Stock Options Or Pilfered Savings? Maybe This Cyprus Thing Is A Copycat Raid On Wealth

by: MacDougal Irving

A company issues stock to senior executives amounting to 3% of total common stock outstanding, and plans to go on and do so annually for the next 24 years. There were 1 billion shares out on Dec 31, 2012, so management will receive 30 million shares in 2013 and ever-increasing amounts as the transactions grow the total. Street parlance dubs these things "employee stock options".

You're one of the owners. You hold one thousandth of one percent of the company, represented by 10,000 shares of common stock recorded in an account included in the stockholder's equity section of the balance sheet. After the first transaction, your ownership interest, expressed as a percentage, will be reduced from .001% to .00097% and then more than halved to .00049% after 24 years. You call that looted savings.

Who's right, The Street or you? Well, here's what the spreadsheet looks like:

Shares Outstanding over 25 Years (in Millions)

Issued to Total Held by Held by Your
Execs Outstanding Execs Public Ownership
Year During Year on Dec 31 on Dec 31 on Dec 31 Interest
2012 - 1,000.0 - 1,000 .00100%
2013 30.0 1,030.0 30.0 1,000 .00097
2014 30.9 1,060.9 60.9 1,000 .00094
2015 31.8 1,092.7 92.7 1,000 .00092
2016 32.8 1,125.5 125.5 1,000 .00089
2017 33.8 1,159.3 159.3 1,000 .00086
2018 34.8 1,194.1 194.1 1,000 .00084
2019 35.8 1,229.9 229.9 1,000 .00081
2020 36.9 1,266.8 266.8 1,000

.00079

2021 38.0 1,304.8 304.8 1,000 .00077
2022 39.1 1,343.9 343.9 1,000 .00074
2023 40.3 1,384.2 384.2 1,000 .00072
2024 41.5 1,425.8 425.8 1,000 .00070
2025 42.8 1,468.5 468.5 1,000 .00068
2026 44.1 1,512.6 512.6 1,000 .00066
2027 45.4 1,558.0 558.0 1,000 .00064
2028 46.7 1,604.7 604.7 1,000 .00062
2029 48.1 1,652.8 652.8 1,000 .00061
2030 49.6 1,702.4 702.4 1,000 .00059
2031 51.1 1,753.5 753.5 1,000 .00057
2032 52.6 1,806.1 806.1 1,000 .00055
2033 54.2 1,860.3 860.3 1,000 .00054
2034 55.8 1,916.1 916.1 1,000 .00052
2035 57.5 1,973.6 973.6 1,000 .00051
2036 59.2 2,032.8 1,032.8 1,000 .00049
Click to enlarge

By year end 2036 you've lost a tad more than half your personal property. There are many ways to put lipstick on this pig, but before we go ahead and do that, lets just stop right here and ask ourselves one simple question. What would be the difference between others dipping their fingers into the personal property accounts of 1) public shareholders on the corporate books of America and 2) private citizens at the banks of a tiny Mediterranean island?

Market pundits have been screaming "where did this come from?", treating the Cyprus decision to consider confiscating personal wealth as some kind of surprise. Folks, the idea emanated straight from our shores, a practice that has already transferred vast sums of middle class savings into the pockets of corporate managers since the kind of equity compensation we see today got started back the early 1980s.

It's just that, near as this ol' country CPA can figure anyway, nobody but nobody's been noticing. At least not in the U.S.

The history of capitalism, for our purposes here, can be lumped into two disparate timelines. The first, a comfortable place for the public investor, spans the years from maybe 1901 through the 1970's - a post-Robber Baron/pre-employee stock option Gilded Age. The second timeline includes the eras immediately preceding and following. Throughout those golden Twentieth Century days of yore, dilution of shareholder interest was stamped out by responsible business practices, probably owing to effective legislation and accompanying watchdog efforts - largely at the state level first, then by states and Washington following passage of the Securities Act of 1933. I'd describe the adjoining bookend timeline as the Dark Ages of public investment, characterized by runaway CEO shenanigans.

The likes of Jay Gould and Diamond Jim Fisk simply printing as many shares as deemed necessary to manipulate stock prices in the 1800's and the corporate hotshots of today skimming shares off the bottom for themselves, the net impact on Dark Age investors many decades apart being one and the same thing: confiscation of wealth by the private sector through the dilution of ownership interest.

Stated in mathematics that should be at least fermenting in any Seeking Alpha mind by now, on 1 billion shares outstanding, $2 billion in earnings divides out to $2.00 of earnings per share, a critical number that quickly halves into $1.00 if management ups the share count to 2 billion. In fact, everywhere the hapless small investor would turn in that crippling event, valuation gets downsized by 50%.

Glance back at the above table, and note that the hired help has helped itself to absolute voting control in 24 short years. As a practical matter, they'd reached that point much earlier. It's not just loss of value we're confronting here. This gang has skimmed effective ownership away from you and placed it in the hands of the perps who committed that crime. Somewhere in here, amidst all that transparency between the lines of this striking table, terms like "scam" and "racketeering" and "grand larceny" can't help cropping up.

Which brings this Cyprus thing into focus. In today's low interest environment, calling that contemplated 9.9% wealth confiscation a tax is a lot like dubbing the 2007-2009 Global Financial Apocalypse, "The Great Recession", currently the reigning metaphorical poster child of spin. In fact, running the numbers on the Cyprus caper would seem to place its potential impact on the islanders maybe two-thirds of the way up there with striking down all the firstborn males of Israel, now ranking somewhere in the mid 30's on a catastrophe scale of 1 to 10.

