverts moved on to fresher climes? Weren't the actual google results I'd found of nude Saudi women good enough for them? Did they need to actually find a site with more graphic descriptions or pictures? Won't google do?
I'm really rather upset about this - those were hits I'd earnt through obscure intervention in a blog meme, and a bellicose woman's approbation doesn't quite cut it as reward, darn it.
* A pedant: "A person who prefers his statements to be true" - Russell
I haven’t seen the whole video yet, but what I saw suggested that Mr Mathers is reaching for a new (a first?) level of artistic merit. The section I saw was of OBL in his cave on “ENN” all of a sudden getting up and dancing in what’s best described as a techno-Morris-dance. And the thought that immediately came to me was “Chaplin, the Great Dictator”.
Given the obsession with avoiding shame, “machismo”, etc in Middle Eastern cultures, I doubt anything could be more galling than for Chaplin to find natural successors to mock the purported “strongmen” of the region. Plus, of course, it’d drive CAIR nuts…
Yes, yes, I know that the muppet's probably not got this in mind. But if he had, it'd be rather nice. Caveat- I'm not sure what else is in the video or song, so it could be rather offensive - also, there's a case that it's distateful, as Chaplin's work would have been some years on. That aside, it amused me for the seconds I saw it
Anyway, my reason for mentioning it is an example that it has lurking the middle of an excellent tract on weaknesses of rationality and how to improve your thinking. The example’s one about income distributions, taken from an old issue of the Economist, and the only comparative item on the web today is this study of Canadian old age pensions. So I’ll quote the whole passage (spaced for the web), and those interested in the numbers will need to get hold of the 1973 edition of the Economist.
“The Economist recently made and published some calculations about the distribution of wealth in an imaginary country…Egalitaria.
These are relevant to us in three ways, First, they constitute another and even more impressive example showing how unexpected may the results revealed by still not intolerably difficult calculations.
Second, they underline the curiously neglected importance of the fact that people progress through life cycles from infancy to old age; and that we can scarcely expect, in either sense of “expect” [i.e. “expect” in the sense that X will happen or that X should happen], to be in the same financial situation at every stage in our particular cycle.
Third, they spell out some of the unnoticed implications of one set of egalitarian ideals.
They thus provide those who nourish such ideals with a very necessary frame of reference, enabling them to assess more accurately how far and from where the actual situation falls short of their own aspirations.
All Egalitarians are educated publicly up to the age of 21, with no opportunity at this age to earn enough to save. All men then work for the same wage till 65, when they retire on full pay: women work for only twenty non-childbearing years, but in those years get equal pay with the same pension rights. Inheritance is forbidden.
But all earners and all pensioners save exactly 10 per cent of their incomes, which savings are invested in state bonds yielding 10 per cent compound. This rather high rate perhaps compensates for the absolute embargo on all capital appreciation.
The roundness of the figure also simplifies the arithmetic, as do two further stipulations: that the net reproduction rate has been unity for the past 85 years; and that everyone dies on their 85th birthday.
So how much of the privately owned wealth in Egalitaria is owned by the richest 10% of the whole population?
“The answer seems to be that the wealthiest 10 per cent of Egalitarians (who by definition are all the men aged from 68 to 84 inclusive) must now own about 74 per cent of the privately owned wealth…””
References – Flew, 1975, p.90f; The Economist 26/v/73, pp.16-18.
Some might view this as a bit sexist (surely the women should get paid during their child-rearing years?). And without the precise data used, it’s tricky to replicate the whole thing. Indeed, my numbers come out wildly different – perhaps the assumptions about savings on interest are out?
In drawing up my own version, I’ve assumed that workers and pensioners get £100 a year, and non-working women and children get £90 a year (10% less, so basic living standards are the same for everyone). People save if they receive £100 or more a year. Women enter the work-force at 45, work for 20 years, and are retired for 20 years. The spreadsheet is available on request, and may go on-line when Geocities starts up again.
There are five indicators that I’ve bothered to track – public income, income from savings, amount saved that year, total income and “opening total savings”. My failure to follow the precise rules by killing people off at the end of their 85th year rather than beginning means that the richest 10% of the population are men aged 69 to 85. The below figures are Total population vs richest 10%, in round pounds or percent
As you can see below, it doesn't yield the 74% of privately held wealth for the richest 10% the Economist got to. But 37% is an awfully high proportion for 10% of an “egalitarian” society. Something should be done….
|Total population||Richest 10%|
|Amount saved that year||£1,101||£297|
|Opening total savings||£22,109||£12,714|
|Amount saved that year||£7||£17|
|Opening total savings||£145||£748|
|Percentage of the total|
|Amount saved that year||79%||21%|
|Opening total savings||63%||37%|
For a society in which everyone gets to experience every point on the income spectrum for their sex, this is much more skewed than you'd expect the income distribution to be. It doesn't show that this is what's going on in our society. It patently isn't. However, it does show that age effects can have huge effects on the apparent income distribution. If you took an age cohort, summed their life-time income in constant dollars, and then compared, you'd get a fair view of income inequality. Of course, this would be computational murder to do looking forward, and involve huge, unsupported assumptions. However, if you try to do it across age cohorts the effect of different policies during their lives, economic growth and missed or hit recessions and booms would make everything murderously complex.
