SEC Settles Microsoft Accounting Investigation

guttentag writes "The Securities and Exchange Commission has wrapped up its two-year investigation into Microsoft's accounting practices. The investigation focused on "cookie jar" accounting practices in which a company reports that it earned less money than it actually did, secretly storing the unreported money to artificially boost earnings in the future. The SEC called off its investigation in exchange for Microsoft's promise that it will not break the rules in the future, though the company is not admitting that it broke rules in the past. Microsoft publicly states that it has $40 Billion on hand." Gates realized a long time ago that regardless of actual performance, if you "beat estimates" people will buy your stock. So, he's arranging it so that no matter what the actual performance is, Microsoft always "beats estimates". If your analyst estimate is low 61 out of 63 times, either A) you need a new analyst or B) someone is feeding the analyst bad numbers. In this case, probably both.

Analysts are not entitled to correct information

[ObviousGuy]

The only time a company has to make its numbers known publicly is in its quarterly reports to the SEC. Any whisper numbers that are passed around by analysts are simply that - whispers.

And you really answered your own question. Why does an analyst guess wrong 61 out of 63 times (in favor of better stock performance)? Because they can make more money that way.

There is something rotten, but it isn't in Redmond. The stench is coming from Wall Street.

Re:Analysts are not entitled to correct informatio

[kadehje]

If your analyst estimate is low 61 out of 63 times, either A) you need a new analyst or B) someone is feeding the analyst bad numbers. In this case, probably both.

I think this is the key statement in the story post. There is corruption EVERYWHERE in the finance industry. This includes the government, corporate management bodies, and the people (both in the media and the private finance industry) that make money off of reporting on companies and the government.

Enron is by far not the only company with a corrupt management that artificially inflated their numbers throughout the late '90s and early 2000's. It just happens to be the first company to get caught by the national media red-handed. Nearly every failed dot-com with a successful IPO did the same things Enron did, such as under-reporting liabilities by giving much of their compensation in stock options and B.S.-ing about projected billions of future revenues from customers that would never exist. Other more traditional companies like Xerox and Polaroid have also been caught doing the same sort book-cooking. If it had turned out that Microsoft was not engaging in such accounting tricks, Microsoft's board would clearly be in the small minority of the Fortune 500 in that regard.

The government, both under the Clinton and Bush administrations, did virtually nothing to reform regulations that were being exploited legally but unethically by corporations around the U.S. and also virtually nothing to punish those executives engaging in insider trading and other practices that have been illegal for decades. Had the government stepped in and set some reasonable rules, the boom of the late 90's would have been much more reasonable in scope (Dow 11K and Nasdaq 5K would never have happened, but the gains in stock prices would have still been substantial and, most importantly, justified) and we'd still be in very good economic situation now. Unfortunately, the watchdogs were either sleeping or put to bed (by some well-placed "bones" if you get my drift), and did not attack the biggest ripoffs since the late 1920's that the U.S. stock market has seen.

And the media and the analysts glorified everything that was going on. Back in 1998 and 1999, I was shocked at how many companies' stocks had been given "strong buy" upgrades AFTER A RISE of 20, 30, even 50 percent in the previous month or two. WTF? Any person with a modicum of experience in the market would take such a dramatic increase as an opportunity to cash in a portion of his/her holding in that stock for short-term gain or to stand pat if the holding was for a long term investment. To do as these analysts were suggesting would be essentially refusing to pay $10 for something because it's overpriced, but to buy two of that thing when its manufacture raises the prices to $20. In fact, it has been alleged that some analysts were in fact trading against their recommendations, upgrading stocks that they wanted to take profits on and downgrading stocks that they themselves had wished to accumulate.

As the saying goes, "you can fool all of the people some of the time, some of the people all of the time, but not all of the people all of the time." The "some" time in the first part of that statement began to end in the spring of 2000, and many more woke up following the Enron debacle. Only now are we beginning to understand how broken the regulatory structure necessary for a successful, mostly capitalist (but obviously not pure capitalism) was in the U.S. in the 1990's. Just like it wasn't until after 1900 Americans didn't understand why having an economy dominated by a few "Robber Barons" was bad, or not until the 1930's was it known why having a market based on uninsured banks and buying stocks on margin was bad. Many of the flaws in the U.S. financial system WILL be fixed. At some point, the American people will not accept anything but a good-faith effort to correct these problems. At first, the existing government will be given a year or two to make the required changes. After that, people will begin to demand a "New Deal" and clean house on Capitol Hill. If things don't change significantly by early 2004, the voters will bust out the brooms in November of that year.

However, it is likely that we will endure another period of economic ugliness like we did in the 70s before things brighten signficantly. It took nine years (1973-82) for the U.S. to determine a successful course of action after the end of the Vietnam War required the nation to turn away from a largely military-industrial economy to one better suited for a peacetime environment. My guess is that it will take until at least 2006 or 2007 for the U.S. economy to rationally handle the changes effected by the so-called Information Revolution and prosper again. Things won't be horrible between now and then (barring any further Sept. 11-scale or greater terrorist attacks), but they probably won't be peachy either.

People have rightly questioned the integrity of the entire financial system and are waiting for things to improve before increasing their commitments to it. As a matter of fact, the U.S. is the last major market in the world that has been challenged by investors: while Japan, Europe, and later Latin American and southeast Asia floundered, people flocked to the U.S. believing that our system was infallible. It was not, and never will be infallible, though it has been and will become much more sound than it is today. As the next couple of years unfold, people will gradually learn what the biggest reasons for the unsustainable bubble and subsequent bust were and proceed to try to correct them. After that, people will begin to regain faith in the market, they will begin to realize that current valuations of stocks are by-and-large reasonable again, and the U.S. economy will begin to poke its head out of the clouds.

The stench of corruption right now is everywhere. We're just going to have to give ourselves a while for it to subside.

Re:Analysts are not entitled to correct informatio

[Beliskner]

Agreed. To evade the IRS they hide money in tax havens [tvindalert.org.uk] like Cayman islands. Same place binLaden put his money. A small island having $36 billion, hmmmm. All the big companies do it, as far as the IRS is concerned teh money's gone into a big black hole.

Another popular one is a boss ordering a $100 product from India and paying $10,000 for it. The supplier gives his client the product PLUS $9,900 as a present to his own personal account in Cayman islands or whatever. If the Indian IRS tries to investigate, in that part of the world you just give the tax inspector $100 and he'll say, "Nothing to see here, move along now". As IRS controls become tightened, we're going to see more corruption to get around it, Bill Gates meeting the CEO of Sun in dark alleys, whilst a Bill Gates lookalike is at a product launch on TV or something, so that's Billy's alibi.

People won't try to fix the US banking system after Enron, they'll just blow hot air until everybody's forgotten about it just like BCCI... Ooooooh, jogged some memories did I? Forgotten about that hadn't you? The collapse of BCCI was supposed to trigger this big change, destroy corruption and make everything transparent, but it didn't - why exactly?

Read my lips - the banking system changes for nobody, you might get some token changes because the banks want to look liek they're doing something. After WTC everyone's gonna cut the banks some slack and they'll have us by the balls again after Enron blows over.

Many of the flaws in the U.S. financial system WILL be fixed. At some point, the American people will not accept anything but a good-faith effort to correct these problems. At first, the existing government will be given a year or two to make the required changes. After that, people will begin to demand a "New Deal" and clean house on Capitol Hill. If things don't change significantly by early 2004, the voters will bust out the brooms in November of that year.

Nope. In the war against terrorism, everybody's supporting the President, nobody will care about Enron in a few months.

Re:Analysts are not entitled to correct informatio

[electroniceric]

The stock market of today is used by many people as a wealth-generation tool. People think that the stock market is around to help people make money.

I think is an incredibly insightful comment, and I encourage you to follow up on it more.

For my part I see a couple deep problems here:
The market is meta-capitalism - that is, it's not making money through doing anything, it's more or less making money through a loan. Risky loans, as they involve to trying to put a dollar value on a very complex operation (a sizable business) involving personal and economic dynamics of negotations between entities. One don't have any problem with the captains of Solomon Bros, etc losing their silk shirts, but I don't think people really understand the risk - particularly not working-class 401k contributors who are led into bad loans by well-connected shysters (Enron), or people who invest in mutual funds who rely on shyster analysts.

Another problem is:
Making money for money's sake is fundamentally incompatible with another function of the economy, which is to deliver services to people (I'd rather not use the word consumer, because I think it doesn't leave room for economic transactions that improve quality of life - e.g. working on your neighborhood' park cleanup effort, or working on another neighboorhood's park cleanup effort). Is there any way to reestablish the ethic of doing work for its own sake?

Another thing y'all may be able to fill in is a comment a friend made to me. He said:
The market is really driven by the big investment houses: Solomon Bros, JP Morgan Chase, Morgan Stanley, etc. Index prices mostly react to the movements of huge amounts of money in these kinds of institutional transactions. Do you think this is true?
To me it reflects on a situation I think is unfortunate: the government is current afraid to assert its authority over big business because big business basically threatens to put a lot of people out of work (political death) if they don't get what they want.

