MBS Blog

OK…it is one thing for Ukraine to send letters begging for money to the USA, the EU, even China…but Russia? What are they thinking in Kyiv? Sure…Russia will loan you the money. They may be running a bit short due to propping up rubles and oligarchs, but they will find some spare cash as they know they will gain considerably from any arrangement.

 

After all, they promised the Kyrgyz Republic some money too. However, the conditions-regardless of what is officially denied-is that a U.S. base be closed. Imagine what they will demand of Ukraine?

 

From www.ft.com:

Ukraine pushes for loans to meet shortfall

 

By Roman Olearchyk in Kiev

 

 

 

Ukraine has appealed for emergency loans from the world’s richest countries to help support its economy, which has been battered by the global financial crisis.

 

Yulia Tymoshenko, prime minister of Ukraine, said her government had sent letters to the US, Russia, China, Japan and the European Union asking for loans to fill a shortfall in budget revenues for this year.

 

 “We have already received a positive response from some countries, including Russia,” Ms Tymoshenko said at the Munich Security Conference at the weekend. “Russia is ready to sign such loan agreements.” She did not clarify how much Kiev was seeking to borrow but reports in Ukraine suggested Russia could lend $5bn (€3.9bn, £3.4bn).

 

Ms Tymoshenko said Ukraine was keen to harmonise relations with Moscow, soured after last month’s gas prices dispute. She insisted Kiev would stick to a western integration agenda that included efforts to join the European Union and Nato.

 

News that Ukraine was seeking emergency loans amid frozen credit markets comes days after a senior International Monetary Fund delegation warned of “serious problems” brewing in Ukraine’s economy.

 

The fund delegation ended its one-week visit to Kiev last week but provided no clear signal on whether it would grant further disbursements from a $16.5bn standby facility agreed last year.

 

Ukraine received a first tranche of $4.5bn last November. Future disbursements depend on the implementation of tough conditions and are needed to keep Ukraine’s currency, the hryvnia, stable. It lost nearly 40 per cent of its value in 2008.

 

The IMF’s concerns centre on Kiev’s 2009 budget, which has a 3 per cent deficit in spite of a fund stipulation it be deficit-free. It also seeks a freeze on social spending at a time when more than 1m out of a population of 46m have lost their jobs.

 

Ukraine’s gross domestic product is expected to contract by around 5 per cent this , thus curbing budget revenues, complicating the state’s ability to rescueshaky banks and to provide unemployment benefits.

 

Ukraine is struggling to tame annual inflation of more than 20 per cent and toadjust to a fourth stiff price rise on natural gas imports from Russia in as manyyears.

 

The US and other western nations are keen to stabilise Ukraine for geopolitical as well as economic purposes, given its important position in Eastern Europe as a neighbour of Russia.

Technorati Tags: Ukraine, Russia, United States, European Union, China, Kyiv, MBS Ltd., Anton Olff, Kyrgyz Republic, military bases, loans, Roman Olearchyk, global financial crisis, Japan, Munich Security Conference, Yuliya Tymoshenko, Moscow, NATO, International Monetary Fund, hryvnia, gross domestic product, natural gas, geopolitics

Although this article from the Russian News & Information Agency at www.en.rian.ru states that money will make its way to Switzerland and Cyprus. OOPS!! They don’t actually say that…but wherever it winds up, it will not be in Russia.

We believe that capital outflows will be higher than $90 billion if the crisis continues. On the other hand, much of this capital will eventually return to the Russia when the crisis passes as investors see beyond the current mess to burgeoning opportunities in this emerging market.

	Russia’s capital outflow expected to hit $90-91 bln in 2009

MOSCOW, December 18 (RIA Novosti) - Capital outflow from Russia is expected to continue, and hit $90-91 billion next year, a deputy economics minister said on Thursday.

Andrei Klepach said Russia’s international reserves are expected to decline $110-140 billion amid the ongoing global financial crisis, but remain above $300 billion.

Russia’s Central Bank announced on Thursday that its international reserves, which hold foreign exchange and gold, stood at $435.4 billion as of December 12, down $1.6 billion against $437 billion on December 5.

International reserves declined $28.9 billion in November, $71.5 billion in October, $25.6 billion in September and $14.3 billion in August. The reserves had been increasing in the months prior to August.

Inflation in Russia in 2009 could drop to 10-12% from the economics ministry’s revised 2008 forecast of 13.4%, Klepach said.

Russia is expected to keep its foreign trade balance favorable at $18 billion, with $303 billion in exports and $283 billion in imports, Klepach said.

In its macroeconomic forecast for next year, the ministry also said that crude exports from Russia were expected to decline 3.8%, year-on-year, in 2009 to 235 million metric tons (1.7 billion barrels).

Natural gas exports from Russia are expected to grow from 203 billion cubic meters in 2008 to 208 billion cubic meters in 2009, the ministry said.

Russia’s oil production is expected to decline 1.6%, year-on-year, in 2009 to 480 million metric tons (3.5 billion barrels) while natural gas output is likely to increase 0.7% to 670 billion cubic meters, the economics ministry said.

Technorati Tags: Russia, Andrei Klepach, natural gas, oil production, natural gas, inflation, foreign trade balance, international reserves, global financial crisis, Russian Central Bank, foreign exchange, gold, Moscow, RIA Novosti, Russian News & Information Agency, www.en.rian.ru, Anton Olff, Switzerland, Cyprus, capital outflows, emerging markket,

The short term outlook for foreign investment in Ukraine is not positive. As this assessment by Oxford Analytica on www.forbes.com indicates, this is partially due to the continued slide of the hryvnia as well as the inability of the Ukrainian Government and Central Bank to intervene successfully on a consistent basis.

