CFO Blog: Commentary and Opinion

SEC Chairman Christopher Cox gave a speech today. I dimly know that the speech is about how the government must have an exit strategy for the bailout, but have to admit I stopped reading after these two paragraphs and decided it was time to leave work and go get a drink:

When I first came to Washington to work in the White House in 1986, the total annual budget of the federal government was less than $1 trillion. The amount of taxpayer money that has been committed in just the last few months for bailouts and guarantees is more than six times that. By comparison, that is far more, even in inflation-adjusted dollars, than we spent fighting all of World War II.

The $700 billion TARP program alone is worth more, in inflation-adjusted dollars, than the combined cost of the Hoover Dam, the Panama Canal, the first Gulf War, the Marshall Plan, the Louisiana Purchase, and all of the moon missions. Multiply that ninefold, and you have the current running total of the federal government's economic rescue programs.

If you need me, I'll be at Cheers.

Automakers and financial institutions begging for loans and cash infusions seem to be getting a free ride, much to the chagrin of struggling small businesses that have no hope of a government handout. (After a few weeks of public humiliation, does anyone truly believe the Big Three aren't going to get some federal help?)

If only this application for the Treasury's TARP funds, prepared by Vanity Fair, were the real thing. (Thanks to Securities Docket for the link.)

Way back in late September, when Treasury Secretary Hank Paulson was struggling manfully to sell the Troubled Asset Relief Program to Congress, thoughts of the Great Depression weren't invoked as often as they are today. It's amazing how fast government intervention in the economy has lost its stigma.

Yet when TARP was being sold, you'll recall, the administration and much of Congress were much more wary of bailouts and direct infusion of capital in ailing companies than they are today. With that in mind, and the financial crisis whipping itself up into a frenzy, Paulson and Fed Chairman Ben Bernanke knew they had to do something big—but also something consistent with free-market principles. That was the inclination of the two men, anyway.

So when TARP became law on Oct. 3, the plan was to use much of its $700 billion allotment to buy up distressed mortgage-backed securities, thereby making a market and setting a price for the securities. The purpose was to give the banks a boost so they could start lending again. This retained at least the trappings of a free-market solution, even if it was the government that would be its generator.

But a combination of a horrible stock-market response to the plan, ill-founded name calling, and politics, especially, sunk the plan. True, the speed with which the problems of the banks and Wall Street were permeating Main Street seemed to demand radical action. But demagogic members of Congress picked up as a rally cry the wide-scale grumbling of average citizens. The man in the street simply did not want to bailing out bad bankers by buying up the junk they held. Thus, on November 12, Paulson scrapped the initial plan and decided to inject TARP funds directly into financial services companies.

Not that that has necessarily been the wrong move. But the quick, politically driven policy turnabout has had unintended and counterproductive consequences, The Economist has reported . "Distressed markets tend not to react well to offers of salvation being abruptly withdrawn," our sister publication pointed out before Thanksgiving.

With a government investment in ailing mortgage securities gone begging, the prices for those securities have plummeted, hurting investors and weakening their backing for commercial and residential real estate even more than heretofore, according to the magazine. Those effects ricocheted through the stock market in mid-November, sending it plummeting to new lows. A particularly worrisome effect: the previously sound market for commercial property is falling apart.

Further, mortgage-securities indices have been walloped, perhaps in part by the transformation. "Because banks use mortgage-securities indices as an important input when valuing their holdings, the latest spiral presages further write-downs," according to the article.

The extreme move by Paulson seems the work of a man doing the best he can in the face of a political vacuum. Had President Bush not been a lame duck, perhaps he might have absorbed some of the political heat and kept TARP on a more moderate course of investing wisely in distressed assets and at the same time injecting capital directly, as conditions warrant. To succeed, an economic policy needs to have the absolute backing of a strong leader.

When is saving a cost not a savings? When the cost is saved for the sake of appearances.

Public opinion bullied bailed-out AIG into canceling meetings with legitimate business purposes — bottom-line ones — and having to fend off knee-jerk attacks against other events it went ahead with, including an educational meeting this month for independent reps who sold $200 million of AIG annuities in the past year.

Now come the Big 3 car companies to Washington, looking for their own bailout and starting to learn how to play the game.

Their CEOs were embarrassed when Congress rapped their knuckles for flying in on their corporate jets. While those were paid for before the car companies' business tanked, and no one said anything about them then, it does cost maybe 30 times more to operate the private planes than to fly commercial, so the criticism was reasonable.

Harder to understand was yesterday's news that General Motors and Tiger Woods had ended their endorsement deal with one year remaining on the 10-year contract. GM, which had been paying Tiger $7 million a year to pitch cars, especially the Buick Enclave, attributed the decision in part to its "search for budget efficiencies during a difficult economy."

GM and Tiger also claimed that the decision was mutual, with the uber-golfer desiring more personal time. Let's hope that is the real reason (Tiger being that rare sort for whom $7 million is couch change), because as budget efficiencies go, this one looks suspect.

In fact, a GM official in essence admitted as much to the Associated Press. GM had been trying to give the Buick brand a more youthful image, AP's article noted. Buick golf marketing manager Larry Peck told the wire service that during the launch of the Enclave a few years ago, 78 percent of consumers who bought the SUV had not been Buick owners previously. "We attribute awareness of that brand to Tiger," he was quoted as saying. Contrarily, Peck also said ending the pact "sure frees up a lot of money for us."

If Tiger Woods — arguably the world's most famous person, possessor of a spotless image, super looking with an all-world smile, and a purveyor of convincing TV-commercial performances that may rival his golfing ones — does not generate more cash for endorsees than he costs them, then it's safe to say that every penny companies spend on celebrity endorsements and sponsorships is completely wasteful.

Woods does not, though, make more money for GM than the many billions of bailout dollars the company is still hoping to wrest from the government. And what the government wants as a condition of forking over the cash is plans showing how the auto giants will reinvent themselves, including a determination to shed unnecessary costs.

In the current toxic environment in which the car (and financial) firms operate, even a good investment like a Tiger Woods endorsement can be judged unnecessary by elected officials whose constituents are screaming for blood. How useless it probably is to point out that if Congress wants a new plan for the car companies' survival, it should include keeping strategies that actually work.

Of course, it's entirely possible that Woods simply wants more free time, and GM is simply seizing an opportunity to trumpet its frugality. And why not? That is how the game is being played.

Advocates of the U.S. moving toward using IFRS rather than GAAP claim the changes will bring investors and firms many benefits, and make the (debatable) claim that there will be comparability between companies, across borders. Finance execs at multinationals who support the move believe they'll save money in the long run by eliminating one accounting system off their workload. But there's reluctance to give CFOs new to the topic the data they most crave: How much will converting to IFRS truly cost?

Speaking at the MIT Sloan CFO Summit last week soon after the SEC published a proposed timeline for moving all U.S. publicly traded companies to the global rules, Martin Headley, CFO of Brooks Automation, was cynical about the entire process. He questioned whether the expense is necessary for small and midsize companies, which will likely pay a disproportionate amount for conversion.

Accounting firms and service providers — the sources who could best estimate how much an IFRS switch would cost — are staying mum, citing "different facts and circumstances" as their excuse for not getting specific. Instead, they have been referring to a study by the Institute of Chartered Accountants in England and Wales, which came out after EU companies switched from their home-country GAAPs to IFRS. Those with revenue between 500 million euros and 5 billion euros spent 0.05 percent of their revenue in their first year of transitioning to IFRS. However, Headley disputes those numbers can be translated to the U.S. since IFRS is derivative of the accounting rules EU companies had previously been using. It'll surely be harder for U.S. GAAP users to make the change, he said. His remark forced Frank Edelbut, president of consultancy Control Solutions, to concede the ICAEW's figures could be used only as a "floor."

Unlike the auditors and vendors, the SEC has to provide cost-benefit numbers when it proposes rules. Executives still sore from Sarbanes-Oxley may remember the SEC initially estimated that companies would pay an average of $91,000 to comply with Sarbox — a number quickly ridiculed when companies began seeing their auditor bills rise to the millions. For now, the SEC estimates U.S. companies will spend between 0.125 percent and 0.13 percent of their revenue on transitioning to IFRS. Let's hope commenters to the SEC's roadmap can nail down better specifics before CFOs like Headley have to come up with their IFRS-conversion plans.