So, this isn't necessarily a lesson about the world, or a pointer towards a way to work out what the "real" income distribution of a country is. But it is an interesting illustration of how bald income figures can be very misleading about the "fairness" of a country's economy.
[Thanks to reader Roger for eventually sorting out my HTML woes - way beyond the kind of help my initial HTML coding deserved]
Some TV folks are saying some crazy stuff about contractual obligations to watch adverts. My favourite extrapolation is this:
"2. Watching MTV if you are older than 35 or Matlock reruns if you are younger than 40.
Advertisers buy ads to reach a particular demographic. If you aren't part of that demographic you are, effectively, a thief. "
My favourite, as (it appears) was Charles Johnson's, is this:
"The problem: The world media is extremely biased against Israel, choosing to yammer about massacres without evidence while subsequently ignoring the evidence that there was no massacre. People like Robert Fisk make up facts on a regular basis, while Oxford poets discuss their desires to see "Brooklyn-born Jews" shot. American newspapers ignore major pro-Israel rallies and put on the front page pro-Palestinian rallies, even if only sparsely attended.
The solution: Hulk smash puny newspaper men! Hulk smash puny editors! Hulk hate Daily Bugle! Daily Bugle mean to Hulk! Hulk SMASH!"
Wednesday, May 01, 2002
""Something is terribly wrong with the administration of justice in Saudi Arabia," said Hanny Megally, executive director of Human Rights Watch's Middle East and North Africa division. "In a fair and transparent judicial system, it should not be a mystery whether trials have taken place or if defendants have been sentenced.""
"Arlington, VA: Did Human Rights Watch send anyone to investigate the Passover bombing?
Peter Bouckaert: We do cover the suicide bombings also and consider the suicide bombings as a crime against humanity. We think it is very important to understand that suicide bombings are not carried out by individuals on a whim but are planned by networks of people with the backing of some foreign countries. We think it is important that the backing stops and the suicide bombings are condemned without reservation and that the sponsors of these bombings are brought accountable for these crimes. "
"New York, NY: Have you seen any proof of a massacre of hundreds of people as the Palestinians are claiming?
Peter Bouckaert: No, we have not found any evidence to suggest that hundreds of people were "massacred" by Israeli forces in Jenin. We have found at least 51 people were killed in the offensive including 21 civilians -- many of whom were children, women and old men. Even though some of the worst allegations about Jenin have not been proven to have occurred we do think that the abuses which did take place are extremely serious and warrant the attention of the international community. The four categories of abuse that we are most concerned about are:
1. Significant number of civilians who were killed in circumstances directly related to the forceful methods used by Israel during its offensive.
2. The massive destruction of civilian homes and sometimes indiscriminate use of helicopter fire used in the camp.
3. The use of Palestinian civilians by the Israeli army to carry out some of its most dangerous tasks in the camp.
and 4. The blanket denial of medical and humanitarian access to the camp during and after the military operation.
We think that the U.N. fact finding mission set up by the U.N. security council will play a crucial role in establishing what really happened inside the Jenin camp.
[Q]: Of course, every military wants to avoid the "collateral damage" of the death of non-combatants. But when combatants, i.e. gunmen who can not be easily identified by a uniform, fire at a military from an area where non-combatants are, what should the military being fired upon do? Should they fire back, at the combatants and non-combatants surrounding him, or let themselves be fired upon?
Peter Bouckaert: First I think it is important to understand that Palestinian militants who use civilian populations to shield themselves against attacks are violating the laws of war. At the same time, Israel has the obligation to distinguish military targets and civilian populations who cannot be targeted for attack. In a situation like the Jenin refugee camp, home to 14,000 Palestinian civilians, Israel had the obligation to ensure that the Palestinian civilians did not have to unduly suffer during the military operation. They clearly failed in that important obligation by causing the significant loss of civilian life and massive damage to civilian property. "
The rest makes interesting reading too. The problem is that HRW doesn't suggest what Israel should to to capture/kill/impede Palestinian terrorists who are using the civilian population of the camps as human shields. Israel should definitely try to minimise civilian casualties, but that has to be consistent with a moderate respect for the lives of its own troops. And without a suggestion of how this could be done, there's no indication of whether we really should be condemning Israel.
Especially to be noted is that the HRW spokesman mentions that there were booby-trapped houses and a bomb-factory that they noticed, but says that this doesn't justifying Israel "destroying" 140 houses and severely damaging many others. But if this is the only way to operate safely because of booby-trapping, then the choice is between Israel not acting at all, or of acting in a way HRW finds unacceptable. But that choice is forced by those sheltering in and operating from the camps.
So, "Kadoura Mousa Kadoura, director of Yasser Arafat's Fatah movement for the northern West Bank", says that 56 Palestinians died, with no information given on the civilian-armed split. Israel says about 50 died, including 7 civilians. The Times print edition had Human Rights Watch suggesting numbers like 66 and 20 respectively.