As this article hints, foreign currency controls may be imposed. This will almost crimp foreign investment and trade to an even greater extent.

 

Global Financial Crisis

Ukraine: Currency Slide Stalls Foreign Investment

Oxford Analytica, 12.11.08, 06:00 AM EST

Sporadic, counter-productive market interventions could reignite liquidity problems.

Newly elected parliamentary Speaker Volodymyr Lytvyn announced yesterday that Prime Minister Yulia Tymoshenko and President Viktor Yushchenko would reform their fractious governing coalition. Lytvyn’s selection as speaker will help break Ukraine’s legislative deadlock, but it remains uncertain whether Yushchenko and Tymoshenko can cobble together a functioning government.

One of the most critical challenges the authorities face is the severe devaluation of the hryvnia, which has fallen to all-time lows against major foreign currencies in the last two months. Furthermore, Ukraine’s domestic currency markets are now experiencing the worst deficit of foreign currency since the regional financial crisis of the late 1990s.

Questionable Policies?
Given the extent of the ongoing currency devaluation, it is hardly surprising that the wisdom of the central bank’s policies has been widely questioned.

–Sporadic market interventions.Rising devaluation pressures have prompted the National Bank of Ukraine to resume its active presence on the wholesale currency market. Earlier in the year–and especially in the aftermath of the most recent one-off currency revaluation in May–the bank clearly preferred to keep its presence at the minimum needed to ensure nominal currency stability. However, in the ensuing crisis, the NBU took its time in responding to the changing currency situation; it was not until early October that the first large-scale interventions were actually conducted.

Even then, such interventions proved surprisingly sporadic, and were only able to temporarily slow, not prevent, the devaluation. Moreover, after having spent as much as $6.6 billion in foreign reserves in October to support the hryvnia, the NBU sharply scaled back its spending in November to around 2.2 billion dollars.

Apart from obvious concern over the rapid depletion of foreign reserves, the drawdown apparently reflected the bank’s belief that it could still retreat to the very last “line of defense” for the currency. NBU chief adviser Valery Litvitski has suggested that it will now defend the current trading rate with all the resources at its disposal.

–Counter-productive refinancing. The NBU has also had to increase its financial aid to domestic commercial banks, many–if not all–of which have been suffering from the financial crisis. In November, the NBU provided just over 35 billion hryvnia in loans to commercial banks, up from approximately 30 billion in the previous month. By comparison, the cumulative volume of refinancing in the first nine months of 2008 amounted to 63 billion.

However, the NBU has either failed or neglected to properly control recipient banks’ use of such resources. As a result, rather than being subsequently lent to the real economy, most of the hryvnia-denominated resources obtained in the last three months have found their way to the currency market, only exacerbating devaluation pressures. It is mainly for this reason that Yushchenko has recently chosen to publicly criticize the NBU’s overall handling of the raging currency crisis.

 

Outlook 
Although the latest trading week saw the market rate essentially stalling at a ceiling of 7.5 hryvnia per dollar, this may well be a temporary point in the hryvnia’s downward slide. Decreasing foreign investment inflows, compressed external borrowing and falling export revenue mean any firm stabilization of the currency will come slowly.

Furthermore, additional short-term factors threaten to delay the stabilization–of particular concern is state holding company Naftohaz’s planned foreign currency purchases to repay debt owed for

In any case, the NBU is likely to face difficulties in fulfilling its freshly declared task of preserving the hryvnia. In terms of possible market interventions, the regulator is constrained by the International Monetary Fund’s requirement that it hold no less than $26.7 billion in net foreign reserves by the end of 2008–a condition attached to the $16.4 billion loan Ukraine recently received.

As of December, gross reserves stood at $32.7 billion. Should the NBU be forced to focus on reducing foreign currency demand by purely monetary methods, restrictions will almost certainly reignite liquidity problems. This could exacerbate the real economy’s deterioration.

Technorati Tags: Ukraine, foreign investment, Naftohaz, commercial banks, NBU, NBU, currency market, liquidity, Volodymyr Lytwyn, Yulia Tymoshenko, Viktor Yushenko, Oxford Analytica, www.forbes.com, Ukrainian Government, National Bank of Ukraine, Anton Olff, foreign currency, hyrvnia, currency controls, Global Financial Crisis,

OK…here is a bit of gratuitous sex from the bloggers at MBS. Of course, we could tell you that our interest in the subject is strictly from a business standpoint and how prostitution is affected by the global financial crisis, blah, blah, blah.

Anyway, there are no photos (disappointed?) in this article from the International Herald Tribune (www.iht.com). Hey…isn’t the Tribune owned by the verging on bankruptcy  New York Times? Maybe if their columnists would write more articles like this one they would be doing better……..

World’s oldest profession, too, feels crisis

By Dan Bilefsky

Monday, December 8, 2008

PRAGUE: On a recent night at Big Sister, which calls itself the world’s biggest Internet brothel, a middle-aged man selected a prostitute from an electronic menu on a flat-screen television, pressing his index finger against it to review the age, hair color, weight and languages spoken by the women on offer.

Once he had chosen an 18-year-old brunette, he put on a mandatory burgundy terry cloth robe and proceeded to one of the brothel’s luridly-lit theme rooms, an Alpine suite decorated with foam rubber mountains covered with fake snow.

Nearby, in the brothel’s cramped control room, two young technicians used joysticks to control the dozens of hidden cameras that would film his performance and stream it, live, on Big Sister’s Internet site.

Sex is free at Big Sister, but that is not cheap enough for some men. Customers get the cut rate in return for signing a release form that allows the brothel to film their sexual exploits.

Even with this financial incentive, Big Sister’s marketing manager, Carl Borowitz, 26, a Moravian computer engineer, lamented that the global financial crisis had diminished the number of sex tourists in Prague.

“Sex is a steady demand, because everyone needs it, and it used to be taboo, which made a service like ours all the more attractive,” said Borowitz, who looks more like Harry Potter than a Czech Larry Flynt. “But the problem today is that there is too much competition, too many free pornography sites and people are thinking twice before making impulse purchases, including paying for sex.”

Big Sister is not the only brothel suffering the effects of a battered global economy. While the world’s oldest profession may also be one of its most recession-proof businesses, brothel owners in Europe and the United States say belt-tightening caused by the global financial crisis is undermining a once-lucrative industry.

Egbert Krumeich, manager of Artemis, the largest brothel in Berlin, said that the recession had helped dent revenue by 20 percent in November, which is usually peak season for the sex trade. Meanwhile, in Reno, Nevada, the multimillion-dollar Mustang Ranch recently laid off 30 percent of its staff, citing a decline in high-spending clients.

Big Sister is not struggling as much as some of its more traditional rivals; its revenue is largely derived from the €30, or $40 monthly fee each of the company’s 10,000 clients pay to gain access to its Web site.

But Borowitz said Big Sister hoped to offset a 15 percent drop in revenue over the past quarter by expanding into the United States. Big Sister also produces cable TV shows that air on Sky Italia and Television X in Britain, as well as DVDs like “World Cup Love Truck” and “Extremely Perverted.”

Ester, an 18-year-old prostitute at Big Sister who declined to give her last name, said that big-spending clients had diminished, but noted that she was still earning nearly €3,000 a month, enough to pay rent and to pay for her favorite Louis Vuitton purses.

“The reason I do this is for the money,” she said, after gyrating half-naked around a pole. Being filmed, she added, made her feel more like an actress than a sex object.

In the Czech Republic, where prostitution operates in a gray zone but is largely tolerated, the sex industry is big business, generating nearly €400 million in annual revenues, 60 percent of which is derived from foreign visitors, according to Mag Consulting, a tourism research company in Prague that also studies the sex industry.

Since the fall of Communism in 1989, the Czech Republic has become a major transit and destination country for women and girls trafficked from countries farther east, including Ukraine, Russia, Belarus and Moldova, the police say. Czechs and those transiting the country are most often sent to Western Europe or the United States.

Since 1989, tens of thousands of sex tourists have streamed into Prague, the pristinely beautiful Czech capital, drawn by inexpensive erotic services, an atmosphere of anonymity for customers and a liberal population tolerant of adultery.

Mag Consulting said 14 percent of Czech men admit to having had sex with prostitutes, compared with an EU-wide average of 10 percent.

Dozens of cheap flights to Prague have also ensured a steady flow of bachelor parties from across Europe. In 2005, an average of 30 flights arrived in Prague every day from Britain alone, a figure that analysts said has dropped by a third.

Jaromir Beranek, the director of Mag, said that when Germany and Britain - the two countries that send the most tourists to Prague - began to stagnate, sexual tourism suffered too.

The strength of the Czech crown against the euro, lower spending power and competition from even lower-cost sex capitals like Riga, Latvia, and Krakow, Poland, were threatening one of the country’s most thriving sectors, he said. “If you ski and there is no snow, you stay home. The same applies to sex.”

Many Czechs are more than happy to see Prague shrug off its reputation as one of the world’s top-20 sex destinations, but some in the hotel industry are so alarmed by the drop in tourists that they are lobbying the government to legalize the trade, in hope that it will help lure more clients.

Jiri Gajdosik, the manager of Le Palais, one of Prague’s top hotels, argues that regulating prostitution would help attract business by making prostitution safer. “We must ensure that the city loses its bad reputation of a city where foreigners are afraid that they will be robbed,” he said in an interview with Hospodarske noviny, a Czech financial daily.

While some critics have warned that legalization would effectively transform the Czech state into the country’s biggest pimp, the government is considering whether to emulate the Netherlands and Germany by regulating prostitution, just as it would any other industry. It is considering passing legislation by the end of this year that would require the Czech Republic’s estimated 10,000 prostitutes to register with the local authorities.

Dzamila Stehlikova, the Green Party minister for minorities and human rights who is shepherding the bill through Parliament, said that forcing the business out into the open would make it harder for human traffickers to thrive, while also helping to assure mandatory health check-ups for prostitutes. Other advocates argue that legalization would generate millions of euros in tax revenue from an industry that now largely operates underground.

Not everyone is enthusiastic, including the prostitutes themselves, who warn that being issued prostitution identification cards would further stigmatize them.

Hana Malinova, director of Bliss Without Risk, a prostitution outreach group, said she feared the current credit crunch was pushing more poor women into prostitution, since they could make more money selling their bodies - about €120 for a half-hour session at some upmarket sex clubs in Prague - than flipping burgers at McDonalds.

Even with the economic downturn, she added, prostitution was far more resilient than other industries, though the downturn was discouraging adultery.

“An Austrian farmer from a remote area who is not married will still cross the border to the Czech Republic looking for sex,” Malinova said. “On the other hand, the recession is helping to keep husbands at home who might otherwise be cheating on their wives.”

Near the border with Germany, in towns in northern Bohemia that were long blighted by a daily influx of sex tourists seeking cheap thrills, many are rejoicing in the decline.

Only a few years ago, the town of Dubi was so overrun by prostitution that a nearby orphanage was opened to provide refuge for dozens of unwanted babies of prostitutes and their German clients. Sex could be purchased for as little as €5 - the price of a hamburger in nearby Dresden - drawing a daily influx of more than 1,000 sex tourists.