Re:Analysts are not entitled to correct informatio

[ronfar]

Is there any way to reestablish the ethic of doing work for its own sake?

That's an odd question, because there are many reasons why people do work, but whether any of these are "work for it's own sake" is open to debate. For example, if a person builds model ships because he enjoys doing it, that might be "work for its own sake," depending on your definition. A significant amount of free software is developed under this ethic. There is an important point, though, I'm not going to build my model ships and give them away to people who want them unless those people are my friends (or maybe occaisionally on a whim). If I were to start a small business where I made such ships and sold them at a small profit, it would likely be more hassle than it is worth. So, I might make a ship to give to my cousin's son, but I wouldn't give it to you, and I also won't sell it to you. (Like I said, the minute it becomes the hassle of running a business, hiring accountants , complying with regulations, it stops being fun.)

I don't really consider altruism as "work for it's own sake," but perhaps this is what you meant. I might do altruistic work for people I know, or for the local Buddhist Temple where the monks are always nice to me, but I won't do it for people I don't like. The trouble with this is that people usually don't agree on valid reasons for disliking people. Honestly, altruism works better in tightly knit societies. It's doomed to failure as a way of getting things done in diverse societies. (People might also do work for religious reasons, such as to make merit to do "well" in their next life. However, if you do altruism to gain "treasure in heaven," then isn't that a kind of selfishness? There is a "gain" involved.)

Now, you might also mean taking pride in the work you do, even if it is for a profit. That's another matter altogether. For example, I think the thing that makes people sick about doing work for money is that so many people act like it is more valid to scam someone, and do crummy substandard work and get paid through the roof for it than it is to do good, productive work and make money on that. What do you expect? If you scam people, you do better than if you are honest. You won't pay as much in taxes if you are a huckster than if you are an honest man, you won't have to comply with as many government regulations, and you won't have any politicians in your back pocket who can regulate the economy such that you become a monopoly or part of a cartel while your competitors who won't or can't afford to play ball are crushed underfoot. I've watched crummy, corrupt businesses crush decent businesses (Bleem!) under foot using the courts. I've watched the media cartels pay the government to try to force computer manufacturers to sell screwed up, crummy, substandard computers and the issue is being sold as an aid to help consumers get broadband.

So I don't have any confidence in government fixing these types of problems. How can the government which brings us the DMCA bring us regulation to end corruption in finance?

Re:Analysts are not entitled to correct informatio

[Beliskner]

I think the thing that makes people sick about doing work for money is that so many people act like it is more valid to scam someone, and do crummy substandard work and get paid through the roof for it than it is to do good, productive work and make money on that.

Strongly agreed. However capitalism doesn't force money-oriented gain to be the only acceptable type of gain. Remember the construction of the Empire State Building, expansion capacity for 10 more floors both structurally and electrically, and the electric generators have been running non-stop since 1920. I remember long ago when consumer goods like washing machine became widepsread that there was great concern that once every home had a washing machine, only maintenance would be required. All the washing machine factories would be shut. They were correct, those washing machines were built to perfection by a few large companies and were prohibitively expensive. The parts broke down almost like clockwork. 5 years for the control system, 15 years for the drum friction surfaces, 5 years for the drainage pump. If these parts were replaced an infinite number of times, the washing machine was made to last forever. It was constructed like a military device, everything was over spec, a geek's dream, the motor would have windings 20% thicker than necessary, engineers would carry spare carbon brushes as this was the only component subject to wear in the motor. A worn motor bearing would be replaced by removing the rotor from the motor housing and replacing the slip ring. Nowadays we just bin it when it gets old.

When the market approached saturation, the American product-style system came to Britain where washing machines are designed to break down after five years ^H^H^H^H^H^H^H^H to not last longer than five years. I remember there being digust at the low reliability and build quality, the units weren't constructed by hand. The burden of disposing this number of machines was considered prohibitive. The Americans argued that as time progressed the design and efficiency of new washing machines improved, but these improvements couldn't propogate unless the old products were disposed of, thus the American system allowed technological progress. Of course the Americans won the day, my washing machine will die in 3 years. US culture ingrains into its citizen that cash is king, you are what you have, a man with a ferrari is a better man than one with a 15-year odl Lincoln towncar. However surely changing this would be killing the American dream?

Re:Analysts are not entitled to correct informatio

[Malcontent]

"Moral - don't trust an analyst. Do your own research. And hope you don't get screwed anyway in the end."

A sincere question for you.

What if I don't have the five hours per day it will take to thoroughly understand the very complex financial system of stocks and bonds? What is I am unable to understand it even if I do have the time? It takes a lifetime of study to understand just bonds for example.

What is your advice to the average Joe on the street. It sounds like you are saying "stay out unless you understand fully" knowing full well that the average Joe can't ever understand and do their own research. Are we headed for a future in which the individual investor should stay out of the market altogether?

Shocked! Shocked I am!

[reynolds_john]

Why to think that a company would attempt to find a way to continue shareholder money at all costs is simply shocking!

I'm highly preturbed! It must be an accounting glitch, nothing more.

We all know that a company such as Microsoft with its high upstanding ethical and moral values would never do anything to mislead the common investor.

Re:Shocked! Shocked I am!

[Disevidence]

Slashdot Funny Comments, version 2.1

Dripping in Sarcasm...... Check
Having a swipe as microsoft.....Check
Saying absolutely nothing new or interesting.. Check

+ 5 FUNNY!!!!!

Dicks....

Does it matter?

[BinBoy]

Microsoft stock is worth less than 50% of its value about 2 years ago so it doesn't seem to be working anyway.

Re:Does it matter?

[Malcontent]

When evaluating whether to invest in a company you are not limited to investing only in the same sector. I don't think anybody will dispute the fact the MS is the strongest player in the tech industry. The question is can my money better elsewhere? And in the case of MS the answer is yes. MS is too big to keep growing at the rate they are now. In fact since so much of the money they make comes from buying and selling it's own stock I'd say it was a pretty risky buy. you money is better off out of the tech sector for a while anyways.

Analysts are the ultimate sheep!

[JohnA]

Sorry to go off on a rant here, but analysts are the biggest farce in the financial industry. Don't take my word for it... see for yourself [analystscan.com]. Analysts consistenly raise or lower their rating of a company AFTER a major rise or fall.

Anyone who uses an analyst's recommendations as anything other than a source of humor needs to seriously reconsider their actions. Here's another great example of how "accurate" analysts are [analystscan.com]. Merrill Lynch is one of the worst.

Just my $0.02.

Re:Analysts are the ultimate sheep!

[cpeterso]

Don't forget to mention that "analysts" upgrade a company when they want to "pump up" a stock so one of their firm's big clients can sell high.

Re:Analysts are the ultimate sheep!

[kmellis]

I have a friend who's a senior analyst at one of the big banks. He told something that I already knew, but that many people don't.

The "buy/sell" ratings are unimportant. If you're an investor basing your decisions on ratings, then you're an idiot. It simply isn't true that an analyst's job (even in theory) is to study a company and then come up with a simplistic investment recommendation that's universally applicable. That's not the analysts's chief concern.

Their chief concern is understanding what's happening with the company. They try to present that understanding in detailed reports and those are what you should pay attention to. The real investors are looking at that, not the rating; and, in fact, they're not really even looking at the report so much as they calling up the analyst and talking about the stock in person.

If I were in my friend's shoes, which I'm certainly not, because I'm pretty outspoken and a risk-taker, I'd go right to the top of the company and say, "Let's position ourselves as the one that investors trust. Let's stop making buy/sell ratings, and insist that investors and their advisors make decisions based upon our lengthy analysis of a stock, and the personal situation of the investor." I'd either lose the job, or have contributed to a real smart strategic move.

I'm not defending analysts as much as it may appear. Theoretically, they were supposed to have integrity, and their integrity was compromised at many firms during the boom. Reading Blodgett's emails is enlightening. But day-traders and other retail investors deserve a huge chunk of the blame for jumping into the market as if they were running to the craps table because they thought they were on a hot streak.

Re:Analysts are the ultimate sheep!

[Malcontent]

Unfortunately our society has come to this. Nobody can be trusted to their job with integrity. The concept of "buyer beware" has been taken to such extreme that every person in this country has to know the intracasies of investing, insurance, medicine and law just to be able function in this society.

These so called professions have complicated the matters by purposfully obfuscating the laws and regulations so that an average person is unable to understand the subleties. All this in order to rip off the consumer who needs insurance, health care, or to try and invest their money somehow.

Your advice should be broadcast far and wide. You can not trust the professionals and you must not get involved in fields you yourself can not understand. Pull your money out of the market and only invest in safe and guaranteed investments. Those who are intimate with the details of a complex market are waiting to rip you off the minute you enter.

No surprise there...

[NeuroManson]

Remember what Microsoft has been saying all this time regarding software piracy? Since we're talking copies they never made being sold for money they never got, along with losses they've claimed where none physically existed (If you make one million copies of software that sells out, and someone makes one million copies of their own to give away, then they haven't technically lost any money, as they never made that additional one million copies to begin with), I would have to definately say they were using the cookie jar tactic here as well...

Welcome to the world of Income Smoothing

[Silver222]

And before we crucify MS, every single public company does it. Investors and analysts don't like crazy up and down profits. They like the earnings line chart to climb up like a ramp if possible, and since that is what they like, companies will try to give it to them.

The real bad guys here are probably the auditors, since they are supposed to find stuff like this and make sure it doesn't happen. People in the know are aware that audited financial statements are just bullshit backed up by a promise that means just about nothing. There is still good info in there, you just need to really read between the lines and pay attention to what the company does not have on the balance sheet.

Re:Welcome to the world of Income Smoothing

[jayed_99]

You're exactly right.

Investors do not like to see large variations over a short period of time. Large fluctuations -- either up or down -- skew the statistics they use to make future projections.

Investors want to be able to make accurate projections. Analysts want to be able to make accurate projections so they can get paid by investors. Companies want to be able to provide the information to make accurate projections so they can get paid by investors. Accountants want their numbers to be conducive to making accurate projections so they have a company to work for. Auditors want their reports to say that accurate projections are possible so they can get paid by companies.

It's an incestuous system whose sole purpose is making people think that investing is more like monopoly than blackjack.

Re:Welcome to the world of Income Smoothing

[Multics]

Income smoothing has been turned into a (questionably) legal art form by General Electric [yahoo.com] and its former leader Jack Welch [twbookmark.com].

This started long before George 'W' and represents a larger than Enron class failure of auditing and business ethics. The point of accounting is to report the accurate state of affairs of the organization, not some CEO/CFO's wishful thinking.

Generally Accepted Accounting Principles (GAAP) are created and maintained by the Financial Accounting Standards Board [fasb.org] (which interestingly doesn't come up with a Google search -- at least when I looked for it). Much of the current round of problems can be laid clearly in their lap.

The consensus in the auditing community is that the lesson was not learned with Enron and hence an even larger disaster will have to happen before this increasingly corrupt set of practices, auditors, and corporations is revised.

I'll also note that I am about as pro-business as it is possible to be, but when all of business stands on quicksand because of bogus financials there is the opportunity for just a little shaking causing the whole thing to liquify and slide into the morass.

-- Multics

Re:Welcome to the world of Income Smoothing

[mpe]

And before we crucify MS, every single public company does it. Investors and analysts don't like crazy up and down profits. They like the earnings line chart to climb up like a ramp if possible, and since that is what they like, companies will try to give it to them.

So why don't people just go and play "fantasy stock market"? What is the point of trading real companies or even believing that the numbers that come out of New York, London, Tokyo and Hong Kong have any meaning at all...

The real bad guys here are probably the auditors, since they are supposed to find stuff like this and make sure it doesn't happen.

The Enron situation showed that this simply dosn't work anyway.

People in the know are aware that audited financial statements are just bullshit backed up by a promise that means just about nothing.

About as much as Microsoft's word to abide by the rules in future. Something they never did in the past...

Re:Welcome to the world of Income Smoothing

[spectecjr]

And before we crucify MS, every single public company does it. Investors and analysts don't like crazy up and down profits. They like the earnings line chart to climb up like a ramp if possible, and since that is what they like, companies will try to give it to them.

Which is one of two things that I've never understood about the stock market.

A lot of businesses are seasonal. A hell of a lot. Quarterly reporting adversely affects those businesses - because they have to have that ramp. Which means that if you typically have a summer slump, you have to do something radical every summer to beat it, instead of just riding out until your more than twice as profitable winter months.

It's insane. One of the reasons why Porsche (IIRC) is always profitable on paper is because they do yearly reporting. The markets keep asking them to go quarterly, but they keep refusing because of exactly this.

The other issue I have is the fact that the stock market expects growth or you die. You can't have a completely successful little company that makes enough to get by -- that's viewed as a failure.

Simon

Microsoft is always loosing money

[ehiris]

With so much product theft how can they make profits?
:)

"Evaluation = Evolution"

Justice is served? Maybe on a plate.

[Inoshiro]

"The SEC called off its investigation in exchange for Microsoft's promise that it will not break the rules in the future,"

Compare: Ok, Mr Dalhmer, we'll not look into the funny smell if you promise not to kill and eat anymore people, while keeping other parts of them for sexual "funning."

See, in the country I live in [www.gc.ca], we usually prosecute entities (people, companies) when they break the law. We don't just say, "well, don't do it again."

Re:Justice is served? Maybe on a plate.

[Erbo]

Somebody from the SEC ought to have asked the people who got the consent decree out of Microsoft in its first antitrust case just how reliable Microsoft is at keeping its promises. Expect another SEC investigation in a couple of years or so.

Re:Justice is served? Maybe on a plate.

[tswinzig]

See, in the country I live in [www.gc.ca], we usually prosecute entities (people, companies) when they break the law. We don't just say, "well, don't do it again."

So do we. The thing is, Microsoft didn't break any laws here. But they may have broken some regulations enforced by the SEC.

Re:Justice is served? Maybe on a plate.

[tswinzig]

They were found guilty of breaking a federal law in court and that verdict was upheld on appeal. Why do you think they are in court now? To determine the penalty for breaking the law.

Uhhh... you are talking about the anti-trust case, whereas I and the rest of the people on this thread are talking about the SEC investigation.

Re:Justice is served? Maybe on a plate.

[tswinzig]

Oh contraire - "regulations" are in fact so close to law that mere mortals can't tell the difference.

Who said I'm a mere mortal? ;)

Regulations correctly issued by government agencies have "the force and effect of law" until overturned by a court of legislated out existence by Congress.

The SEC is a government body that REGULATES the exchange of stock. They can fine you or your company for breaking the SEC regulations. They can do things to your public stock. They can cause you or your company to be criminally investigated, but they themselves are not able to put people in jail.

From their site:

"While the SEC has civil enforcement authority only, it works closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action. "

There are lots of people in jail today because they broke IRS "regulations".

Can you give me some examples of broken IRS regulations that landed people in jail? Not paying your taxes doesn't count -- you must pay federal income tax, that is a law, not a regulation. So hopefully you are talking about something else?

Re:Justice is served? Maybe on a plate.

[Malcontent]

In our country we almost never prosecute rich people let alone corporations.

Ilegal but

[asv108]

Most corporations usually don't have the luxury of beating estimates with large unreported cash reserves. In a twisted way this showcases the strength of Microsoft's business model giving them the ability to ride out the hard times. If I was a shareholder, I would approve so therefore Microsoft is doing what any good corporation should do, increase shareholder value. Obviously the risks of legal action do not outweigh the benefits for the company so in a sense this is just a good business strategy.

Re:Ilegal but

[mjh]

If I was a shareholder, I would approve so therefore Microsoft is doing what any good corporation should do, increase shareholder value.

Yes, but the assumption that is made when a company increases shareholder value is that the company is actually doing something that increases the gdp of the entire country. Otherwise you end up with a zero-sum gain.

So for example, if I am a company that produces widgets, and I develop a way to produce more widgets for the same price, I've increased the value of the company, in that I'll be able to lower the price of my widgets while still increasing the profits of my business. Society benefits by getting cheaper widgets and shareholders should reward that kind of thing.

However, if I don't actually do anything but make it look like I'm perpetually increasing the profits of my company, I'm duping society. You end up with one person getting rich by selling high valued stock, while another person (who buys that stock) gets poor. Nothing is produced. Money is simply changed from one hand to another: the zero sum gain.

In the first example, all of society is richer because of the innovative prodution method that allows them to reap profits which is further rewarded in the stock price. In the latter example, nothing actually improves, money just moves from one person to another, without anyone having had to do any actual work.

Which is fine, I suppose. But I would suggest that we as a society demand that people play by the rules. Specifically that companies get to reap the rewards of being profitable when they produce something that benefits society (as determined by the market). If they don't produce anything new, then they shouldn't be rewarded. If they're using accounting practices that allow a company to reap the rewards of producing something new without actually producing something new, I think we should decide to call that fraud or theft, and treat it accordingly.

$.02.

Re:Ilegal but

[drfrank]

Oh, my. This just comes off as very naive.