What the Cyprus 9.9% could do to a bank account earning 1% a year is shown next. Adding insult to injury, the island already boasts a 20% withholding tax on interest credited to bank savings. In the following example there are neither deposits (there seems no reason to assume anyone would make them) nor withdrawals (you'd think the governing agencies would have to put a stop to anything like that in the light of these numbers).

Bank Balances under 9.9% Wealth Confiscation (in Euros)
Gross Income Net Preliminary 9.9% Actual
Interest Tax Interest Balance Wealth Balance
Year Income Withheld Income Dec 31 Confiscation Dec 31
2012 NA NA NA NA NA 500,000
2013 5,000 1,000 4,000 504,000 49,896 454,104
2014 4,541 908 3,633 457,737 45,316 412,421
2015 4,124 825 3,299 415,720 41,156 374,564
2016 3,746 749 2,997 377,560 37,378 340,182
2017 3,402 680 2,721 342,903 33,947 308,956
2018 3,090 618 2,472 311,428 30,831 280,596
2019 2,806 561 2,245 282,841 28,001 254,840
2020 2,548 510 2,039 256,879 25,431 231,448
2021 2,314 463 1,852 233,299 23.097 210,203
2022 2,102 420 1,682 211,884 20,977 190,908
2023 1,909 382 1,527 192,435 19,051 173,384
2024 1,734 347 1,387 174,771 17,302 157,469
2025 1,575 315 1,260 158,728 15,714 143,014
2026 1,430 286 1,144 144,158 14,272 129,887
2027 1,299 260 1,039 130,926 12,962 117,964
2028 1,180 236 944 118,908 11,772 107,136
2029 1,071 214 857 107,993 10,691 97,302
2030 973 195 778 98,080 9,710 88,370
2031 884 177 707 89,077 8,819 80,259
2032 803 161 642 80,901 8,009 80,259
2033 729 146 583 73,475 7,274 66,,201
2034 662 132 530 66,730 6,606 60,124
2035 601 120 481 60,605 6,000 54,605
2036 546 109 437 55,042 5,449 49,593
Click to enlarge

From the numbers produced here, a starting 500,000 EUR bank balance dropping to just under 50,000 EUR in 24 years, it's safe to conclude that the confiscation would be short-lived, probably a one-time thing, maybe two if there aren't enough guns on the island to bring civil insurrection soon enough.

Now, with the prospect of an overseas asset seizure by the local public sector under our belts, lets get back to the confiscation of wealth inside our own private sector, and take a gander at what happens next. We left off with a pig and her lipstick. While a full discussion of "employee stock options" is outside the scope of this piece, I'd be remiss in not delving into financial cosmetology a bit, putting at least a dab of gloss on that ugly sow.

Clearly, the stock exchanges in this country have been crammed full of squealing pigs since at least the dot-com boom, and putting lipstick on them has certainly grown into a thriving niche industry. How the financial cosmetologist goes about his business is certainly worth a moment of our time.

And here, merger activity is far and away the most important place to have an initial look-see. That's where egregious "employee stock option" activity is most easily hidden. Referring way, way back to our first table, that take came to 30 million shares in the first year. All the CEO here had to do was issue another, say, 600 million shares in acquiring some other company for stock, and that part of the table gets washed away. Reduce the size of his mergers and spread them out over 24 years, and the entire table disappears, the swindle now taking place totally out of sight.

There's a trade off involved, giving up absolute control for money, as bigger companies generate larger compensation packages, but a CEO is generally given practical voting control anyway, so that's no big deal, and out of sight forever is where these guys really need to be. Anyway, merger activity, the most alluring hue in all of financial cosmetology, is a shade we'll call Porky Pink, and one finds it on the lips of corporate swine everywhere. Whenever mergers start cropping up, the first question you want answered is, "how much stock are you boys grabbing anyway?" It's never asked, at least not in the appropriate context, but you still want it to be.

Stock buybacks have long been the second most effective shade of lipstick for the financial cosmetologist, a lustrous color we'll name Smitten Sow. Here, the hired help raises the dough they need to take their shares off the books by, and get this, dipping into company cash otherwise earmarked to fund growth of shareholder equity, said shareholders being the same victims the gang is looting ownership interest from in the first place. It's the old one-two, shareholders getting doubled over with a jab to the belly, then dropped by an uppercut to the jaw.

We don't have to go tabular with those numbers. Execs in the first table issue themselves 30 million shares in 2013. If 1) the company earned $2.00 per share, or $2.06 billion in earnings on 1.03 billion shares, and 2) the stock was bought back at prices averaging close to 66.67, hiding those shares from plain view would cost close to $2.06 billion, or the entire amount of earnings reported that year.

Hopefully readers aren't working in an investment universe that would include anything close to this particular example, but that in itself brings up one important point. How do you know for sure?

Forget Cyprus, people, and turn your eyes back home. The wealth confiscation proposal got started somewhere, and there's no debating the origin. It's my professional opinion that somebody got that notion straight from the U S of A.

It's happening here, and it's happening right now and has been for decades, and, face it, the entire world community can see how bad it is. Except apparently us.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.