The more than three dozen brothels that once operated in Dubi have been winnowed down to four, with several of the former brothels having transformed into goulash restaurants or golf clubs.

Petr Pipal, the conservative mayor of Dubi whose zero-tolerance policy is largely responsible for the change, said that installing surveillance cameras and police officers at the entrance of brothels had deterred sex tourists by depriving them of their anonymity. Rising prices for sexual services and the global financial crisis, he added, were also helping to tame demand.

“Two or three years ago, we would get 1,000 men coming here for sex on a Friday night, which is a lot for a town of 8,000 people,” Pipal said from police headquarters, where members of the anti-prostitution squad sat in a surveillance room, controlling outdoor cameras filming 13 now mostly deserted streets.

“The one good thing about the economic crisis is that it is helping to keep sex tourists away.”

Even brothels in areas of the Czech capital most popular with tourists complain that they are suffering from economic hardship. On a recent night near Wenceslas Square in Prague, dozens of young men outside a row of neon-lit sex clubs beckoned tourists with offers of complimentary alcohol and racy strip shows.

Inside Darling, a giant multifloor cabaret famous for cancan shows modeled on the Moulin Rouge in Paris, scantily clad young women stripped on a stage surrounded by leopard skin couches, flashing disco balls and French impressionist paintings of naked women.

Suzana Brezinova, the club’s marketing director, said sex tourism to Prague had been hit because prices had risen nearly to the levels of Rome. But she added that some high-spending businessmen still came to Darling to shrug off the economic doldrums, thinking nothing of splurging €1200 for a night of sexual pleasure and escapism.

“People have less money,” she said. “But hard times also mean that people want to be cheered up.”

Jan Krcmar contributed reporting from Prague and Victor Homola from Berlin.

Technorati Tags: gratuitous sex, MBS, Ltd., Jan Krcmar, Victor Homola, Suzana Brezinova, Rome, Darling, Moulin Rouge, Paris, French, Petr Pipal, Dubi, Dresden, Austrian, Bohemia, Hana Malinova, Bliss Without Risk, McDonalds, Dzamila Stehlikova, Green Party, human rights, Netherlands, Jiri Gajdosik, Le Palais, Hospodarske noviny, Riga, Latvia, Krakow, Poland, Jaromir Beranek, Germany, Britain, euro, Czech crown, Communism, Ukraine, Russian, Belarus, Moldova, Czech Republic, Mag Consulting, tourism, Louis Vuitton, United States, cable TV, Sky Italia, Television X, Britain, DVDs, Egbert Krumeich, Artemis, Berlin, Reno, Nevada, Mustang Ranch, brothel, Europe, Carl Borowitz, Prague, Harry Potter, Larry Flynt, Big Sister, internet brothel, Dan Bilefsky, Anton Olff, prostitution, global financial crisis, International Herald Tribune, www.iht.com, The New York Times, bankruptcy,

The many causes of the ongoing global financial crisis will no doubt be discussed, dissected and argued about long after the crisis recedes. One significant factor has been the lack of transparency in investment vehicles such as Mortgage Backed Securities, derivatives, corporate financial statements and ultimately the markets.

A result of the crisis will be a revised perspective on the part of investors….to say the least. They will be less trusting of current modes of analysis, as well as more demanding for information. Again: transparency will be key as the ability to measure value and risk may have been obscured as much by the lack of financial regulations and standards, as well as the imposition of regulations.

The article below from www.pajamasmedia.com by the CEO of Cypress Semiconductor Corporation, refers to accounting regulations in the United States. While it relates to conditions there, it is instructive of how well intentioned government actions can cause further harm to businesses and markets.  This is especially instructive for emerging markets where the lack of transparency is an even greater challenge, and continues to hinder investment and economic growth.

 

December 3rd, 2008 2:00 am

T.J. Rodgers: My Financial Statements Are a Mystery, Even to Me

Why are the Pharisees of Accounting in the U.S. trying so hard to destroy American business?  Having crippled high tech entrepreneurship and made it nearly impossible for any U.S. company to ‘go public’, the people who set the rules of financial disclosure are now making corporate financials so obscure that investors literally have no way of knowing the financial condition of their companies.

In 2002, in reaction to Enron and other perceived corporate excesses of the Dot.com Boom Congress passed the Sarbanes-Oxley Act.  The Financial Accounting Standards Board (FASB) followed suit be revising its Generally Accepted Accounting Principles to make corporate accounting more transparent.

 

But in my experience, all that these new laws and regulation have done is make corporate finances more opaque - and is killing off the creation of new public companies in the United States.

 

The first step in the wrong direction came when FASB mandated that companies list “intangibles” such as “goodwill”, as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worst by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options.

 

These accounting burdens, combined with the onerous yet ineffective mandates of the Sarbanes-Oxley Act, are starting to take a real toll on American businesses and markets. In 2007, only $8.5 billion or 7.7 percent of the total $109 billion in issuances of Initial Public Offerings were launched on U.S. stock exchanges, down from 60.8 percent a decade ago.

 

This isn’t merely the law of unforeseen conseqences, but as time passes, evidence of willful blindness in the face of facts. It would be one thing if, after six years, you could point to a greater transparency for investors and the general public regarding corporate financial transactions - but not is that not the case, but I can tell you from personal experience that Sarbanes-Oxley and the new FASB regulations actually make a company’s financials less transparent to the people who run the company. Let me give you an example from my own career.

 

Indecipherable Financial Statements Harm Business, Markets

 

I first noticed the misleading nature of Generally Accepted Accounting Principles a few years ago when an investor called to complain about the small amount of cash on our balance sheet. Since we had plenty of cash, I decided to quickly quote the correct figures from our latest financial report. But to my surprise, I could not tell how much cash we had either. With its usual-and almost always incorrect-claim of making financial reporting “more transparent,” the Financial Accounting Standards Board had made it difficult for a CEO to read his own financial report.

