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I am incensed at H.R. 3574, the bill the house passed yesterday trying to tell companies how to account for stock options. There is a reason that we have an entity independent of Congress make accounting rules. Accounting is subtle and the companies who have influence in Congress often want to push the rules in directions which are not in the best interest of the markets overall. This is similar to the reason that we make the Federal Reserve separate from branches of government. Can you imagine the house passing a bill saying that Alan Greenspan has to cut interest rates? Suddenly I can. (Incidently, when I was in Argentina last year, I was surprised to hear some Argentine economists suggest that the lack of independence of their central bank is the key to their economic difficulties. Whenever a politician needs to be reelected he can pressure the bank to release more money. To him, the Fed was much more important than things like an independent judiciary.)

And if you have any question about the House’s ignorance on the matter, one only needs to look at the rhetoric both sides are using on the floor. Whether a company expenses stock options has nothing to do with whether we think stock options are a good or bad thing. It merely reflects the fact that options represent an obligation that will cost the company money. Paying for salaries and health care benefits are surely a ‘good thing’, but that doesn’t mean we let companies act as though these things come for free. Accounting isn’t about whether a company is doing good or bad things. It is about truth. Which is why there is no controversy among accountants about the merits of the FASB’s rule.

But members of Congress think that accounting should not be about truth, it should be about helping the economy. According to Representative Anna Eshoo the FASB is proud of ignoring the economic effects of their rules, but “Congress does have a responsibility when it comes to the economy.” Yes, the FASB is concerned with telling the truth, because we assume that in accounting standards truth-telling is the best thing for the economy. But saying that they need to decide whether accounting standards are good for the economy is akin to saying a libel judge can decide that the public and false demeaning statements about someone are acceptable if they had the positive effect of boosting newspaper sales. This suggestion is an interesting reversal of earlier opponents to option expensing, who said that we shouldn’t expense precisely because it will have no economic effect, because savvy investors will be able to sort out the long-term costs whether or not they are on the income statement. At least they were wrong for the right reasons.

Representative Zoe Lofgren goes on to make one of the most bizarre comments on the subject matter when she says that it would: “It would drive a stake through [the tech sectorÂ’s] heart, so this should be a concern of the U.S. Congress, and 312 votes indicate it is. We should know what we’re doing here before we allow the green-eyeshade guys to disrupt the economy.” Huh? Is this a disparaging remark about accountants, that they live in the emerald city and donÂ’t see the effect they are having on everyone else?

The argument that option expensing will hurt the economy comes up again and again. Senator Barbara Boxer says asks: “Why on earth would we make ourselves, on purpose, uncompetitive, unable to draw the best and the brightest people and hurt ourselves in the global marketplace? That is just like punching yourself in the face. Yeah, FASB’s (Federal Accounting Standards Board) unelected. That’s just the point. Why would we allow an unelected body to hurt the U.S. economy?” Beyond the fact that she slanders and organization with far more credibility than the elected Senate, there is this unspoken premise that this rule will somehow hurt the economy. (Pete Sessions continues the FASB-bashing when he calls the Connecticut-based FASB ‘inside-the-Beltway accounting techniciansÂ’.)

I havenÂ’t seen anyone justify this economic argument, but it is presumably based on one of two arguments. The first is that expensing stock options will significantly reduce the income of some tech firms (this is true), and that this will depress the stock market. This assumes that investors who value a stock donÂ’t consider the long-term costs of stock options today, and having them do so would be a bad thing. Neither of these is correct. If investors ignored the cost of options it might make the stock market go up for a while, but they would eventually realize their mistake and adjust for it, and it would cause more bubble-like behavior in the market. Over the long term, markets measure how much money companies actually make, not how much accountant say they are making. Regardless, there is plenty of evidence that markets immediately adjust for stock option expensing. IBM, Microsoft, GE and plenty of other companies have chosen to expense stock options, and none of them have seen a significant stock decline. (Interestingly, this fact used to be frequently sited by the opponents of expensing, as proof of why expensing doesnÂ’t matter. This was, at least, a better reason for their wrong opinion.)

