In September 2005 a British retailer, WH Smith, sold all the shares and bonds in its pension fund (£870m) and “invested” the lot in swaps and equity options to make the pension fund asset more secure for its members! [I wonder if they know what a derivative is? Maybe they should read Mr Warren Buffett’s shareholders’ meeting minutes.] (Jan 28th, page 14)
The Enron chickens are coming home to roost. Mr Skilling is facing 35 charges of conspiracy, e.g. manufacturing earnings, concealing debt and selling poorly performing assets to off-balance-sheet partnerships run by Mr Fastow. Mr Fastow has accepted a ten year jail sentence under a plea bargain depending on his evidence against Mr Skilling and Mr Lay. Mr Causey has avoided a 40 year stay in prison by pleading guilty to one count against him – reduced to seven years. (Jan 28th, page 65)
False precision and reckless approximation have defined the actuarial profession’s role in the crisis that has evolved around corporate pensions. By failing to forecast the future liabilities and how assets will be required to meet them, they hastened the collapse of the defined benefit pension schemes. [Great! Another profession can take some flack for a change!] However, the accountants do not escape entirely from this attack. Accounting conventions allowed companies to post profits derived from future expected returns, allowed companies to smooth and not account for liabilities and, in the UK, allowed companies to reduce their liabilities by holding equities in the portfolio. Of course, the trustees also come in for flack permitting asset managers to invest for the short term instead of the long term (see our very own Willie Morgan who wiped out R1,2bn of assets of the Joint Municipal Pension Fund). This article contains many more accusations and suggestions, one which states that pension funds should be seen as part of the sponsoring company’s balance sheet and risk profile. [I understand that this aspect is being considered by the IASB. It will result in the final nail in the coffin for defined pension funds.] (Jan 28th, page 67)
Of the 174 auditors inspected by the regulator in the US, almost 50% have been found to be deficient. This criticism is not confined to small firms. The main compliant by the regulators was that not enough evidence was obtained to support audit opinions. The firms complained that the regulators were being too technical. [Sound familiar?] (Jan 28th, page 74)
Modigliani and Miller received the Nobel Prize for their assertion that the split between equity and different forms of debt and its dividend policy make no difference to the total value of the entity. [I have battled with this idea for the past 30 years! I fought many a student in the past who had this rule drilled into them by their lecturers.] The Economist says that this principle is not wrong but is only true in circumstances so rare that it is the exception rather than the rule and says that structure does affect the value of the firm. [Thank you, thank you, thank you! When I was in merchant banking, we used to structure companies to increase wealth.] The Economist says that this idea set back the study by economists of corporate finance for a generation. (11th, page 71)
David Shapiro (one of my old students who has risen to the top) has stuck his neck out and formed a portfolio of 27 shares which he believes will benefit from increased government spending on infrastructure, health and social welfare. For fun we will watch these shares in my CawB course later in the year and see how it performed. (3rd, page 56)
Willem Punt of the Ethics Institute of SA sets out five steps for creating a culture of ethics:
Get top managements buy-in.
Conduct an ethical audit.
Develop a code of ethics.
Educate and train.
Ingrain ethics into the entity and the staff.
[I often wonder if this all helps. Surely, choosing the right staff to work for you is all important? Unethical people do not change their stripes.] (9th, page 50)
Based on a survey carried out by E&Y, one of the most common internal control problems reported by companies as a result of SOX was the poor application of GAAP. [Why? Trying to deceive, ignorance or both?] (16th page 47)
Risk management should become endemic in an organisation – part of its very culture without erring on the side of excessive caution. (16th, page 42)
A few years back, the Economist had a great-reading cover story on how the price of oil was set to crash to $5 a barrel. [I remember Joel Stern predicting that the gold price would go to $2 000 an ounce about then years ago!] (16th, page 60)
When Kevin Mitnick was sent to jail for computer hacking, he spent eight months in solitary confinement because one of the guards convinced the authorities that he could launch nuclear missiles by whistling into a telephone handset! (16th, page 64)
Stephen Mulholland always has something relevant to say in his articles. I never miss any of them. This article deals with those who want to be the boss but do not want to take responsibility. [If you want authority accept responsibility.] He quotes Ronald Reagan who said that you can achieve practically anything if you don’t mind who gets the credit. Winston Churchill never hesitated to take personal blame for anything that went wrong whereas Hitler constantly blamed others when the war went against him. Leaders encourage constructive dissent. (23rd, page 26)
Zimbabwe’s inflation for the year to January accelerated from 585,5% to 613,2%. [Don’t you just love the 0,2%!] (26th, page 38)
Here is an interesting comparison of PE ratios and dividend yields: