One of the reasons Sam Gustin is underwhelmed
by the Fake Steve Jobs book is that its author doesn’t take options backdating
seriously enough. It’s "nothing short of an epidemic", he says, and
"there is something slightly unfunny about basing a satire on the single
largest corporate scandal of the past year".
Well, I’m not sure about that. I’d say the single largest corporate scandal
of the past year was the way in which mortgage originators, having made millions
of dollars in the housing boom by selling inappropriate mortgages to people
who couldn’t afford them and then flipping the paper to Wall Street at a profit,
quickly declared themselves bankrupt or out of business when the mortgage market
turned, thereby holding safely on to all of their earlier ill-gotten gains.
That corporate scandal, as we are now seeing, is having enormous real-world
repercussions in the form of bankruptcies, foreclosures, and even a possible
recession. Options backdating? Not so much.
But Gustin is on the lookout for victims of options backdating all the same.
He’s not sure who they are, but he’s sure they must be out there somewhere:
It’s easy to chalk the story up to yet another esoteric corporate-accounting
scandal, but in the zero-sum game of stock market investing, for every ill-begotten
dollar obtained through illegal backdating, there is a loser on the other
side of the deal.
Stock-market investing is not a zero-sum game: in fact, it’s probably
the best example the world has ever seen of a positive-sum game. Stock prices
generally go up over time, for all investors: if I buy Google shares at $200
and they go to $300, I might have made $100 per share, but there isn’t someone
else on the other side of the trade who is sitting on a $100 loss.
Derivatives are a bit different: traded options are a zero-sum game.
But options issued by companies are not. If a company sells its stock for $200
when the market price is $300, that company is not losing money. And if its
shareholders know the details of the company’s option scheme, and they know
that the company is going to have to sell a certain number of shares at $200
after a certain date, then they’re not losing money either: all the dilution
should be priced in to the stock price.
If there is anybody losing dollars from options backdating, it’s Uncle Sam,
and even that’s debatable. As David Harper said on an earlier
post about options backdating, "I don’t understand how the IRS ever
lost here; the gains are taxed one way or another."
Options backdating is bad because it involves senior management lying to shareholders.
It’s illegal, and it’s deceptive. But it causes very little in the way of financial
harm.