The other side of the economic argument is that companies will use options less, which are a vital part of our entrepreneurial sector. This is also a curious assertion. The rule will not affect private companies (who do not need to file statements consistent with the FASBÂ’s principles), so what we are really talking about is bigger technology companies. I am suspicious of the assertion that stock options are a key part of our entrepreneurial economy, which thrived for many years without equity-based compensation. But even if options are essential, expensing in no way penalizes companies for using them. Yes, it causes their income to decline in the short-term, but so do any number of other investments. Companies continue to make these investments because they are important, and explain to investors why they are doing so. Giving out a stock option is like building a factory, it costs you something now but it becomes worth it down the line. Expensing is only a penalty to companies that cannot justify the costs of the options they are giving out.

In addition the billÂ’s supporters continue to recite the often-repeated argument that we donÂ’t know enough about the behavior of stock options to accurately account for them. Which in one sense is true, like many accounting items, our measure of the value of options is an approximation. But whatever inexact approximation the FASB comes up with, it is guaranteed to be more exact than the current approximation that the cost of stock options is nothing.

But suppose that you accept the premises that options are a bad thing, expensing them will hurt the economy, and we donÂ’t really know how to do so in the first place. IsnÂ’t it odd that in an attempt at compromise this bill actually says that companies do have to expense the options they give their five highest paid employees. Why would we want companies to do this bad an inaccurate thing on a small scale? WouldnÂ’t that promote all kinds of abuse in deciding who the top 5 are? That clause seems to be nothing more than a lure to draw an anti-business contingent on board, by demonstrating that Congress is still hurting rich people in some nebulous way.

One of the curious suggestions of a number of supporters of the bill is that the FASB has recently jumped on an option-expensing bandwagon in a trendy post-Enron attempt to reform corporate accounting. It is true that the FASB has made some appropriate adjustments after Enron, but it supported option expensing years ago when Joe Lieberman and other members of Congress intimidated them into no enacting it, with threats of the same kind of encroachment on their autonomy we are seeing today.

I cannot even support the opponents of the bill, because their understanding is just as ill-founded as the supporters. As Representative Pete Stark sarcastically suggests: “Let’s give more money to the millionaires. We must help those people. That’s what this bill today is doing.” However, a level-headed Barney Frank gets it right, as does Pete Gillmor when he says that “real issue is whether we want to politicize accounting standards. Stock options should be honestly stated as expenses.”

Fortunately, there is evidence that cooler heads will prevail. Neither presidential candidate supports the bill (although it doesnÂ’t seem like a topic for which Bush would dust off his veto power). Senator Richard Shelby chairs the Senate banking committee, and is committed to the FASBÂ’s independence. (I find it odd to be supporting holding up a bill in conference committee.) I donÂ’t know much about Shelby, but this impresses me. In addition, Senators Fitzgerald, McCain, Levin and Durbin have introduced a bill to protect the FASB from meddling. I will write Senators Dole and Edwards and tell them about how all of the accounting I have learned at Carolina indicates to me that supporting the bill is a good idea.

As upset as I am at the poor judgment of politicians, the fact is that they are being lied to and manipulated by executives at big companies, who would prefer to direct their attention and their shareholdersÂ’ money to undermining financial credibility rather than delivering better products. They should not stop giving stock-based compensation, but they should be willing to admit that it has a cost and be accountable to their shareholders for that cost. I once heard the notion of companies influencing their accounting standards compared to children choosing their own grades. The difference in this case is that the children have tried to take over the Board of Education. If they succeed, it will be an awful precedent. In fact, if we were going to mix the two, I would prefer to have the FASB regulate the accounting tricks that Congress uses to pass bloated budgets rather than having Congress tell companies how to write their books.

I just saw excerpts from Kerry’s and Bush’s current speeches. It was mostly standard political grandstanding on military funding. However, Kerry’s rhetoric was familiar: “The United States of America should never go to war because we want to; we only go to war because we have to”. It sounds a lot like Bush in 2000 (or, for that matter, the bulk of GOP foreign policy in the 90s). One traditional stereotype of Democrats and Republicans is that one of the latter wants only to invest in building up military capability and the latter wants only to apply it where it is needed. Now that we have an interventionist Republican president, are we headed back to a world with a hawk party and a dove party? Or is the division between the parties going to focus the multilateralism of military action? Did we ‘need to’ send troop to Serbia or patrol the no-fly zone in Iraq? Has the entire tenor of discussions about ‘nation building’ been inverted by the fact that we now want to get involved in improving other nations as much for our sake as for theirs?