 

FASB is a group of seven theoretical accountants based in Norwalk, Connecticut. Its website shows that no FASB member ever started or ran a successful business and that only one member has even held a senior position in a prominent public company other than an accounting firm. Yet, FASB mandates the Generally Accepted Accounting Principles that corporations must use to report to their shareholders. The Securities and Exchange Commission enforces FASB mandates with the threat of criminal prosecution.

 

Although GAAP reports became more complex and less transparent during the 1990s, by 2001 GAAP accounting was good enough to enable companies to report accurately, both internally for control purposes and externally to shareholders. Unfortunately, since then - thanks to the new rules — the FASB-mandated GAAP reports have become nearly useless. I no longer bother to read the financial reports of companies I follow because I would literally need an analyst to decipher them for me.

 

One big step in the wrong direction came when FASB mandated that after an acquisition, companies list “intangibles” such as “goodwill” as corporate assets, artificially inflating balance sheets. After that, FASB meddled with the revenue recognition rules, in some cases not allowing companies to report revenue from cash payments received from a customer for a delivered product. Finally, and worse by far, FASB mandated punitive and nonsensical rules for so-called expensing of stock options.

 

As I’ve already noted, these new rules are having a devastating effect upon America’s companies and markets. And it’s getting worse. Duncan Niederauer, the CEO of the New York Stock Exchange, reports that as of July 1, 2008, “only four sponsor-backed deals (those with either venture capital or private equity investors) raised a mere U.S. $1.7 billon,” down 90 percent from the 2007 figures. Unfortunately for the rest of us, FASB doesn’t care about consequences; it rarely considers the bureaucratic burdens it imposes on companies

 

This increased regulation burden makes it less attractive for venture capitalists to fund small startup companies-an economic disaster for Silicon Valley, the most prolific producer of America’s technology successes (and, by extension, new job creation in this country). On July 7, the president of the National Venture Capital Association, Mark Heesen, addressed the current IPO drought by stating, “We need to put regulators, legislators, presidential candidates and the private sector on notice that this situation represents a serious problem that will have long-reaching economic implications if not addressed. We view this quarter as the canary in the coalmine.”

 

The case of my company’s confusing cash report was explained by a GAAP accounting rule that mandated spreading the liquid assets on our balance sheet into three categories: cash and cash equivalents; short-term investments; and “other assets,” a category containing both liquid investments, like Intel stock, and illiquid investments, like the stock of a startup company. My company’s actual cash position is inferable from our official 172-page 10-K report, but only by those willing to dig into the 74 pages of footnotes. Few investors would have the time to do that exercise for just one stock, let alone a portfolio.

 

Let me say this one more time: It is only going to get worse. And fixing this mess can only occur at the highest levels of government - which means that rescue isn’t coming any time soon.

 

In the meantime, we are going to have to survive on our own, navigating our way through useless, confusing, and often downright wrong financial reporting to find those tiny pearls of truth that we need to compete and survive in a volatile economy. And since the official guardians of our financial integrity, are not only unhelpful, but actively working against us, I have compiled the following nine rules on the unfortunate realities of GAAP financial reports.

 

Rule 1: GAAP reports do not allow the average investor to know how much cash a company has.

 

My most recent encounter with inaccurate AAP reporting came as I prepared to write the President’s Letter for Cypress’s 2007 annual report by reading our SEC-mandated Proxy Statement, which said that I had earned $11.3 million in 2007-a number that seemed not only wrong to me, but wrong by a factor of two. That night, my wife (and domestic CFO) reported to me that I had taken home $4.7 million in 2007: $1.5 million in salary and bonus; a $1.2 million special stock bonus awarded for the success of our solar energy company, SunPower; and a $2.0 million gain from exercising a decade-old 1997 stock option grant that was about to expire.

 

With those two figures so wildly different, I decided as a tiebreaker to the Cypress tax department the next day to find out how much they thought I earned. Both they and the IRS said I earned $4.7 million in 2007-in direct contradiction to our Proxy Statement.

 

How did GAAP accounting distort my reported 2007 income? One error comes from the accounting for my retirement account, which contains tax-deferred income I earned and saved over my career. The account grew by $1.7 million in 2007 because it held stock that appreciated during the year. I neither own nor can borrow against that retirement account, but GAAP and SEC rules required that the $1.7 million gain in it be reported as my 2007 personal income.

 

Rule 2: Old income can be reported two times-or more.

 

My apparent 2007 income was also inflated by the phantom income I did not receive that is attributable to my company’s having to “expense” stock options that vested during the year. I neither bought any options at a discount nor sold any for a gain. I simply received the right to buy some options. If I died or my company performed poorly, the potential value in those unexercised options would never be realized, yet my company was forced to declare them as actual 2007 income for me and a “loss” for the company.

 

According to FASB, I “earned” an extra $4.9 million in 2007 — without putting a penny in the bank — because at option granting, the GAAP rules simply mandated that my unvested shares had a built-in gain of at least 60 percent of their face value, which I received as the options vested. The GAAP rules further required that one-fifth of that unpaid “gain” be reported as income each year. This constitutes another supposedly transparent FASB accounting rule: Hypothetical income is calculated on a stock option that an employee does not own and is counted against corporate earnings. Moreover, that one-time calculation of CEO pay (and corporate loss) is locked in for five years-even if the stock goes down and the options are never even exercised.

 

Of course, the IRS would never dare tax me on the phantom income - not without losing the case in tax court.

