We live in extraordinary economic times here in the U.S. and this success could ignite a whole new cycle of economic prosperity. We must first, however, take a hard look at what is occurring at Microsoft. Microsoft is a great company with terrific employees. Sadly, many of these brilliant people have been blinded by the stock price and unable to see that Microsoft is also the key architect of the greatest financial pyramid scheme this century. It is not uncommon for participants in pyramid schemes to lose their emotional bearings. My close friends who work at Microsoft are particularly upset over my work and it is possible that even Bill Gates and Steve Ballmer do not realize the implications of their financial practices.
An Overview of Financial Pyramid at Microsoft
The fundamental problem is that Microsoft is incurring massive losses and only by accounting illusions are they able to show a profit. Specifically, Microsoft is granting excessive amounts of stock options that are allowing the company to understate its costs. You might ask yourself, what would happen to Microsoft's stock price if the public suddenly realized that they lost $10 billion in 1999 rather than earning the reported $7.8 billion? If 80 percent of its stock value or roughly $400 billion is the result of a pyramid scheme, one might also ask what kind of effect this could have on the retirement system. It is also important to note that this is a relatively new situation that did not occur before 1995. Microsoft has always been a highly valued stock and that might have been justified prior to 1995.
This situation is not about stock valuation, product quality or whether or not Microsoft has monopoly power in its markets. Nor is it part of a pro or anti-Microsoft movement. This situation is instead a shining example of financial fraud and corruption enabled by bad government policy. If not quickly and aggressively addressed, we will all be losers as credibility in our financial markets is destroyed.
The Financial Pyramid At Microsoft Is Now Accelerating
One need only examine the State Teachers Retirement System of California to see the impact. This one system now owns more than 16 million Microsoft shares with a current market value of $1.4 billion due to its commitment of indexing based upon the S&P 500. If 80 percent of this value is the result of a pyramid scheme, based upon manipulating a breakdown in the accounting rules, that would imply a future loss of $1.1 billion to the teachers of California. It is unfortunate that teachers will bear this loss when they are already struggling to keep pace with inflation. To confirm this amount one need only contact James Wollman, CEO of the California State Teachers Retirement System. This is just one public retirement plan in one state.
Right-click to download a Simplified Spreadsheet (Excel 95 format), with supporting data and charts. If you download using Netscape and can't open the spreadsheet, send e-mail to firstname.lastname@example.org requesting it as a file attachment.
In July I met SEC Chairman Arthur Levitt here in Portland, Oregon, and provided him a complete summary of findings. This summary has also been provided to Robert Parry and Alan Greenspan of the Federal Reserve, Treasury Secretary Summers, Secretary of Labor Alexis Herman and both Joel Klein and Phil Malone of the Department of Justice. In addition, the largest public pension funds, their investment advisors, state budget officers and representatives from leading bond rating agencies, including Duff and Phelps, now have the report. These pension managers were specifically asked to remove Microsoft from their indexed portfolios based upon the S&P 500 as a step toward demonstrating their fiduciary responsibility to plan participants.
Two Historical Perspectives - Samuel Insull and Charles Keating
Two other situations this century involving similar techniques include those of Charles Keating, who first destabilized and then later plundered the Savings and Loan system and Samuel Insull who was President of Edison Electric, the great technology company of the 1920's. Insull was a national hero in the 20's yet came to be recognized as a symbol for what caused the great depression in the 1930's. Sadly, his good intentions and significant charitable and civic causes did not include ensuring the financial integrity of his company. He died of a heart attack in 1938, penniless, in a Paris subway station, exhausted from years of fighting lawsuits for fraud. Interestingly, he was never convicted.
Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. Today many now fear a similar stock market crash but in reality the economy is very strong and, if we can reform this pyramid at Microsoft, the overall market should not need to correct more than 20 percent. What is most likely to occur is a structural shift within the S&P 500, not unlike what occurred with HMO's, in which Microsoft and a small group of large tech stocks grossly misreporting their earnings decline while other companies in the index increase. Another more recent example might be Waste Management, another monopoly that used pyramid like accounting techniques only to be forced to restate several years of earnings. Key to both these situations are estimating techniques that grossly underreported debt pyramids and operating costs.
