Tuesday, September 16, 2008

Cuban perspective

Mark Cuban, prospective Cubs owner, former Dancing With The Stars outcast and Dallas Mavericks owner posted his take on the financial sector downturn yesterday. We all know greed is the catalyst for yesterday, but Cuban, a billionaire himself, has an interesting take on how men reach a certain level in the investments sector, they have nothing to do but make calls that risk the money of others' to fatten their own pockets.

Mark Cuban's blog

AIG - Lehman - Merrill Lynch: 3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months.

Can anyone say 'financial engineering?' Think all 3 companies could have used that cash they spent trying to pump up their stock prices? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.

Again, there is no risk to CEOs for playing these financial engineering games. All it does it pump up the stock. They sell into the rise and put money in the bank.

One last point, has the irony of 3 of largest companies in the country who make their money giving financial and insurance advice to companies and individuals, are facing ruin from the advice they gave themselves ? If this isnt a lesson to every individual who is taking advice from an investment firm, i dont know what is.

The list of CEOs who have walked away with huge severance packages is a long one. The problem however isnt how much they got paid.

There is zero downside to a CEO for taking chances beyond the embarassment of getting fired. Would you let someone fire and embarass you for a check for $20mm dollars ? So would CEOs.

He also talks about the need for more regulation/oversight. Sounds like a buzz phrase doesn't it? Democrats and Republicans keep saying it over and over again. But what exactly do they mean? Who knows. They probably mean nothing because they'll say anything to get elected and once elected won't care about companies filing for bankruptcy. Here's Cuban's explanation of effects of deregulation in the markets and why it's lead to many companies, over recent years, going under:

The 2nd option would be to prevent certain types of companies from being or going public. Law Firms can;t go public. Investment firms like Goldman Sachs used to not be able to go public. They were partnerships. Partners were paid for the most part in cash. If the partnership had money to pay, it got paid. If not, not. I promise you, their tolerance for risk was far lower than it is today for Goldman because there was a direct link between the risk and reward for partners. I also guarantee you that if the business makes sense, there will be other companies that step in to handle any business that a partnership cant grow to handle.

And what about the CEOs that just screw up companies, but not to the point of federal bailouts ? You cant protect against hiring a bad CEO. It happens. You can pass a law saying that officers and board members can’t be paid in stock. Let them take their cash earnings and go on the market and buy stock or options like everyone else. Putting their own cash money on the line will create a link between the risk and the reward. They will be in the same boat as every other shareholder . It’s their money on the line.

Crazy ? Some people might say that it would make it tougher to find CEOs for big companies. Companies couldn’t pay them enough. I say thats crazy. What are those potential CEOs going to do otherwise ? If the market for CEO pay isnt high enough for them, they can go out and start their own companies and take on the risk.

As long as we pay CEOs with lottery tickets, I mean stock, that they don’t have to pay for, risk and reward will be decoupled. As long as that is the case, you can count on many a future bubble and meltdown and there is absolutely nothing anyone can do to stop them.

At least he's being honest. I get nervous when fiancial experts speak in generality and non-specifics. Then say, "Don't panic." WTF?!!!

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