 

The errors and misrepresentations can get extreme. Ian Cockwell, CEO of Brookfield Homes, was reported as “earning” a negative $2.3 million in 2007 in his company’s proxy statement. It seems that some of the “income” from prior years, which he never took home, did not materialize according to FASB’s one-size-fits-all formula and had to be subtracted from his 2007 reported income.

 

Rule 3: Due to the faulty logic embedded in GAAP stock option expensing rules, companies over report their CEOs’ earnings and, worse yet, underreport corporate earnings.

 

In many cases, the errors are large. In 2001, presumably to prevent a few companies from generating the appearance of growth through serial acquisitions, FASB decided to make acquisitions less financially appealing by implementing the deeply flawed concept of forcing acquiring companies to put intangible assets-assets that do not exist and have no value-on their balance sheets. Here is an example of the theory behind this nonsense: When one company acquires another, say for $2 billion, the acquiring company puts the value, say $1 billion, of the acquired company’s real assets on its books. In this example, the acquiring company would then be required to put the remainder of the $2 billion acquisition price on its books as a $1 billion intangible asset. With this FASB edict, the real assets of U.S. corporations-cash, buildings, trucks and the like-were mixed deceptively with intangible assets on balance sheets.

 

Rule 4: A company can be broke but still appear to have big assets.

 

In the original version of this hallucinogenic accounting rule, the intangible assets were “amortized,” taken as quarterly losses in equal amounts over a period such as five years. Thus, in the example above, the “amortization of intangibles” created a phony loss for the acquirer of $200 million per year for five years. What do you get when you merge two identical companies, each like the one described above-valued at $2 billion, with $1 billion in real assets and $100 million per year in profit? Don’t say the resulting company is valued at $4 billion with $2 billion in real assets and $200 million in profit. That would be too rational.

 

The answer, according to FASB, is a company valued at $4 billion with $3 billion in assets-one-third of them intangible-and zero profit. Fortunately, the mystery losses caused by amortized intangibles led to the rise of reporting non-GAAP earnings, in which the GAAP phantom-asset distortions were excluded from otherwise nominal GAAP reporting for acquisitions. Today, my company and many other publicly-traded American companies are judged by analysts and investors according to these non-GAAP earnings (approximating pre-2001 GAAP earnings).

 

The final saga in the Alice in Wonderland “intangibles” accounting tale occurred in 2001, when I testified at a hearing of the Senate committee, which was forced to deal with the uproar over the evaporating GAAP earnings of acquisitive companies. Since no one was sworn in at that strange hearing, no one had to bear responsibility for the outcome, a compromise that kept intangible “assets” on the books. However, the amortization of intangibles was dropped in favor of an annual evaluation. Now, once a year, all companies are required to review their goodwill assets-to review the accounting residuals of acquired companies that ceased to exist years before-and debate whether the evanescent assets have gone down in value, and thus creating a phantom loss in GAAP earnings.

 

Institutional investors and analysts have always ignored this folly, but FASB still mandates the foolish and expensive yearly exercise of valuing things that don’t exist. And, as is true with most government mandates, there is now a camp following of firms which, for a bargain price of tens of thousands of dollars, will provide an opinion on the value of-nothing.

 

Rule 5: Beware of the balance sheet; it contains things that do not exist.

 

Companies can fund themselves by borrowing money or by selling stock. The cost of selling stock is dilution, the loss of earnings per share (EPS) due to a rising share count. The cost of borrowing money is an interest expense that lowers EPS.

 

One preferred form of financing for technology companies is the convertible debenture, a hybrid of debt and stock option, in which investors lend money to companies. At the end of a typical five-year convertible debenture, the borrowing company must pay back the loan in cash with interest-or, alternatively, if the company’s share price is above a “conversion price,” pay off the debt with stock at that price. If the share price at settlement is well above the conversion price, the investor has the option to take stock and make a significant capital gain.

 

The accounting rule used to compute the cost of a typical convertible debenture on its issuer’s financial statements is conservative, but reasonable. Companies calculate their quarterly earnings — both for the case of paying back the convertible debenture in stock and the case of paying it back in cash-and report the less favorable outcome.

 

By contrast, FASB’s treatment of employee stock options is outright punitive. It requires companies to report employee options in an unrealizable worst-case scenario-both as EPS dilution and as an expense that reduces EPS further. It is as if FASB has gone out of its way to make employee stock options unaffordable by double counting their cost. Most unfortunately, this change has caused many Silicon Valley companies to reduce or eliminate stock options given to rank-and-file engineers. In the long-run, that will concentrate wealth in the hands of the ‘haves’ at the expense of the ‘have-nots’, absolutely the opposite of the spirit on which the Valley was founded.

 

Rule 6: The profits of companies that grant employee options are often grossly understated by GAAP rules because of the double counting of stock option losses.

 

Without a deep dive into complicated GAAP reports, investors can no longer know what a technology company’s true (cash) profits are.

 

In a recent review of potential acquisition candidates, I noted an obvious error in the financial analysis of one very good target company. Its financial statements showed the company nearly breaking even, when I knew that it consistently produced 20 percent pretax profit. The disconnect came from the fact that the young MBA doing the analysis used GAAP financial statements that included all the accounting distortions described above. We adjourned the meeting until a useful analysis could be completed.

 

Rule 7: If a long-tenured CEO of a New York Stock Exchange-listed technology company -me - cannot decide whether to buy a company based on its GAAP financials, neither can investors.

 

GAAP accounting even misrepresents the revenue that some companies report.

 

One would think that if a company receives a cash payment for delivering a product, it would recognize revenue and profit, and pay taxes. Not so. As a board member reviewing financial statements of a startup Silicon Valley data communications company, I became very confused by the company’s reported revenue, in which were factors below the company’s actual shipments.