If I were to play philosophical, I'd point out that it takes approximately the first volume of the Principia Mathematica to demonstrate that 1+1=2, and hypothesise that it would take until somewhere near one and a half volumes to explain the distinction between 7 to 20 civilian casualties (7 to 20 too many, but a rather low number considering what the toll from the Israelis taking a "safe" approach (safe for their skins) would have been) and "hundreds of dead".
You are a David Weinberger.
You are smart, savvy, interested in why people do what they do,
enjoy questioning yourself and are not balding.
Take the What Blogging Archetype Are You test at GAZM.org
Tuesday, April 30, 2002
Take the Which Star Wars Character are you mostly likely to get it on with? quiz, by ProtocolDroid.
* I don't remember the source of the quote, but it's been said that "miscegenation is the state sport of California"...
My first (partial) target is this column by Desmond Tutu, pointed out by Damian Penny. I'll aim to follow it with some more genuinely "philosophical" stuff later on.
"I believe Israel has a right to secure borders. What is not so understandable, not justified, is what it did to another people to guarantee its existence."
This approximates to the classic argumentative form "A. However, not A". If Israel has a right to secure borders, but not to act to defend its very existence, then it has no right to secure borders.
Let's be under no illusions on this point: "secure borders" is a higher goal than mere "existence". "Secure borders", as a goal, approximates to "peace". "Existence" is merely a limit to how bad things can get.
Tutu offers reasons why he thinks that Israel's actions count against its goal of "secure borders"/"peace". The attitudes of the Palestinian people are vital to whether SB/P can be achieved.
Tutu also makes some moral claims about the policies Israel has adopted (claims I won't deal with here - they're nothing new).
What he doesn't do is provide an explanation of how Israel's sought "guarentee" of its "existence" is inexplicable (or unjustifiable, though his moral claims may suggest that it is ultimately misguided), though the point of his argument is that he is against the actions it has taken in pursuit of such a guarentee.
He doesn't argue that Israel is buying too strong a guarentee at too high a price. He doesn't suggest that the quality of the guarentee of existence sought undermines the chances of SB/P. He doesn't engage in the sort of sophisticated analysis (in the copy of the text I read) that would enable him to claim that, for example, Israel might somehow obtain "secure borders"/"peace" at the price of marginally reducing its security by giving up the settlements (as Pollyanna-ish as that view seems these days).
Tutu does define the objective as a "true peace": "Israel will never get true security and safety through oppressing another people. A true peace can ultimately be built only on justice." However, he doesn't acknowledge that right now Israel appears prepared to settle for a level of security less than "true security": the knowledge that the risk of being driven into the sea has been minimised.
If the risks to get from where they are to a "true peace...built on justice" are too large, then they'd be mad to take them. In the absence of a "guarentee of existence", who would trust, to be frank, the promises of any country in the Arab world right now (a more prudent student of history would refuse to trust any other country without at least a warranty...).
Hence, when he says "The military action of recent days...will not provide the security and peace Israelis want; it will only intensify the hatred.", he has failed to distinguish between what Israel wants, and what Israel needs *.
His prescription for the situation doesn't set out the two things Israel needs to hear: how it gets a "guarentee of its existence" between ceasing on its current course and arriving at peace, and why on earth it should think that this "possibility" is anything other than a logical possibility:
"We should put out a clarion call to the government of the people of Israel, to the Palestinian people and say: peace is possible, peace based on justice is possible. We will do all we can to assist you to achieve this peace, because it is God's dream, and you will be able to live amicably together as sisters and brothers."
A lot of people have suggested saying nice things to solve the Arab-Israeli conflict. Few have suggested how those nice words will help. Now there's one more person to do so (though at least Tutu condemned suicide bombers and terrorists).
My argument in stream-lined form:
Israel prefers existence to secure borders.
Tutu's suggested course of action may lead to secure borders, at a significant risk to its guarentee of existence.
Israel's current course of action may provide a very strong guarentee of existence, at a significant risk to its chances of secure borders.
Therefore Israel is at least minimally rational to act as its doing, whereas Tutu's argument has little persuasive force as it doesn't address Israel's concerns.
[added claim] Tutu's argument is therefore reduced to "since Israel cannot obtain a guarentee of its existence at an acceptable cost (even if the cost is forced on it by those it needs the guarentee against), then it should risk whatever's necessary on the chance of obtaining secure borders".
Clearly, if your country was less than sixty years old and yet had been attacked from every neighbouring country more than once, and hence you preferred guarentees of existence to chances of peace, you'd find Tutu's position less than persuasive. In a sense, his position arises from the best being the enemy of the good: since if Israel could achieve the optimal outcome, its minimum aims would be met. But Israel has been placed in a position where the local optima of guarenteed survival is all they feel they can aim for.
PS: I'm not sure what the original context of this sentence is, but it suggests that the years may be taking their toll on Desmond: "I am not even anti-white, despite the madness of that group.". It doesn't make any sense in the location that the Guardian places it in, but it sounds, well, a little racist to me...
* I'm amazed I got this far without mentioning the obvious reason why Israelis might be more concerned than members of any country other than Rwanda or Armenia (perhaps) about having a "guarentee of existence".