Most unusual about Microsoft's situation is that they pride themselves in being a leader in setting "conservative" accounting standards. It is also noteworthy that the previous CFO, Mike Brown, was aggressive in setting accounting standards and also simultaneously Chairman of the Board of the Nasdaq stock exchange while CFO at Microsoft. It is hard to imagine a more direct conflict of interest given that Microsoft is the largest listing on the exchange.
Mr. Brown also hired his former boss from Deloitte and Touche to be internal auditor at Microsoft. When this respected former partner of Deloitte told Mike that what they were doing was illegal and constituted securities fraud he was given the option to resign or be fired, according to an ABC News Story. He later was awarded $4 million under the Federal Whistleblowers Act.
The Original Purpose of The Study
In the summer of 1998 the rapid movement of global capital flows began to have a crushing effect on developing countries. While everyone was analyzing the speed at which capital moved, no one was trying to answer the basic question, where did it end up? A closer look revealed that a primary contributor to global economic instability was an elaborate financial pyramid scheme being utilized by the Microsoft Corporation, which others are now rapidly seeking to emulate. Frankly, I was astonished myself and contacted Steve Ballmer's assistant several times along with other Microsoft representatives, including the editor of their Slate magazine, before publishing the results of my study in a press release on PR Newswire. The Independent, a major UK Newspaper, based their story on this study and shocked many readers. The study also included projecting that Microsoft would begin issuing "watered stock" in an effort to disguise and diffuse the pyramid.
A Breakthrough With The Independent Editorial
In October of 1998 a prominent British publication, the Independent newspaper, published a lead editorial, citing my study and concurring that Microsoft had erected a financial pyramid scheme in which employees were prepaying their own wages and the retirement system was being plundered. I can still remember the editor's voice who interviewed me and his startled realization that the study was credible. The study results and follow-up work were then sent to The Economist and several leading business publications here in the US, more than a dozen times, in addition to regularly calling once a month and leaving detailed messages. Another breakthrough could have occurred when CNBC scheduled a panel discussion on World Business Review with Caspar Weinberger yet the show was canceled due to the controversial nature of the content.
The Economist Story Legitimizes My Study
Bill Gates has publicly said that this is his favorite publication on finance and economics. It is also generally believed to be the leading such publication in the world. In an 8/7/99 cover story, The Economist noted that a proper accounting at Microsoft would result in a loss of $18 billion for 1998 rather than the reported earnings of $4.5 billion. If you are not an accountant, don't waste the time pretending you are, trust The Economist, the earnings are not real. Don't let yourself be intimidated or deceived by financial analysts, TV commentators, bullies on Internet forums or Microsoft's elaborate public relations campaign. Bill Gates trusts The Economist and you should too. Abbey Joseph Cohen and Rick Sherlund of Goldman Sachs have been sent this material numerous times over a 9 month period and neither has publicly divulged this situation. A link to the Economist article in available in the featured press releases at www.billparish.com. Do note, however, that the reference to Microsoft occurs well into the article.
Microsoft's Response to The Study
Microsoft's perspective is best reflected by Bob Herbold, Chief Operating Officer, to whom the CFO reports. Bob very sincerely replied, "Bill, everyone is doing it." My response was that Microsoft is a leader and that others are now seeking to emulate these fraudulent practices they have legitimized. Naturally Bob was not pleased by this perspective and that was our final conversation. A second informal response came when Microsoft asked PR Newswire to stop issuing my press releases.
Microsoft is PR Newswire's largest client. Pam Edstrom, director of Microsoft's public relations, Steven Holley, lead outside counsel with Sullivan and Cromwell and Bob Herbold are regularly called prior to releasing any new information on the study yet they no longer respond to inquiries, which is disappointing. Although confident of the findings, it would be nice if they could issue a formal statement or response. A key legal point here is that they were all informed regularly over a several month period that their actions constituted fraud. This is important because in order to prove fraud you must demonstrate a willful intent to misrepresent the financial results.