 

The GAAP accounting theory behind this problem is explained in the following example: If a company ships a product for $1 million and warranties the product for five years, there is a possibility that the product will have to be repaired or replaced. Under GAAP accounting, the result might be stated by reporting $700,000 in revenue immediately and $300,000 in revenue over time as the product warranty period winds down; for example, $60,000 in revenue per year for five years. Thus, the last $60,000 in revenue for a system shipped in 2008 might not be reported until 2013.

 

Unless returns and warranty expenses are significant relative to revenue, the previous and time-tested method for revenue recognition is to record revenue when a system is shipped and to handle returns as they occur. This method gives much more realistic picture of a company’s performance to investors-and to management. Under FASB’s “improved” system, companies must keep two revenue records to know what is actually going on internally. While the splitting of revenue may make sense to theoretical accountants, consider the practical burden it puts on companies.

 

Think about shipping hundreds of different products with different warranty terms to thousands of customers with many different contracts. In that environment, just calculating “revenue” can take weeks for a large group of accountants. Furthermore, once a company has built up a large reservoir of deferred revenue, it can have a real revenue problem that is obscured by the fact that it is still reporting revenue from products shipped years before.

 

 

 

Rule 8: The investor often cannot decipher the true revenue of high-tech systems companies by reading their GAAP profit-and-loss statement.

 

GAAP accounting rules and the Sarbanes-Oxley mandates are no longer just a source of colorful stories; they are starting to cause tangible harm to American businesses and markets. With the IPO revenue hurdle rising because of bureaucratic costs, venture capitalists are now focusing on mega-startups that can better bear the costs of government-mandated bureaucracy.

 

Unfortunately, small startups are a crucial component of the Silicon Valley economic model-one that has consistently prevailed over old-line companies in Japan and Europe. Silicon Valley always creates “too many” innovative companies in each new technology field-and later consolidates the intellectual property and people of those companies into dominant companies, such as Cisco Systems, the world’s leading data communications systems company. The Valley’s winning formula is to develop new technologies in many competing startups, rather than the less effective practice of developing technology in the form of a few big projects in one or two big companies.

 

Rule 9: Despite its theater of public hearings, FASB rarely considers the bureaucratic burdens it imposes on companies and seems incapable of understanding the impact its utopian accounting schemes have on markets.

 

The Wall Street of Silicon Valley is Sand Hill Road in Menlo Park, where one can drive by tens of billions of venture capital dollars on the way to Stanford University, the epicenter of Silicon Valley. The premier venture firms on Sand Hill Road always have all the money they need. Indeed, in recent years, many of them have returned funds to investors because they felt there were not enough good investment opportunities. Thus, the GAAP rules that discourage the venture funding of smaller companies directly harm Silicon Valley’s economy.

 

Our company’s 215 accountants and I live daily with indecipherable GAAP financial reports and draconian Sarbanes-Oxley mandates. I have become firmly convinced that we have given too much power to a board of seven accountants who have a tendency to regulate to death the wealth-creating companies that they themselves are incapable of creating-or even understanding.

 

When Wall Street is no longer the center of the financial world and Sand Hill Road no longer rules venture capital, all Americans will be harmed-and we will wish we had demanded simple common sense from the counterproductive bureaucrats who control our financial system. Silicon Valley changes continuously. Over time it became Test & Measurement Valley, Semiconductor Valley, Minicomputer Valley, Personal Computer Valley, WorkstationValley, BiotechValley, Communications Valley, Search Engine Valley and, most recently, Web 2.0 Valley. We are now becoming Renewable Energy Valley. This place runs on free markets, abundant venture capital, and the unbridled entrepreneurial spirit of smart, hard-working, well educated people.

 

The underlying mechanism of our success is a new economic social contract, under which the economic pie is broadly distributed to rank-and-file engineers, who can earn life-changing wealth from their stock options. The CEOs of Silicon Valley successes like Google often brag about the dozens, or even hundreds, of millionaires created by their companies. This spreading of wealth drives a different work ethic in Silicon Valley. A job in a startup company is a personal mission, not a paycheck. Computers turn the lights off in our buildings at 7:00 p.m. to remind our employees that it’s time to go home. It deeply angers me that government lawyers and naive theoretical accountants have been allowed to impair the economic miracle that democratized the silicon chip, the personal computer and the Internet.

 

In attempting to make business more ‘fair’, Sarbanes-Oxley and FASB have made the U.S economy less accurate, less efficient, and most of all, less fair.

 

T. J. Rodgers is a founder, president, CEO, and a director of Cypress Semiconductor Corporation. He is a former chairman of the Semiconductor Industry Association and sits on the board of directors of several high-technology companies and of Dartmouth College.

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The Age of Anarchy has begun! No…I am not referring to modern terrorism, or the collapse of governments, riots in the streets, or the current “global financial crisis”-though many of these modern events reflect the changes that began in the 20^th century, and are rapidly evolving in the 21^st.  The Age of Anarchy is about the end of the systems and structures that we have known for centuries, if not thousands of years.  

Anarchy is a dirty word. It implies chaos, lack of order, and an uncertain future. As security seeking organisms, we crave a degree of predictability or what we could define as stability in our lives. The question is: when has there ever been a period-other than for short intervals-when this “stability” was the long term norm in any society or civilization? Has the world stayed the same in the last decade? How about in the last twenty years? How about during the lifespan of any individual?

The Age of Anarchy is a measure of the changes that have already occurred, and those that are occurring as you read this. It is:

1.     A rational and self-motivated decoupling of individuals from the current framework-or the matrix of society-into new formations, groups, associations, alliances and relationships. It is not just about the destruction of the old, but rather the overlay of the new on top as new structures are reformed in its wake.  