Now, the points:

1. • Yes, but the assumption that is made when a company increases shareholder value is that the company is actually doing something that increases the gdp of the entire country.
   • No one that knows anything about capitalism and/or the Stock Market makes this assumption. If MS makes SQL Server 21.3% spiffier than ORACLE, and as a result steals 21.3% of ORACLE's market share while not growing the market at all, MS has increased its sales, and decreased the sales of ORACLE. Now, if as a result of this ORACLE's stock drops 5% and MS's rises 5%, MS has just increased shareholder value while not affecting the GDP. Duh.
2. • shareholders should reward that kind of thing.
   • "Should"? Shareholders "should" invest their money in whatever gets them the best return, if they know what's good for them. Or maybe they "should" just give me all their money. Yeah.
3. • You end up with one person getting rich by selling high valued stock, while another person (who buys that stock) gets poor.
   • Yeah, that sucks. Maybe we should switch to some kind of "communal" system where everyone earns exactly the same wage, no matter what job they do. And the "Central Government" can decide who does what particular job.
4. • I would suggest that we as a society demand that people play by the rules.
   • The rules which society expects it's members to obey are called laws, and there're reasons that the idealistic principles you're talking about aren't on the books.

In summary, I recommend picking up a book on Macroeconomics, or catching the excellent "Commanding Heights" series on PBS, in order to reacquaint yourself with Capitalism. Capitalism "works" (to what extent is arguable), because it expects people to act selfishly. And there's just no stopping that.

Re:Ilegal but

[kmellis]

"Capitalism 'works' (to what extent is arguable), because it expects people to act selfishly. And there's just no stopping that."

Exactly. And that's why a functional market requires a mininum level of regulation to assure that a selfish agent is unable to subvert the market.

Capitalism does not glorify "selfishness"; and an understanding of macroeconomics and the benefits of free markets does not require that selfishness be elevated to a virtue.

Rather, capitalism elevates rational self-interest as a fundamental principle. Rational self-interest allows--requires--some level of enforcement of the rule of law such that less rational people are prevented from literally and metaphorically hitting other people over the head with a rock and stealing their sheep. Rational self-interested agents support the rule of law because they recognize the fundamental benefit of markets: the principle of comparative advantage. Stealing is zero-sum, comparative advantage is not.

You might ought to learn a bit more about macroeconomics. Let's take the counter-example you offered. It had to do with one company taking market share from another, and your contention was that this doesn't represent an increase in productivity. No? Well, you're wrong.

Theoretically, there is an increase in productivity because the consumers--presumed to be rational self-interested agents--evaluated one vendor as being superior to the other. The only reason the market works at all is because, collectively, these judgments are usually correct. If company A is making a superior product to company B, then switching resources to the production of company A's widget necessarily represents a gain in productivity. Whatever that extra value is that the consumer recognized is present when it otherwise would not have been present.

We have markets for all sorts of things, and this is because they tend to work significantly better than any designed process. This is true in capital--thus, the securities markets--in international capital flows--the currencies markets (although there's good reason to believe that the currency markets are flawed at present)--and others. In the case of capital, theoretically, your capital investment will only show a return if that investment has generated wealth. In reality, there are speculative bubbles and whatnot that mean that people can, and do, generate large returns on investment where there was no actual wealth generated. But that doesn't mean that it is rational for an investor to make investment decisions independent of real corporate value--because, on average, it's necessarily the case that the market punishes faux wealth creation and rewards genuine wealth creation. Otherwise, we'd all be broke by now.

If you're an investor and you believe that you can predict the short-term false and longer-term-but-false valuation changes, then, hey, go for it. But not only are you less likely to be right than wrong, even if you're right your trading strategy would only be effective until the market incorporated it and cancels it out. So, if you're a gambler--and a certain kind of investor is a gambler--then you'll think that it makes sense to invest outside the context of fundamentals (which ultimately represents wealth creation or destruction). In contrast, if you have any sense, you'll ultimately look for actual wealth creation or destruction to evaluate your investment decisions. Just like you would if you were investing in your brother's bakery.

Market economics is a good thing because it works. It creates wealth where there was no wealth before, and as a general rule everyone benefits from this. (Certainly that's true in contrast to mere wealth redistribution.) That's why it's revered and promoted. Not because it makes sense to elevate simple selfishness to some grand moral principle. That way of thinking is that of the Market Cultists, and they're down the hall, in the padded room with the Objectivists.

Re:Ilegal but

[electroniceric]

What a great post! Lots to respond to:

Rather, capitalism elevates rational self-interest as a fundamental principle.

Certainly this is a deep-running theme in economics. Of course you can make a pretty good case that it works because people believe it should work, try hard at being rational self-interested agents, largely succeed, and their efforts result in wealth. I don't like that these theories offer a very reductionist view of human nature - people are much, much more interesting than rational self-interested agents. It's fair to say that you can count on people being self-interested perhaps more than other qualities like altruism, need for a bond with others, intellectual and physical passions, etc., but those other qualities fill in what it means to be human.

Rational self-interest allows--requires--some level of enforcement of the rule of law such that less rational people are prevented from literally and metaphorically hitting other people over the head with a rock and stealing their sheep.

This is true. But you can also read it as a parable about the Northern European diaspora's craving for order - it's not okay to steal someone's sheep using a rock, but a lawsuit is A-OK. That's not intended to be cynical, just pointing out our quirks.

In this age of global fluidity, you can thread together a pretty convincing story that rational self-interest also requires some redistribution of wealth:
Whatever you think of their merit, we need to pay some money to works in Africa so that continent doesn't collapse in famine and disease and hose the rest of the world in the process.

Market economics is a good thing because it works. It creates wealth where there was no wealth before,
Good point. Another way of putting this is that it requires people to keep one eye on the bottom line - are we actually producing something of value?
and as a general rule everyone benefits from this. That's not so clear. Market economics does very little about disparities in power. If you believe Marx's economic analysis (leaving aside the crap about "collective anarchy") - those with money make more money, and quickly accumulate power. Pretty convincing.
I'd hesitate to argue that more people are better off today than before - there's a lot of very poor and desperate people in this world today. Is it better or worse than before? I don't know if that question can be answered, or really if it should - the relevant one is how do we make most people OK off, without putting roadblocks in the way of generating wealth.

(Certainly that's true in contrast to mere wealth redistribution.)
A professor of mine once characterized a huge problem with the Soviet economy as the fact that politics always superceded economics. Things always got built where politics (mostly personalist Party politics) dictated. That seems like a pretty insightful way to look at it. But the reverse is true, too: the triumph of "rationally self-interested" economics over everything else means a breakdown of civic society - a course I hope the US and others reverse. The question is how to keep the freedom to express individual genius and drive but not reduce every interaction that involves money to one that can be commoditized.

Not because it makes sense to elevate simple selfishness to some grand moral principle. That way of thinking is that of the Market Cultists, and they're down the hall, in the padded room with the Objectivists.
Well hopefully most of the Objectivists can be safely sent off to write philosophical and scientific treatises to their objective hearts' delight, but right now we've got Market Cultists in the White House, and this bad news for a market that needs some coralling.

Re:Ilegal but

[kmellis]

"...but right now we've got Market Cultists in the White House, and this bad news for a market that needs some coralling."

I think it's worse than that. I don't think that these folks have a naive, or, possibly, ideological view of markets, which was the case with Reagan's crew.

Instead, I think many of the folks in this administration are simply pro-rich people and corporations. I believe there are some very morally corrupt people hanging out at the White House. I still believe that G. W. Bush is a well-meaning dupe, however.

In general I tend to think that most free-market Republicans and others are merely naive, and to some degree ideological. Recognizing that demand economies don't work, recognizing that over-regulated markets are wasteful, and being heirs to the American political ethos of "government==bad", well, they jump to a simple and rigid conclusion that regulation is inherently bad.

I'm pretty intransigent in my insistence that judgments such as these be based upon an informal utilitarianism. I do very much think that the poor of market economies share in wealth creation, and that what is considered poverty today would have been privileged not too long ago. (For example, there was recently a study that showed that people's satisfaction and estimation of their wealth is relative, and that in real terms, with a few exceptions, the poorest of today have significant wealth in comparison to their predecessors.) My point is that I support market economics because it works, and not because of some ideological or metaphysical principle. I imagine that most working economists are similar (er, I don't mean to give the impression that I'm an economist), but a lot of policy people are more ideological. This can result in some deep differences of opinion that are baffling to each side.

Your comment on lawsuits was provocative. You've called my attention to something that I want to muse over for a while.

Thank you, by the way, for the compliment on my post.

You can just go to the beginning (of the so-called "west"), and find Plato, in the "Republic", offering a prescient critique of capitalism and democracy. His argument was that power inevitably accrues to the wealthy, who then institute formally or informally an plutocracy. That's why it's called a "plutocracy". (Everyone wants money, that's why it's called "money".)

I stand by my contention that it's not markets to blame for the symptoms of illness you're describing; but, rather, they're the symptoms of a second stage of plutocratic distortion in our very mature capitalist democracy (the first stage being the robber-baron era). Under-regulated markets (or, worse, markets regulated by the marketers) allow for what I suppose can be called "dishonesty". And the market breaks. All that's left is the unpleasant side-effects of capitalism without the benefits.

Not only might there be a necessary level of wealth redistibution at present, it's worth noting that a significant portion of Euro-American wealth is built upon a foundation of stolen capital. It's also worth noting that multinational corporations (or governments, or whomever) will repeat this plunder if given the opportunity.

Latin America should be far, far more wealthy than it is today. A lot of resources have been exploited, not traded. The fact that they haven't had the wealth they should have had as a result of honest trade, and a tradition of very corrupt government and distorted ecnomies, is why they're as poor as they are. We, the wealthy, owe them something, I think.

But there is the difficult problem of bootstrapping the economies of the very poorest regions of the world. Market forces would take care of it if they had something to trade (and were allowed to do so). But, for example, Africa's biggest problem is that much of it is resource-poor and it's simply over-populated. The only thing they have to trade is labor. Ideally, market globalism should include as fundamental complete fluidity of labor. But the biggest bleeding-heart liberals, worrying over the world's impoverished, become notably less caring when it comes to the question of those poor people "taking away jobs".

So, I don't know. If simple market forces can't get the job done, then these regions need huge infusions of capital that is correctly distributed. It's that last bit that's the problem. Of course, that's always the problem when you're trying to build something that only can be grown.

Re:Ilegal but

[electroniceric]

Instead, I think many of the folks in this administration are simply pro-rich people and corporations. I believe there are some very morally corrupt people hanging out at the White House. I still believe that G. W. Bush is a well-meaning dupe, however.
Regrettably I think you're right - Dick Cheney and company are basically cynical opportunists. There's a strand of feeling for this that they're capitalizing on - in my experience, many people are still kind of resentful about the "you have it better than most of the world", "corporations are greedy scum" rhetoric of the past several decades, like they're being called morally corrupt for wanting wealth. I hope we can come back to a more balanced view, where wanting wealth is perfectly fine thing to want, in tandem with duty to family, friends, neighbors, community, world.

with a few exceptions, the poorest of today have significant wealth in comparison to their predecessors.
Not to be picky, but where did the survey cover? I believe that health, bad is it is in places, is probably no worse than before, and vastly better in some places, so I'd buy better health. But I'm not sure I think that about starvation, unemployment, and violence. And whether it's absolute or relative poverty, if people feel a lack of dignity, they feel it, it's real.

The only thing they have to trade is labor. Ideally, market globalism should include as fundamental complete fluidity of labor. But the biggest bleeding-heart liberals, worrying over the world's impoverished, become notably less caring when it comes to the question of those poor people "taking away jobs".
Undoubtedly, freely moving capital and blocked labor will always favor the capitalist over the laborer. Bleeding-heart liberal or no, I just don't think it would work to emmigrate millions of Africans to the G8 countries. Besides, it wouldn't surprise me if we could automate most manual labor within 100 years. Which only makes the contrast even starker. Call me utopian, but imagine 3 billion intellects working in synchronicity....or 2 billions souls starving in front you.

So, I don't know. If simple market forces can't get the job done, then these regions need huge infusions of capital that is correctly distributed
And many of them need some way to recover from the cynicism about the rule of law that centuries of colonialism and corruption have left.

I think a key thing for those of us who want to see this infusion of capital happen to do is to stay on top of the WTO. The WTO offers a enormous opportunity to align interests here. Investors have a natural and stated interest in transparency, economic stability, and rule of law. Though they may say don't want to pay for it, they have a secondary interest in developing the infrastructure of these countries. And as much as they may crow about having all the money, investors need investment opportunities, and companies need labor. If there were really good people (like George Soros good) in there advocating for the fair and equitable application of the principles of the WTO, countries could do much better leveraging their resources for capital under terms favorable to them.
Imagine for example, a truly powerful Mercosur-EU alliance that told the US to go to hell when we ratified illegal subsidies for steel. Even Bush's blinders would hold that out.

It's that last bit that's the problem. Of course, that's always the problem when you're trying to build something that only can be grown.
Brilliant turn of phrase. I'll have to remember that one.

Re:Ilegal but

[Beliskner]

Not only might there be a necessary level of wealth redistibution at present, it's worth noting that a significant portion of Euro-American wealth is built upon a foundation of stolen capital. It's also worth noting that multinational corporations (or governments, or whomever) will repeat this plunder if given the opportunity.

LOL! Like the crusades but conquest via prime industrial this time instead of prime military (colonisation) of the past. One of the clearest indications of this is the symptom that workers in the supply chain are unable to purchase the finished product they are creating, whereas the Americans are. Cocoa bean growers cannot afford chocolate.

I'm much disturbed by the hardcore capitalism implemented in the US. Globalisation in the world today is a distorted oligopoly meat market where these corporations are monopsonies in their supply chain countries. For example:

Latin America should be far, far more wealthy than it is today. A lot of resources have been exploited, not traded

The majority of goods exported from these countries are wood and other raw materials. Due to the limited number of massive globalised corporations with a sophisticated transport infrastructure capable of transporting these massive volumes of raw materials, the corporations are in effect monopsonies and can thus force the sale of raw materials at near cost price.

But there is the difficult problem of bootstrapping the economies of the very poorest regions of the world. Market forces would take care of it if they had something to trade (and were allowed to do so). But, for example, Africa's biggest problem is that much of it is resource-poor and it's simply over-populated. The only thing they have to trade is labor. Ideally, market globalism should include as fundamental complete fluidity of labor. But the biggest bleeding-heart liberals, worrying over the world's impoverished, become notably less caring when it comes to the question of those poor people "taking away jobs".

The textile industry among others thrive in Africa, unfortunately the trade barriers between the US and these countries is so high that business is impossible. The only way to decrease these barriers and allow trade is to gain favour, usually achieved by buying weapons from the west. Unfortunately instead of being stockpiled as an unwanted goodwill purchase, often the temptation to use these weapons is too great, giving the west a smooth revenue stream whilst distancing themselves, no *ourselves* from the conflict by deluding ourselves that they fired the weapons, we're merely supplying them.

Re:Ilegal but

[Beliskner]

Ok, but we should agree to a higher price? Why?

No, this'll actually reduce the price. Monopolies and monopsonies are distortions of capitalism same as communism is a distortion of a democratic government. You cannot look at Micro$oft as the epitomy of good capitalism. A coffee farm employee in Brazil gets around $1 a day because Starbucks use their monopsony position to force them to sell coffee beans at very near cost price. Seattle coffee house feels sorry for these guys and gives them around 50% above marker rate which is why anti-capitalist demonstrators go there. Starbucks buys coffee beans for $1 and ends up selling them in coffee for $80. This is a greater profit margin than Micro$oft.

In Micro$oft the coders of a software package get paid out their $40 billion so in effect it's free for Micro$oft to create software (other businesses have to pay loan interest - Micro$oft has this in its kitty). Then they sell it, their costs are a box, $0.50, seven CDs $5, a manual $3. This product (VStudio .NET) sells for $1400. They don't have to pay for tech support because after they get this payment they can use it to hire some temp staff at $10/hour if they sell 100 units. Micro$oft can actually pay off all their debt but they won't because they'd have to pay a lot of tax, same as completely paying off a mortgage leaves you poor if your state gives tax credits on mortgages.

So it costs Micro$oft risk (insignificant) with their $40 billion plus $10 per unit, and the revenue they get is $1400 per unit. Where does that money go? Same with starbucks, it goes into the corporate kitty, have you ever wondered how they can set up a new Starbucks shop in like 6 days? Sorry to say something pro-Micro$oft on /. but they don't usually dump their customers, their software can be buggy but they don't say "You want an update, get lost asshole" they do eventually roll out SP-1 and updates, whereas with linux a software goes alpha, you try it, it's buggy but it never gets coded up because the developer got bored, when you buy Micro$oft you buy the handholding (they treat you like a baby).

Look at McDonalds and Burger King. I was driving to some place like I do once a month, and I saw this yellow M sign. I thought "Hey this'll be a great place to have a McDonalds" and then I expect to see scaffolding and "Opening Soon". I drive past it and - it's FULLY OPEN. I turned my car around and had breakfast there. I mean the thing just popped up out of nowhere, one day it's a disused gas station, the next day it's a McDs! The actual cost to McDs of manufacturing a 2xbeef patty, 1xsesame bun, 2xcheese slice is very low. Where does the rest of that money go? Wherever they want it to, at the moment is building new McDs in China. Now how about those poor cattle ranchers who have to sell one beef patty for 1cent, does it seem fair? If they raise their prices McDs will go somewhere else OR set up their own ranches. In a free market system this meat would be sold at market price (>> 1cent) to another buyer BUT McDonalds bankrupts surrounding burger shops establishing itself as a regional monopoly, so the ranchers can't sell to anybody else (not a free market - one buyer only). If the ranchers want to participate in a free market they have to move their meat from Texas to Washington, a prohibitive cost so the wholesellers who move massive amounts of meat also have a monopsony.

The barrier to entry into a mass manufacturing market is so gigantic that almost nobody would risk it, reinforcing the megacorporations monopoly on demand side, and monopsony on supply side, just like a big bloated middleware that everybody's afraid to break.