A critical mistake of Microsoft's was not paying adequate attention to the SAS auditing standards which have very strict disclosure requirements. Most investors have never heard of the Statement of Auditing Standards but it is adherence to these standards which has resulted in Certified Public Accountants being granted a monopoly over the ability to express an opinion on audited financial statements. Far too much emphasis has been placed on GAAP which are Generally Accepted Accounting Principles. Statements must indeed be prepared according to GAAP yet equally important is to conform to the SAS auditing rules. By issuing an unqualified opinion with no reference to key disclosure requirements due to the materiality (size in plain English) of several key issues, Deloitte is itself clearly guilty of financial fraud. An expanded discussion of this will follow in a later section.
Financial Pyramid Building Techniques Being Used by Microsoft:
Stock option programs are an excellent benefit and many companies use them responsibly. At Microsoft, however, stock option accounting is only one of its many pyramid building techniques, what could be called a cash generating component. Additional pyramid building techniques include the following. It is important to note that the genius of the pyramid scheme is to leverage share growth from investors using a passive investment approach based upon indexing to the S&P 500. Most smaller and mid size technology firms are not in the S&P 500 and therefore are locked out of this key aspect of the pyramid from the beginning.
1) Earnings Management: The first and most important tool Microsoft uses is the manipulation of earnings to ensure analysts' expectations are met. According to an ABC News 1/22/99 article by Michael Martinez, Microsoft’s own internal auditor, a respected 30 year veteran and former partner of Deloitte and Touche, was fired in 1996 after informing management that their earnings manipulations were illegal and violations of the SEC and FASB laws. He was given the option to resign or be fired and later settled for $4 million after suing under the Federal Whistle Blowers Act.
2) Speculating on Their Own Stock: Microsoft issues a massive amount of put options. During the same quarter ended 3/31/99, Microsoft sold put contracts on their own stock for $400 million, basically betting that the stock will not decline. They need not worry because they are allowed to “cook the books.” Of Microsoft’s significant cash balance, it is also a financial fact that more than 65 percent of that cash did not originate from product sales but rather from tax benefits associated with the exercise of stock options, employees prepaying their own wages, and the sale of put contracts on its own stock. Microsoft's financial innovation is making a mockery of financial integrity, ethics, and the securities laws, just as Insull did in the 1920's.
3) Convincing Employees to Take Less Real Wages: Microsoft aggressively markets stock options to new employees in an effort to take wage expenses off the books. They also know that they can pocket the exercise price employees will be required to pay to take ownership of the stock. What also seems clear is that Microsoft is still aggressively marketing its stock option program to new recruits. To quote an email received, “I am about to begin employment at Microsoft and the stock option was the selling factor. Does your article overall state that it will be bad for me and will fail me in my retirement planning?” Is Microsoft fulfilling its disclosure obligations to its own employees, especially those that have put their entire 401K balance in Microsoft stock? This explains how 22 percent of Microsoft's massive cash balance has actually come from its own employees in the form of them prepaying their own wages through stock option exercise prices.
4) Publicly touting the stock: In a recent earnings release, CFO Greg Maffei jokingly cited 10 reasons why Microsoft is a $1 trillion company. A common strategy here is to have top executives issue conflicting statements, one talking up the stock and the other talking it down and then within a few days financial analysts all come out with buy recommendations on the stock due to a small decline. They are making a mockery of financial integrity, ethics, and the securities laws.
5) Controlling the media. After issuing several press releases on PR Newswire, Microsoft told the service to stop issuing my press releases. Microsoft is PR Newswire's largest client. PR Newswire is owned by Miller Freeman of the UK, a large media company that publishes many computer related publications including Information Week in addition to Microsoft focused journals such as the Windows System Developer. Miller Freeman does indeed function as if it were a department of Microsoft itself.
6) Stock Option Accounting: It is important to note that any discussion of stock option accounting must address two completely different and independent situations. The first is to analyze the impact of options exercised and already retired and the second is to analyze the remaining options debt outstanding. This study focused on both whereas most media coverage only focuses on the remaining options debt outstanding.
