BerkAdvisory

High and Low Finance - Inside G.E., a Little Bit of Enron

Seeking Alpha reports on Floyd Norris' article about General Electric's recent settlement with the SEC over accounting issues.  It introduces it's breaking news article this way:

With Jack Welch at the helm, General Electric (GE) used to be a shining star of business. What's inside the company now, in the wake of its $50M SEC settlement over charges of book-cooking? Floyd Norris says maybe a little bit of Enron.

High and Low Finance - Inside G.E., a Little Bit of Enron - NYTimes.com.

This seems to suggest that GE was a paragon of virtue when Jack Welch ran the joint.  It just ain't so.  Jack Welch invented the idea that "managing for value" was "making your EPS numbers".  Complicit Wall Street analysts lauded the company for its consistency in always making the numbers - keeping your promises I guess Jack Welch would say.

The problem?  The real world does not and did not work out the way GE's EPS numbers smoothly progressed.  There is so much leeway in GAAP accounting that the bigger and more complex a conglomerate is - the easier it is to "make the numbers".  Whether it's hiding away excess performance in good times or tweaking valuation reserves in the finance subsidiaries, there seems to be endless ways to make the numbers - until there isn't.

Norris says his story reminds him of Enron.  And if you are talking about companies that manipulate their EPS by using off-balance sheet financing, advance selling agreements, big bath accounting or just plain uneconomic investment using loads of debt, the list is long.  Lets take a look at Enron's "Risk Manual":

Reported earnings follow the rules and principles of accounting. The results do not always create measures consistent with underlying economics. However, corporate management’s performance is generally measured by accounting income, not underlying economics.  Risk management strategies are therefore directed at accounting rather than economic performance.

Performance is measured by "accounting" not by the economics - not by creating economic value!  And so it was with GE and 90% of the companies in the Russell 3000. 

As the two graphs above suggest, companies can make EPS or accounting income look good while EVA is going straight down.  Why don't all investors and analysts use EVA?  Great question.

BERK

Tax Burden of Top 1% Now Exceeds That of Bottom 95% - or You Can't Eat Percentages!

The government pays for stuff with dollars.  It takes dollars from citizens through the income tax and transfers those dollars (after it goes through the government filter where billions are sucked out to pay for the bureaucrats, lobbyists and politicians plus their staffers).

You can't eat percentages.  Percentages are ratios. Tax rates are ratios and percentages.  Here's the news: When you raise tax rates - percentages- you do not always get more to transfer to those that do not have to create, risk, employ to earn, whatever dollars those ratios end up representing.

Here me now and here me LOUD!  Raising tax rates or lowering tax rates does not make a tax system more or less fair - more or less progressive.  Tax systems are for efficiently collecting revenue for the government.  Tax rate changes have perverse unintended consequences.

So why do I hear about tax cuts for the rich and how George Bush's tax cuts for the rich created the deficit that Obama inherited - Bull S*?$t. 

There were tax rate cuts but there were not any tax cuts.  Tax rate cuts do not mean that the wealthy pay less taxes. They only pay less if everything stays the same - and nothing ever stays the same.

Since the middle of 1987 after the Reagan "tax rate cuts for the rich"  - the rich have been paying - or sacrificing ever since.  The Tax Foundation - Tax Burden of Top 1% Now Exceeds That of Bottom 95%.

Nobody but nobody should be able to ever say again that the rich got the benefits while the poor suffered. On the contrary - the rich in total paid a greater share of total dollars to fund the other 95% of DOLLARS collected every year since 1987....

...the IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.

Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

1.4 million people pay more and more dollars - screw tax rates - than 134 million people - Is that fair?  Mind you I am not complaining - I am not in the top 1% but I know that I will only have a chance to become one of the 1% if there are incentives for everyone to win!  Soaking the rich, the fat, the skinny - is immoral, unfair and un-American.  AND IT DOES NOT WORK!

 HT:CARPE DIEM

I'm Berk and I am not taking it anymore!