In summary capitalism works if Governments act against distortions like monopolies and monopsonies, unfortunately looking at DoJ vs. Micro$oft, Bush is abolishing the free market system

In latin america any extra money will only go to the guys on the take... it won't be "redistributed". If it is, I rather doubt that it would be in a manner that you would approve of. Face it, societies are social constructs and some work better than others... they are not all created equal

Chicken and egg. It's true that the plantation owners will whip their employees and not give them further money due to the massive number of unemployed people that would kill for their jobs, but you've got to start somewhere. It'd be easy to look at the gold prospectors in the US many years ago and say "OK, market is saturated with gold, withdraw from America, give it back to the native American indians". These people "on the take" will eventually become elected officials, same as Washington. Popular revolt still [keepwalking.tv] works no matter what Government you have.

Re:Ilegal but

[Beliskner]

Of course you can make a pretty good case that it works because people believe it should work, try hard at being rational self-interested agents, largely succeed, and their efforts result in wealth. I don't like that these theories offer a very reductionist view of human nature - people are much, much more interesting than rational self-interested agents. It's fair to say that you can count on people being self-interested perhaps more than other qualities like altruism, need for a bond with others, intellectual and physical passions, etc., but those other qualities fill in what it means to be human.

Obviously, but I think you have the causal effect mixed up a little. From an economic point of view people want to accrue. As for intellectual and physical passions, etc. the idea is the pursuit of these passions coincides with accruing money. For instance an athlete can enter races and make money doing something he loves. Of course in the US altruism has been warped out of all proportion, to such an extent that corporate rule seems like a distinct possibility, resulting in an unhealthy jump from passion to obsession, leading to athlete's taking drugs because coming second is a failure all of a sudden. Programmers work 18 hours a day taking all the enjoyment out of the job, the slightest oversupply of programmers resulting in brutal capitalism devouring passion and creating obsessed borg drones. The toilet cleaner gets more respect than us programmers because nobody wants to do his job - doing something so far from everybody's passion, and yet he's paid so little despite sacrificing his passion.

In this age of global fluidity, you can thread together a pretty convincing story that rational self-interest also requires some redistribution of wealth...
...If you believe Marx's economic analysis (leaving aside the crap about "collective anarchy") - those with money make more money, and quickly accumulate power. Pretty convincing.

You are incorrect, in the past whenever redistributions of wealth occur where all money is confiscated from the rich and is given to the poor, the people that used to be rich simply become rich again. How? Well, this is proof it's not what you know it's who you know. Is a poor black kid from the drug-infested projects going to get an interview at the White House or in Xerox PARC?

Business flows via contacts, and jobs flow via hierarchical mechanisms. The economy is constructed not to override this structure but is built around it, supporting it. This is why people that through personality/wishes want a compartmentalised symbiotic relationship with a business entity get jobs, being dependent on others for their living. On the other hand people that want to pursue business do networking, cut deals, come up with good ideas, and bad ideas, and cost these using the capitalistic model and then take a chance. Employees don't want to "take a chance" with their house, so businessmen do this using Banks and private funding (friends' money, Banks' money). This is why Jews coexist optimally with the capitalist system, they have a network of contacts where they can trust every contact upto $100million. Many normal Americans would break friendships for $1000 which makes normal Americans far inferior to Jews at the levels of trust and co-operation require for big business (in the current implementation of the capitalist system).

For instance here a construction company which has Jewish people in the background dishing out the big $$$ has approached a sparse village near me with massive disused warehouses and offered $60million to buy all properties so that they can demolish them and invest $200million in constructing a small CITY.

Us programmers in dot-coms think we're important but when we look at these big managers you can see that you're an almost insignificant part of the pie when it comes to cooperative wealth-pooling in a circle of trust. You definitely need money to make money.

now we've got Market Cultists in the White House, and this bad news for a market that needs some coralling.

*sigh* I wonder how those Alaskan and Arctic drilling platforms are getting along. Kyoto violators and non-signatories should get sanctions.

I'd hesitate to argue that more people are better off today than before - there's a lot of very poor and desperate people in this world today. Is it better or worse than before? I don't know if that question can be answered, or really if it should - the relevant one is how do we make most people OK off, without putting roadblocks in the way of generating wealth

The rich say they want the poor to be better off, but really they don't, and the political elite know that the rich are just having "conscience pains". People treat being rich like a right - we've been rich for so long we cannot even comprehend what we'll lose if we fall from grace. Americans always assume they won't get turned away by customs due to posing an unacceptable risk of asylum (economic migrant) or something. When planes full of Americans get turned back and American businesses are denied loans, then they'll fight tooth and nail to get things back the way they were with massive trade barriers against importing African goods --- why? Well one way or another, the poor will have their pain eased thanks to AIDS. Turns out that God is indeed mericful, even if we are not.

Re:Ilegal but

[Beliskner]

Unless you happen to be jewish and can post a few links verifying your $100 million trust cutoff, kindly shut up. Where exactly did you get that? And no, I'm not jewish, but this level of ignorance is maddening. What, if I were jewish I could make millions selling dog food online? Oh, wait, someone tried that one already... dammit, if only I could have been born Israeli I'd bet set.

I respect the anonymity of my contacts and thus I choose not to provide verifying information. I can drop a hint however, look at the jewellers, the people in the shadows. You're right in another way, I can't prove causal effect, perhaps this group of high-powered contacts happens to be Jewish by coinicidence, like there being two types of mafia, the aggressive mafia that does drug-dealing and the other mafias and other groups that chose not to do drug-dealing (and thus aren't on front page news but instead pull up at a Vegas club in a stretched $100,000 limousine and then disappear again into anonymity).

Hmmm very well I withdraw my statement that it's Jewish contacts only, it's any group of rich contacts that can trust each other e.g. mafia, yakuza. Only a very small part of their business is drugs, and these people are usually distanced from the main group. If you seriously want to find them, go to exclusive areas where the restaurants and clubs don't advertise, there are white rooms just like in the movies where you go past the outer restaurant and into the "secret restaurant that nobody knows about after a weapons search" just like the movie "Rush Hour" I'm not joking. I suggest you read some books on the inner workings of business tycoons and mafia groups on www.amazon.com it's very interesting reading, much better than the usual "top sellers" trash.

Only VCs invested in dot-coms, but here's a clue - where do the VCs get their money from? I suggest you read this [ieee.org] and find out to get some clues about how business really works.

Re:Ilegal but

[Malcontent]

"It creates wealth where there was no wealth before, and as a general rule everyone benefits from this."

Why otherwise rational people keep repeating this is beyond me. Where does all this extra wealth come from? Does it come from the ninth dimension? From inside of a black hole? from God? No of course not it comes from the earth and the sky. Economies grow because natural resources are used up and turned into products and services. There is more money in the world and as a result there is less oil in the ground, less fish in the sea, less trees on the planet, less minerals in the ground, less coal, less clean air, less clean water.

Some people claim that wealth comes from "productivity" as if productivity was not a factor of machinery, energy usage and human effort all of which impact the environment.

Even a "low impact" products like software production require human beings who have to eat, shit, be moved around, heated, and sheltered.

There is no such thing as a free lunch.

Re:Ilegal but

[kmellis]

Why otherwise rational people keep repeating this is beyond me.

Because it's true. Do a web search on "comparative advantage".

But I'm not sure if that's your point. Essentially, you seem to be saying that ultimately it's a zero-sum game and you can't fight thermodynamics. Well, you're right. But that's mostly irrelevant. The second law doesn't disallow localized decreases in entropy. That is, in fact, why life is able to exist.

One misconception that you seem to have is that "wealth" is necessarily something that inherently has value. That is to say, the value that is represented in that "wealth" has to come from somewhere, per the previous paragraph. But that's not true. Wealth only has to be perceived to be valuable to someone for it to be "wealth".[1]

Let's lock you in a room for a day. You have a pencil and a pad of paper. In one hypothetical universe, you doodle for 12 hours and then sleep. In another hypothetical universe, you make origami. And in a third, you write down your unexpected physical insight that allows for a true Theory of Everything.

In each case you consumed about the same amount of calories.

Now, is the "wealth", if it is wealth, found in that notebook equal in all three universes? No, it's not. The origami is arguably more valuable than the doodles, and the Theory of Everything is arguably more valuable than the origami. Somehow, putting the same into each of the three situations produces different outputs, each with different values. Poof! Wealth has been created.

Does this make sense? Yes, because wealth is not necessarily a physical attribute. To your dog, the ToE is no more valuable than the doodles, and the origami is probably more valuable than both. To a rock, none of them matter in the least.

Wealth can be, and is, often represented in a reduction of physical entropy. But even there, the "wealth" only exists as wealth because the stored energy is valuable to us in some way.

So, disabuse yourself of the idea that wealth can't "really" be "created". It can. The physical manifestation of it in a house (as opposed to a pile of wood); and the abstract manifestation of it in creative and organizing thought; and the abstract manifestation of it as it is temporarily stored in "money"....are all just variations on a theme. All are qualitatively (regarding the quality we are discussing here) the same.