Options Exercised and Retired: When stock options are exercised, the options are retired as the employee takes ownership of the stock. The value of these “retired” options should not be a subject of debate. Upon exercise, the options are valued at the market price of the stock less the exercise price and the employee pays W-2 taxes on this gain, even if the stock is not sold. The company then takes a tax deduction for wage expense for the same amount. What is surprising is that not a dime of this expense is charged to earnings at Microsoft, which they could voluntarily do. This amount alone for 1999 should exceed $9 billion even though net income is only $7.8 billion.
Remaining Options Debt Outstanding: The remaining unexercised stock option liability is a completely separate issue and a debt just as real as the current stock quote, especially if half of the options are currently vested and exercisable. We all know that stocks can be over and under valued yet the market gives us a price on any given day and that is the price. The Black Scholes and related footnote disclosure is a great mathematical model yet has become nothing but a Trojan Horse for plundering the retirement system. What the Treasury Department and Federal Reserve might concern itself with is that this debt, $60 billion at Microsoft, has no interest cost that hits the income statement and increases $800 million with each $1 increase in the stock price. Simply put, Microsoft is somewhat immune to Federal Reserve interest rate hikes, which explains why the stock is increasing as the Fed raises rates and continues creating a Long Term Capital like debt pyramid.
7) Purchasing future sales via equity investments: Another earnings management tool being used by Microsoft is the purchase of future sales via equity investments in other companies. Here is my understanding of how that works. I could be wrong on this and therefore the best thing to do would be confirm these claims with their CFO, Greg Maffei.
First of all, Microsoft makes a $250 million investment in WebMD for an 11 percent equity stake and part of the deal is that WebMD commits to $100 million of advertising on MSN network. At the same time, Microsoft agrees to subsidize an equal amount in medical prescriptions for people using WebMD. Of course there are a few other interesting aspects of this transaction which won't be addresed in this report. You have basically bartered a purely paper transaction and current accounting rules will allow you to recognize the entire $100 million as revenues for MSN network, even though you are just “trading checks.” That is, you are trading subscription subsidies for advertising revenues. Advertising revenues are indeed the political currency of the 1990’s. Keating spent his dollars buying influence in Washington, D.C. Microsoft is buying influence on Madison Avenue.
8) Managing the financial analyst community. Another excellent earnings management technique is the management of the analyst community. This can be done by directing investment banking business associated with acquisitions to a variety of firms based upon their opinion of the stock. Microsoft purchased more than 33 companies in 1998. A good example here might be Rick Sherlund of Goldman Sachs, often noted as the guy who can move tech stocks. One might ask why Mr. Sherlund refers to Microsoft as a company with no debt when they clearly have a contractual obligation, just as real as today’s stock price, of $60 billion to their employees. Fidelity Investments, one of Microsoft’s largest shareholders and also provider of their 401K retirement plan, has been silent on this issue.
9) Trying to Discredit Those Seeking to Expose the Scheme: Microsoft fired its internal auditor, regularly bullies reporters and has told numerous publications that I am an extremist. This might explain why reporters are afraid to print the facts, for instance that Microsoft took a $9 billion tax deduction for wages in 1999 and didn't charge a dime of this amount against earnings.
10) Money Laundering: Microsoft has been aggressively investing cash pilfered from the retirement system in a variety of new businesses, many outside the U.S., including cable investments in Brazil and England. We read about the Russian government robbing its citizens of $10 billion in IMF loans. What about the impact of the retirement system being pilfered and being set up for a Savings and Loan like debacle?
11) Corruption of Higher Education: Microsoft is making massive cash infusions to leading Universities and impairing the system's independence. In the last year alone Microsoft has given MIT more than $50 million in grants, focusing on key growth areas including storage services and software to provide course instruction over the Internet. In the past we were able to rely on these Universities to stimulate key debates yet now they are silent on this pyramid issue. Two Universities that should be ashamed of themselves for not only not disclosing this situation yet also fostering its development are Harvard and Stanford. They are contributing greatly to the complete corruption of our financial markets.
12) Manipulating Investors Who Use a Passive Approach Relying on Indexes Such as the S&P 500. In an effort to reduce investment fees and provide solid diversification, investment based upon mirroring the S&P 500 has become the most significant component of large public pension plans. Since Microsoft represents more than 4 percent of the S&P 500, Microsoft knows that four cents of every dollar going to stock purchases will go toward the purchase of Microsoft stock. Again, this situation has developed because Microsoft has inflated its earnings to such an extent that it looks much more profitable than it really is, fueling interest in the stock and resulting in a market value of close to half a trillion dollars.