I was once afraid that the Democrats push to be agreeable to the administration was going to deprive this election of meaningful debates about the issues of the day. I am less worried about that now. The place of our military in the world is a pressing issue for many reasons, and our country can only benefit from a real discussion of it. The same cannot be said for Bush’s birthday cards to Ken Lay, whether Kerry was throwing medals or ribbons, the minutiae of Edwards’s cases or Cheney’s duck hunting escapades.

In memory of Brando, Slate pointed to an old article of theirs about method acting, which is an enlightening discussion of one of those terms that comes up when you are talking to actors of reading film criticism.

Okay, let’s talk movies. I haven’t seen enough recently, but I have opinions.

Starting with Spider Man 2, which people keep calling the best super-hero movie ever, or at least the best since Superman. That combined with Michael Chabon’s work on the screenplay was enough to make me interested in seeing it. I am afraid that I am going to have to dissent from everyone else on this film. There are a few great things about it, including some perfect action sequences and some fun performances (and two brief non-superhero sequences with genuine emotion). If you are into that sort of thing, it is worth seeing. But the story is a jumbled mess of unrelated elements, which necessitate the sort of needlessly lengthy ending that Return of the King was (falsely) accused of. And it is full of really unsubtle teen angst. That wouldn’t be so bad if any of the plot threads ended in a satisfying manner. But all of them end up leaving them either so unresolved that you wonder why they were in the movie at all, or wrapping things up so nicely that you wonder if there was really any conflict after all. It leaves you wondering what the movie was all about.

When the movie is about something, it is the Spider-Man version of the general superhero moral that those who have the opportunity to make a difference have an obligation to do so. I missed the last Spider-Man movie, but I would be shocked if they didn’t cover exactly the same ground there. The promise of a sequel is that with all the exposition taken care of in an earlier movie, one can focus on taking the characters story in new directions, rather than just reiterating the last film. Also, Spider-Man was never my favorite comic book character, but I always thought that one of his endearing characteristics was that he always had clever quips to deliver when in costume. The only things I can think of that he says to his enemies in this film are along the lines of ‘Put down that woman you picked up that I cannot admit to knowing.’ I know that Chabon didn’t actually get dialog writing credit for this screenplay, so I am hoping that his ideas were jumbled in, and that the screenplay to his perfect testament to youth won’t be similarly insipid.

Yes, this is bothering me more than I probably should. I basically liked this movie, yet I have more negative things to say about it than I do about a lot of worse ones. That is partially a consequence of having expectations set so high expectations. It is also a result of having the opposite experience last summer, when Marvel’s big superhero movie was Ang Lee’s Hulk. While I would not call it a perfect movie, I thought it was a fascinating attempt at transforming the emotional and visual information of a great comic book into something cinematic. But it was panned for being slow and pointless. At the end of the day, people associate comic books and heroic action movies, and judge them with little regard for story, characters or originality. Which is understandable, but disappointing. (As a related aside, I am on one of my occasional comic book-reading phase. The book of the moment is Planetary, but unfortunately there are not many paperbacks available for me to read of it.)

Rating: 5/10

I love election time, and we are getting into the swing of it. Through Volokh, I found a link to Tom McMahon’s Guess The Presidential Election Year Quiz. That was interesting onto itself, but also pointed me to presidentelect.org, which is the sort of website in which I can lose a lot of time. After reading through enough elections, some people show up often enough that you think of them as friends. Like William Jennings Bryan and Grover Cleveland, and the Adams’s and Bushs. But I was still taken aback to when I realized that in addition to being soundly defeated running for President in 1952 and 1956, Adlai Ewing Stevenson was Bryan’s losing vice-presidential candidate in 1892 and 1900. This gives him a political life equivalent to that of the Mayor of Sunnydale. As it turns out, the latter was the grandfather of the former, and both of their predilections towards losing saved American kids a lot of confusion. But still, if you are planning a political dynasty and feel the need to give your presidents the same first and last name, at least give them a distinguishing middle name. Or two, so the next generation can split them up as an inheritance. (I wonder which Bush inherited ‘Herbert’?)

Their analysis of this year’s election is interesting as well. I can’t find anything to argue with, but then again I need to start following this more closely. I wonder about the leaning states, though. I have seen more of an indication that Kerry can pick up a New Mexico or Iowa than that Bush can pick up Washington or Minnesota. It is sure to be a surprise, particularly if they have the same writers who came up with last election’s cliffhanger.