But comparative advantage explains why some systems are able, as a matter of principle, to create more wealth than other systems. It has everything to do with trade and the division of labor.

Mind boggling amounts of human effort is represented and stored (and often discarded) in even the most trivial and common things familiar to people like ourselves. That fast-food paper cup, lid, and straw with the beverage in it in front of me is the result of an enormous amount of human effort. One person, even given millions of years, probably couldn't produce this. It's simply not achievable outside the context of divison of labor, which is most efficiently organized through the workings of markets. Now, I don't deny that this stupid beverage and cup and straw (and lid) seem like a terrific waste. Taken in isolation, it indisputably is. But I don't know, can't know, the full extent of the economic connections involved in making this beverage and its container. Somewhere in there may be something that saved a hundred-thousand lives, or even a marshland or species from extinction. There's things we can do with created wealth that almost all of us will agree are the very reason it makes any sense at all to go to the trouble in the first place. I'd love to get just those things without the shit. At the moment, people aren't smart enough--not even close--to design an economy which does so.

Your real motivation, as I think you already know that I recognize, is related to the wasting of natural resources and destruction of ecological systems. I think you're basically right in most anything you're likely to say about them. Except an assertion that market economics is somehow inherently inimical to these things. It's not. The only reason it works out this way in practice is because economic agents aren't nearly so rational and informed as economists, and myself, would like them to be. Ecological exploitation and despoilation occur because there's something not working in the market. Mostly, this has to do with human attention span and our difficulty thinking long-term.

[1] Only something obviously physical, like a localized decrease in entropy, are things that I can imagine could inherently represent wealth. But I'm pretty sure that that doesn't make sense, either. How could anything have value outside of the context of someone deciding that it has value? A massively engineered planetary system, organized around a constructed black hole, would seem to be an awesome display of tangible, physical wealth. But if there's no one to value decreased entropy over increased entropy, then how can any one thing be any different than another, really?

Re:Ilegal but

[Malcontent]

Let's take your example.

I sit in a room and do one of three possible things. Act one generates no wealth, act two generates some wealth, act three generates lots of wealth. My point is that the amount of wealth generated is irrelevant. No wealth could have been generated if I was not born, was fed, was clothed, sheltered and transported all my life. Trees were cut to make the room I am sitting in, to make the paper and pencil. Fuel was burned to process and transport all those things. Not only that but all the other people who are going to buy or sell the end result consumed immense amounts of natural resouces as well.

As long as the usage of those natural resources outstrips the rate of replenishment then the act of generating wealth harmed the environment. Yes some acts are more efficient (generate more wealth per resources consumed) but practically every single act of generating wealth consumes more resources then the earth can replenish.

It's indisputable. Wealth gets generated by consuming natural resources and no matter how hard people try to deny it it's a zero sum game. Eventually the resources will run out. Maybe by then we will move on to plunder another planet but that does not change the nature of the equation.

Re:Ilegal but

[kmellis]

"Wealth gets generated by consuming natural resources and no matter how hard people try to deny it it's a zero sum game. Eventually the resources will run out."

No.

One thing you might consider is that your general point about the input side of the equation is also true about the output side. It's not possible to create something from nothing, but it's also not possible to create nothing from something. Admittedly, it's really easy to convert something useful into something that's not useful.

The majority of our artifacts can be recycled. That includes the clothes you wear, your shelter, the vehicle you use for transport, writing materials, most everything else. So the amount of actual consumption of resources can be made to be quite a bit closer to zero than it currently is.

Much of this stuff, along with your food, is or can be a renewable resource.

Fossil fuels are not realistically renewable. But there's a large number of alternative energy sources that are renewable or effectively infinite.

Renewable resources, things we consume, are renewed because there's an enormous energy source powering a constant battle against local entropy: sunlight.

Just because the creation of wealth ultimately requires an energy input, doesn't mean that there's a real concern that that energy supply will run out. Every single "natural resource" that exists, exists because, against all odds, really complicated stuff was made from simpler stuff. That includes everything biological as a result of life; but it also includes almost every element above helium in the periodic table. A huge amount of energy went into creating this complexity out of simplicity, and it did so long before we came on the stage.

Our real problem at this point is that we are absolutely dependent upon this pre-existing machinery (the Earth's ecology) to support us. We can't do ourselves what life does for us. Not by a long shot.

As a matter of fact, because of the point I've been making above--that resources aren't really the problem--the real danger is that we'll break the biological machinery that we're dependent upon. I'll repeat that: using up resources is not the problem. Breaking the Earth's ecology is the problem. We could solve a large portion of the resource problem today if we had the will to do so. But we are not even remotely close to even starting to understand how we could do the many things that the Earth's ecology does that we rely upon. Worse, in my opinion, if there were a "resource countdown clock" and an "ecological breakdown clock" like there's a "nuclear risk clock", the ecological clock would be a lot closer to midnight than the resource clock would be.

You're stuck on an idea that probably made a big impression upon you years ago. But what you don't understand is that it's a lot harder to truly destroy (as in, nothing is recoverable) resources than you think that it is. Resources are a red herring. A failing Earth ecology is the real problem. Aside from everything else I've written, resources aren't as big a problem because market forces will solve it. But market forces can't fix what people don't understand--we could break our ecology without knowing it, and therefore never be aware of the price we are paying for doing so until it's too late to do anything about it.

Re:Ilegal but

[Malcontent]

" One thing you might consider is that your general point about the input side of the equation is also true about the output side. It's not possible to create something from nothing, but it's also not possible to create nothing from something. Admittedly, it's really easy to convert something useful into something that's not useful."

If you say so I guess. I have no Idea what point you are trying to make here.

" The majority of our artifacts can be recycled. That includes the clothes you wear, your shelter, the vehicle you use for transport, writing materials, most everything else. So the amount of actual consumption of resources can be made to be quite a bit closer to zero than it currently is."

Well it's hard to argue with that isn't it. Of course atrifacts can be recycled but they are not and there are economic mechanisms in place to discourage recycling. As for consumption being "quite a bit closer to zero" I think that's naive considering the amount of people on the planet and the rate of consumption of very slowly regenarating resources like trees, animals, plants, coal, oil etc.

" Just because the creation of wealth ultimately requires an energy input, doesn't mean that there's a real concern that that energy supply will run out. Every single "natural resource" that exists, exists because, against all odds, really complicated stuff was made from simpler stuff. That includes everything biological as a result of life; but it also includes almost every element above helium in the periodic table. A huge amount of energy went into creating this complexity out of simplicity, and it did so long before we came on the stage."

Not just energy also materials.

"that resources aren't really the problem--the real danger is that we'll break the biological machinery that we're dependent upon."

One leads to another. We need to destroy resources in order to generate wealth, destroying resources leads to ecological unstability, which will eventually lead to breakage of biological machinery. It will probably take some time but it's pretty much inevitable.

"we could break our ecology without knowing it, and therefore never be aware of the price we are paying for doing so until it's too late to do anything about it."

I think we will continue to break our ecology with the full knowledge that we are doing it. Just look around you and see how the proponents of "market forces" will fight vehemently any effort at saving the forests, endangered species, reducing carbon dioxide emissions, etc. Market forces demand short term profits and in fact demand that we destroy the planet as fast as possible. Faster the rate of ecological destruction, the faster the rate of economic growth, the faster the rate of capital gains. That's the way the world works.

Businesses can not be expected to act in an ethical manner and by and large they don't. Just like tobacco companies sell products they know will cause misery and suffering the rest of the economy will continue to extract whatever it can from the planet knowing full well their great grandchildren will suffer for it. They can't help it next quarters profits are on the line.

Re:A free market does not work

[Arandir]

There are two categories of items in your list of evidences and organizations. Government institutions or policies to enforce a managed economy, and government itself.

SEC, FRB, farm subsidies, etc, are examples of a managed economy. In a free market the government has no role except to provide a uniform system of law. In a managed economy government attempts to use what would otherwise be a free market economy to mold and implement policy. Farm subsidies are one classic example. The government policy is that milk should have a particular price. Farm subsidies guarantee that price by paying farmers to produce more milk when the market price indicates that they should be producing less. Then when the farmers produce too much milk the government pays them to dump it down the drain.

Your other category is the government itself (congress, CIA, military). I'm not really sure what you're getting at. Are you trying to tell me that government itself was instituted to deal with free markets? How ludicrous! Certainly some policies of government have been implemented in an attempt to "fix" the market, but that's not the purpose of government.

Let's look at the military. The purpose of the military is to conduct war. Some wars have religious causes, but most are political (too many landless knights so let's start a crusade and ship them all off). But I no of no war that was started because both sides had free market economies. Not one. Wars between nations occur because one nations wants to plunder or punish another nation.

It's zero sum GAME, not gain!