It is admirable to stick to an investment strategy using passive indexes based upon the S&P 500, yet this is not about investment strategy but rather fraud management. For this reason a letter was sent to the top 100 teachers unions in the country, encouraging them to effect a policy change designed to combat this fraud and have Microsoft removed from their portfolios. California State Controller Kathleen Connell, who sits on the board of the California Teachers Pension, has also been sent a summary of findings in the hope that she will help address this issue. Another good question might be, why haven't the State Teachers fund advisors initiated this effort on their own, that is, to modify the index in order to protect participants and meet their fiduciary responsibility?
Is it not also ironic that Judge Penfield Jackson is trying to determine whether or not Microsoft has monopoly power and meanwhile his pension is most likely being plundered by Microsoft in the most significant financial fraud this century? Federal Pensions rely heavily on an S&P 500 index fund.
In October the Dow Jones Corporation decided to add Microsoft to the Dow Index. On a market cap basis, Microsoft will now account for more than 15 percent of the entire index given that its market capitalization and stock option debt exceed $540 billion.
Microsoft now also has 5.2 billion shares outstanding, not including an additional 800 million shares committed and outstanding to employees for stock options. This means that a $1 change in the stock price creates a change in their market cap of $6 billion. Gross annual sales are only $20 billion, an amount on which significant losses occurred.
Sadly, the Dow Jones Corporation, parent to Barons and the Wall Street Journal, has also unknowingly become a key contributor to this massive financial fraud at Microsoft. In the last 6 months the Dow Jones Corporation, which earns licensing fees from these indexes, has initiated two new indexes which will allow Microsoft to accelerate its plundering of the retirement system. These are the Global Titan Index and secondly the revised Dow Index. Both could result in significant new demand for Microsoft stock and leave investors holding inflated paper just as Savings and Loan investors were left holding junk bonds.
Given that Microsoft may be the largest advertiser to the Wall Street Journal, perhaps they should make an outright offer to purchase the Dow Jones Corporation. This would provide more clarity regarding constituencies and the Wall Street Journal could be added to the MSN lineup. Rather than disclose this situation, the Wall Street Journal has instead focused on trivial items regarding Microsoft's financial practices, most recently how deferred revenue is recognized. It is astonishing that the Wall Street Journal refuses to report this story.
A new risk to the market effective November 1, 1999 could be a global panic triggered by volatility not typical of the Dow. Parish & Company believes that such a panic is now unavoidable yet is also very optimistic that the broad market will recover quickly, even though Microsoft should experience a long-term decline of 50-80 percent. If such a situation does occur, it will be a true test of the Federal Reserve. Will they be able to resist lowering rates which would simply reinflate Microsoft's stock?
It may seem hard to accept, yet the net effect of the Federal Reserve's interest rate reductions in 1998 on the stock market today was to result in 5 technology companies' stock values accounting for 77 percent of the entire gain in the S&P 500 year to date, according to USA Today. Microsoft's stock has doubled during the last year. Since there is no interest cost on their stock option debt booked to the income statement, subsequent interest rate hikes have not affected their reported profits.
Microsoft is a Cash Machine but Where Does the Cash
Several Impacts from Microsoft's Financial Pyramid Scheme Include the Following:
This scheme led by Microsoft is having many unexpected impacts, a few of which are noted here. The upcoming book will detail additional impacts and also explain how this situation affects a variety of people in different occupations.
1) Government Will Be Defunded. Beginning next year, education, defense and other key programs will have to fight over a sudden and sharp drop in tax receipts. Corporate tax receipts are already down 6 percent while individual receipts are up 6 percent. Since these bogus deductions are able to be carried over and offset against future quarters' earnings, this difference will accelerate in the future and leave various government agencies fighting for a smaller pool of resources. This was forecast in the study. Also to consider are massive AMT tax credits that individuals who paid tax upon exercising options will be carrying forward into next year and offsetting ordinary income tax. Analyzing this situation should be a top priority for both the Federal Reserve and Treasury given the upcoming budget negotiations.