2.    More creation and destruction of ideas and institutions, and in more rapid fashion.

3.    Flexible power structures that are constantly shifting. These can be governments, corporations, or other “centers” of power. Essentially, the center will never remain static.

4.    Benefits will be more narrowly defined. More importantly, they will be understood or at least available for analysis as transparency will be the byproduct.

5.     Alternative networks will co-exist and in some places, will dominate pre-existing established networks.

6.    The “chaos” will facilitate more ideas, energy, trade, and individual wealth. However, it will also cause greater envy and a backlash from those unable to participate or those on the sidelines…and there are always people who are shut out. This will cause countervailing power structures that will attempt to constrain ‘The Age of Anarchy” in the name of…stability and security.

This is no Francis Fukuyama, “The End of History” thesis . On the contrary-history is just moving on.  

The Age of Anarchy is the collapse of the Old World, its institutions, and the belief systems that were its foundations.

The Age of Anarchy is not some dystopian world full of bomb throwing dreamers…though they will no doubt play a role just as they have in every age…but rather a world where the individual is sovereign, with the power…aided by increasing knowledge and technological power to maintain that sovereignty not by laws, or rights or promises from governments, but by their own means. It is a world where people trade with each other directly, with little interference from intermediaries other than the facilitators who provide the platforms for this evolving trade.

Technology is the means.  The democratization and ever decreasing cost of it, are what is driving “The Age of Anarchy.”

 

This article from www.cafebabel.com, is an example of how this age is being ushered in, and old structures are rapidly being replaced:

 

In Europe internet is in, TV is out

 

 

Television audiences are diminishing, yet consumers have never been as interested in new content which is switching from one screen to another

TF1, the biggest commercial television channel in France, is having a crisis: the famous eight o’clock news, a veritable institution, has dipped below the symbolic bar of 30% of the market share. For decades, the televised evening news has been THE meeting-point for the large majority of French families. This drop in viewing could just be an anecdote that will be told in better times, but in reality it reveals a change in viewer habits which is well underway. It also hints at related, newer economic models (public revenue).

I watch what I want

Throughout Europe, viewers are faced with a plethora of TV channels. Audiences are diminishing because of the increased division of viewing. We have never before watched so much media, but the trend is now to watch à la carte: I-watch-what-I-want-when-I-want-and-not-what-and-when-it-is-imposed-on-me. So, all the big terrestrial channels are following this trend and proposing or plan to propose online ‘catch up TV’ to allow viewers to watch their favourite programme or series when they choose.

 

I watch what I want when I want and not what and when it is imposed on me

In the United States, the TiVo system has become very popular. It lets you record programmes and watch them later, even allowing you to flick past the ads. Along the same lines, Video On Demand (VOD) is taking off at great speed throughout Europe, and its catalogues are getting thicker each day. The European Audiovisual Observatory counted no fewer than 250 VOD services in Europe at the end of 2007, one hundred more than the previous year.

TF1 blames Youtube

For the first time in decades, young people are watching less and less television, in favour of the internet (chat, social networking, blogs) and mobile phones. 30% of young people aged eight to fourteen years use the computer at the same time as watching TV. Rather than putting on MTV, you only have to go on Youtube to find music videos. Video broadcast sites have become quite important in the last few years. Youtube, the French-based Dailymotion and co. represent more than a third of the global bandwidth on the web.

In a single year traditional channels have lost 10% of their audience in the 15 to 34 year old age range. Attempts to curb this phenomenon have resulted in the first complaint: TF1 has attacked Dailymotion and Youtube, claiming compensation to the value of 100 million euros. Others have tried to come to agreements, like Canal Plus and Dailymotion. The TF1 group has launched its own online TV service, called Wat TV, to compete with the giants of online video. Another method is Catch up TV: a web site on which the internet surfer can watch TV programmes at any time, in order to adapt to these new media viewing trends.

Tracking viewers

So is the internet the future for TV viewing? In any case, that is the bet that Janus Friis and Niklas Zennstrom are taking. They are famous on the net for having developed Skype and Kazaa, while creating their platform Joost. Joost is an application based on a ‘peer to peer’ system, which allows you to view audiovisual content. The interface allows a high level of interactivity, giving the user the choice of numerous TV programmes and also allowing them to create playlists or even to participate in the programmes by posting comments or voting.

 

The era of the washing powder company inundating our screens with messages has passed

Interestingly for users, the system allows advertisers to create targeted ads (using the viewing habits and surfing history of the user), and to closely track users (from the moment they see the ad until they go onto the site of the seller). The era of the washing powder company inundating our screens with messages has passed. In the future, they may only be targeting those who are likely to be interested in their product, which will reduce costs and increase the efficiency of their campaigns.

Endless personalisation

Joost merited a huge success since the moment of its launch in May 2007 to the release of its beta version in September 2007. But since then, audiences have not taken off and competitors have emerged: for example,Hulu in August 2007. News Corp and NBC’s Youtube rival (which of course benefits from the content of these shareholders), has targeted audiences which are beginning to strongly attract advertisers. One could also give the example of the combined initiative of Intel and Yahoo to offer new internet applications viewable on your living room TV screen in August 2008. The idea is to display superimposed, personalised widgets over the images on the screen (little windows which deliver information like weather, traffic conditions, TV programmes, and so on).

So, TV as we know it is evolving into a mix of classic television and internet: the interface will resemble that of a traditional TV with more diverse windows of information coming from multiple sources, including a variety of communities which the spectator can join and which can be endlessly personalised.

Anton Olff

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