There is a unique irony that Bill Gates recently dedicated $1.5 billion to minority student scholarships and at the same time is leading a massive fraud that will effectively defund public education in many states.
2) The Retirement System Is Being Plundered. Most new investment in Microsoft is coming from the 401K, 403B and public pension participants through large funds such as Fidelity, State Street, Barclays and Janus. These fund families will make their fees whether the stock goes up or down and they are clearly not meeting their fiduciary responsibility to plan participants. Their consultants and advisors including Buck, Callan and William Mercer might do a risk assessment based upon the 404C fiduciary requirements. The Savings and Loan debacle took down not only many banks but also their consultants, accountants and law firms.
3) Business Owners Are Exposing Their Personal Assets By Not Paying Enough Attention To Their 401K. ERISA 404C has severe sanctions against employers who are not adequate stewards of their 401K plans, specifically those that do not meet the prudent fiduciary expectation. Such lawsuits are already beginning, the corporate veil is no protection and the law also allows for treble damages. Most CFO's put 401K plans on their "to do" list, check them off once set up and move on to the next thing. Many seem not to grasp that these are, for the most part, non-company assets.
4) The Dollar Is Being Devalued In Relation to the Yen. The Japanese have struggled for 10 years to recover from their own version of accounting fraud and they know that now is not the time to accommodate our monetary desires without first forcing us to face up to the corruption in our own markets. Simply put, Japan is becoming our own personal IMF and will devalue our currency until reforms are initiated.
As noted before, what caused the Japanese banking crisis was not plunging real estate values nor bad monetary policy, but rather accounting fraud in which companies put phony assets on the books, in particular software research and development costs. These costs should have been charged to earnings. Loans were made off these bogus assets which helped bank stock values increase, leading to margin lending by consumers to buy the stock, often borrowing off real estate values to get the shares. When the loans could not be repaid and it was realized that there were no real assets backing them, the system collapsed.
It was a startling public display of Alan Greenspan's need to brush up on accounting when he actually said in his Jackson Hole speech that corporate profits were understated due to not capitalizing software costs. Those of us familiar with this industry know software is subject to rapidly becoming obsolete with most products requiring constant upgrades to stay competitive.
Due to this obvious need for the Federal Reserve to better understand key issues in determining share values, Parish & Company is recommending that the Federal Reserve Board be expanded by one non-voting member from the mutual fund industry. This recommendation includes nominating John Bogle, founder of the Vanguard family of mutual funds, to be considered for this role.
5) False Inflation is Emerging. This paper wealth, rooted in a bogus tax deduction that grossly overstates earnings, is driving Microsoft's stock price which in turn greatly expands the purchasing power for luxury goods and services. Most inflation is now in services and luxury goods and not reflected in the CPI. This is false inflation because it is a result of a scheme, not economic fundamentals. Given the capacity to increase supply due to more efficient production and heightened global competition, it is tough to raise prices. Only monopolies are indeed able to even keep prices at current levels. We therefore have a reality of low inflation competing with a pyramid scheme creating an illusion of inflation. This is not good for any of us, especially the investment industry.
6) The Integrity Of The Markets Is Being Destroyed. This is perhaps the greatest risk and again what led to the Great Depression in the 1930's. It is a fact that Roosevelt wanted to nationalize the accounting profession and make all auditors government employees due to a complete loss of confidence in the accounting profession.
7) The Fraud Is Accelerating. Microsoft reported earnings of $2.2 billion for the quarter ending 9/30/99 although they actually incurred a significant net loss. Company press releases imply that they took a tax deduction for stock option wages of between $2.5-4 billion and none of this amount was charged to earnings. Many investors believe that option wages are charged to earnings when the options are exercised, yet that is false. Employees pay ordinary income tax when the options are exercised, even if the stock is not sold, and the company does take a tax deduction, yet this amount is not charged to earnings.
As previously discussed, stock option wages are indirectly considered in the earnings per share calculation due to more shares being outstanding but they are never charged to earnings. These are two completely separate things, that is, charges to earnings and the number of shares outstanding used to calculate earnings per share. In basic fractions we call this the difference between a numerator and denominator.
8) Microsoft auditor, Deloitte and Touche, issued a "clean" audit opinion. This appears to be a clear violation of the SAS auditing standards given that there was no mention in the opinion of several significant items, including the massive contingent liability for stock options. Deloitte has sadly identified itself as a key enabler of this scheme, which is remarkable given that they also function as the auditor for many large pension plans. Fidelity investments is now in the process of gaining approval for Deloitte to audit more plans and does also manage Microsoft's 401K plan.
9) Parish & Company formally requested that the Federal Reserve expand its scope to include more focus on mutual funds and add John Bogle, retired founder of the Vanguard family of funds, as a non-voting member. Mutual funds are to the Federal Reserve what the Internet has been to communications and it is time the Federal Reserve respond. Fidelity Investments alone is now managing more than $600 billion that is completely outside the traditional banking system. This is particularly important given the speed of change in the financial markets. The Federal Reserve needs to be more responsive to breakdowns in the overall system as clearly evidenced by this massive fraud and corruption occurring at Microsoft. Bogle was chosen for his deep knowledge of the mutual fund system and his integrity. A close review of the backgrounds of the federal reserve economists and staff clearly indicate the need for this type of outside influence. More than 75 percent of the Federal Reserve's technical staff appear to come from no more than five universities.
10) Significant one day stock value declines at major corporations that pay more in cash wages than stock options are accelerating. Examples in October include Hewlett Packard, Xerox and IBM. Even though Hewlett Packard is much more profitable than Microsoft, their stock will suffer unless they either join the fraud in an aggressive way or expose it. Let's hope they do the latter.
Should we really reward such financial fraud at Microsoft by making its earnings look much better than others when it will result in significant job losses in companies that choose to pay real wages that are charged to earnings? Maintaining a strong stock value is key to competitiveness given the need to purchase outside technology with stock and forge key partnerships. If unable to keep up, these companies will lose market share and be forced to curtail benefits and ultimately lay off significant numbers of employees. These types of layoffs are now accelerating, further destabilizing the economy. Stock options are an excellent benefit yet like all benefits they have a real cost that should be charged to earnings to maintain the integrity of our free market system.
11) Microsoft organized a lobbying effort to defund the Department of Justice, using supposedly non-partisan groups like the Citizens for a Sound Economy. Imagine how difficult it would be for someone like myself, if a government employee, to discuss this situation. I would probably be transferred to a filing job at the North Pole. Strange, how similar to Jakarta we are becoming. Again, the issue is not about stock market valuation but rather corruption and financial fraud. An inside joke among many top Japanese businessmen is that the only place easier to buy influence than Jakarta is Washington, D.C. Now is the time to send a message of integrity and prove them wrong.
12) Conversions to cash balance pension plans are increasing. This is another pyramid impact. What IBM employees still don't seem to realize is that their lost pension benefits are resulting from fraud at Microsoft. Microsoft is pilfering these cash balance plans into its pyramid scheme by overstating its earnings, thereby drawing a larger percent of the index based investment on the S&P 500 and correspondingly making it more difficult for companies like IBM to compete. This forces these companies to cut back on real benefits in an effort to keep its earnings and stock price up. This was also clearly identified in the original study.
The Department of Labor has begun reviewing the activities of actuaries with respect to these conversions. Is it not amazing that in many cases these same actuaries are advising public pensions whose assets are being plundered by this massive fraud at Microsoft. In the late 1980's pension raids were very popular and easy to implement. You basically hire an actuary to put forth a new set of assumptions indicating fewer assets are needed to meet pension obligations, and skim off the top. Cash balance plans are a sham and nothing more than a creative way to do what was outlawed in the 1980's. The Department of Labor should aggressively investigate this area.
This report was originally 65 pages yet was later reduced to the present
length in preparation for the upcoming book.
The following related resources are also available.
Right-click to download a Simplified Spreadsheet (Excel 95 format), with supporting data and charts. If you download using Netscape and can't open the spreadsheet, send e-mail to email@example.com requesting it as a file attachment.
Contact: Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, Oregon 97223
Web Site: www.billparish.com