[Simon]

For the love of god, the term is "Zero Sum Game", not gain. It comes from a section of maths known as game theory, go look it up if want more info.

--
Simon

Re:Ilegal but

[Alsee]

Score:5, Insightful?!?!?

Ilegal but...in a sense this is just a good business strategy.

Here on slashdot we focus on the bad laws, but most laws are not bad. Did you consider that maybe is illegal for a damn good reason?

If I was a shareholder, I would approve so therefore Microsoft is doing what any good corporation should do

This is much the same thing ENRON did! When the company "under-performs" they they cannibalize hidden reserves and assets to create a fiction the the company did well. The company then has to meet inflated expectations the next quarter. If it under performs again they have to create twice as much fictional income. When you have a string of bad quarters the system collapes under it's own weight.

As a share holder I'd much rather the stock value dip during a bad period and recover, rather then risk an Enron-type total collapse.

Building a reserve to carry you through a bad period = GoodThing.
Lying about your finances = BadThing.

-

Re:Ilegal but

[asv108]

Enron was padding its earnings with money it did not have using private partnerships with companies owned by Enron management. Microsoft is padding its earnings with money they did not report in previous quarters, there is a BIG difference since Microsoft actually has the money to do this.

Re:Ilegal but

[Alsee]

Enron...Microsoft... BIG difference

I think you'll agree they both lied about their finances. If you want to say Microsoft didn't cook-the-books as bad as Enron, fine. Enron is the current current poster-child for corporations lying about finances. That makes it the natural comparison to make.

My point was that corporations lying about their finances is illegal for good reason. Lying about your finances = BadThing.

It may smooth market fluctuations, but it is an illusion. Not only does the illusion hide dips, it hides genuine growth. The moment you run out of hidden reserves the dip gets multiplied into a crash. When executives see a crash coming they are likely to use desperate measures to maintain the illusion. Maintaining the illusion becomes more and more costly, until there's nothing left to canniblize. The result is Enron.

-

Re:Ilegal but

[sysadmn]

The SEC's criticism is not based on whether or not this practice increases shareholder value. It's based on the theory that shareholders should have accurate information in order to make intelligent choices. Using reserves in this way allows companies to hide problems and mislead investors. Fortune magazine has an excellent article [fortune.com] entitled, "Lies, Damned Lies, and Managed Earnings" which discusses the SEC crackdown on the practice.

A promise?

[ProofOfConcept]

A promise? I'm not statisfied with that. I hope they made microsoft pinky swear they wouldn't do it in the future. Or at least say their mom will step on a crack and break her back.

Microsoft agrees to ANOTHER consent decree?

[NZheretic]

Time for the SCC to study some recent history [google.com]

Their operating systems...

[valentyn]

Their operating systems seem to do the same! Microsoft always promised that the next version would be even better. Can the SEC please look into... ehr, oh well, never mind.

same old story

[frovingslosh]

Nothing new here, just another case of Microsoft doing something wrong and the resolution to the problem is that nothing happens to them. And when they get caught doing it again, nothing will happen then either. Funny it doesn't work that way if I get caught.

Can I do that too?

[Bobzibub]

Can I lie to my bank or the taxman and pay no penalty if I promise (when caught) not to do it again in future? Pleeeeeeeeease???? Just this once!!!!!!

Life must be sweet.
-b

Re:Can I do that too?

[jsse]

Can I lie to my bank or the taxman and pay no penalty if I promise (when caught) not to do it again in future? Pleeeeeeeeease???? Just this once!!!!!!

Not before you sign this agreement [air0day.com] like little Bill did.

(OK, I'm just KIDDING, don't click I AGREE before you really read the content for GOD's Sake)

Whiny Shits

[caspper69]

Listen, M$ is in *NO* way like Enron. It's amazing how you zealots place blame. Enron was involved in price fixing and an artificial energy crisis. If I even hear someone say "That's just like MS," then you're too young to remember when an OS used to cost $300. Most people don't even "pay" for Windows.

I'm not here to argue the merits of M$ software, but I am here to point out that they *DO* create shareholder value, and as a company they perform very admirably. Compared to the stock market and the inflated .COM bust of the past few years, M$ is a blue-chip stock. Forget OSS, forget all M$'s shit... If you were sending you kids to college on their stock, you'd be a happy person...

Let's put things in perspective here folks..

Re:Whiny Shits

[msaavedra]

If you were sending you kids to college on their stock, you'd be a happy person.

Well, seeing as how their stock is now worth about half what it was a few years ago, I would definitely not be happy. Over that same period, I'd much rather have invested in IBM. Even a savings account down at the local bank would be better, for that matter.

Re:Whiny Shits

[NineNine]

Are you actually a moron, or are you lying on purpose?

IBM and MSFT's past two year performance nearly identical [yahoo.com]

Now go the fuck away and buy some RHAT stock [yahoo.com] you fucking idiot.

dot-com vs the real world

[Reziac]

Try this instead:

http://finance.yahoo.com/q?d=c IOW hard goods, and I picked 'em cuz they were the first such company that came into my head)

Re:dot-com vs the real world

[Reziac]

Slashdot mangled the URL, but I meant to have folk compare IBM with BWA (Borg-Warner, who make aftermarket automobile parts and the like). Substitute BWA for MSFT in the original poster's link, and you'll get where I intended you to be. Geesh.

(I hate it when /. makes me talk to myself..)

Re:Whiny Shits

[Ibag]

If I even hear someone say "That's just like MS," then you're too young to remember when an OS used to cost $300. Most people don't even "pay" for Windows.


If I'm not mistaken, if you buy a full version of a MS OS (instead of an upgrade version) they still charge about $300.

I think some of the stuff they have done (charging OEMs even for computers where windows isnt't installed, charging OEMs more if they choose to allow alternate operating systems on their computers) is just as bad, if not worse then some of what Enron did.

Still, what microsoft is doing is using shady accounting to artificially inflate their stock price. You might say its creating shareholder value, but that shareholder value comes from more people buying more stock because they are riding a speculative bubble. If the company is leaking money, the investors should know it.

If you are planning on sending your kids to college on someone's stock, shouldn't you have a clear indication of how the company is actually doing?

Should being a monopoly and having lots of cash in the bank negate your respobsibilities to keep your shareholders informed of your finances?

Re:Whiny Shits

[ewhac]

If I even hear someone say "That's just like MS," then you're too young to remember when an OS used to cost $300. Most people don't even "pay" for Windows.

What in the name of Ubizmo are you talking about? No OS, other than an enterprise-level UNIX, has ever cost $300.

It's difficult to make a comparison, since marketing of operating systems per se was never considered a major revenue source for anyone making one. Even Digital Research, makers of CP/M (the OS Gates ripped off, badly), didn't charge anywhere near the figure you quote for a copy of their system. Concurrent CP/M was also affordable. Oh, and DR gave you source code to many crucial modules, too. Not many other OSes show up on the radar as OSes per se, since they were more or less hard-wired into the machines they came with (AppleDOS for Apple ][, Atari DOS for Atari systems, and Commodore BASIC for C-64s).

Schwab

Re:Whiny Shits

[HeUnique]

Well, too bad for DR president that when IBM contact him back then to license his OS, he wasn't at home (he was on a plane) and his wife didn't agree to sign the NDA IBM asked for, so they went with Bill Gate's offer.

Guess who's eating his heart...

price of OS

[catfood]

What in the name of Ubizmo are you talking about? No OS, other than an enterprise-level UNIX, has ever cost $300.

Windows 2000 Professional is going for $271.88 at the first reseller [provantage.com] I looked up.

That's close enough to $300.00 that the other guy is basically right.

lies, damned lies and accounting.

[Performer Guy]

1) There's nothing wrong with a consistently conservative estimate.

2) If you underreport earnings you are actually undervalued. You may iron out the noise but you have sandbagged real money on the books for a quarter.

Re:lies, damned lies and accounting.

[gerardrj]

Do you get to under-report YOUR ernings to smooth out your tax liability from year to year? Could you just hide a $10,000 from the IRS each year until your tax rate goes down after retirement and then start claiming the income? (yes there are mechanisms to do this like IRA and 401k, but were're not talking about 'light of day' transactions in this story).

No. You'd be fined, charged interest, and perhaps put in federal prison for under-reporting your earnings (lying).

Why should any company be allowed to do this?

Re:lies, damned lies and accounting.

[Performer Guy]

Where did I say they should be allowed to do this? By all accounts they aren't being allowed to do this.

Re:lies, damned lies and accounting.

[hagardtroll]

Actually there is Income averaging that the IRS allows. This is beneficial for people with a lump sum cash infusion, like lottery winnings, etc.

Then there is the 401K, IRA you already mentioned.

Bill made a hack

[forgoil]

He, and others, are simply hacking the economic structure. They insert an extra NOP to better the timing, they tweak their routines. Is it any surprise? Finance is a game, with a huge set of rules, and a very bugger compiler (see if you get my anology). They are not being evil, they are playing the game. As others have pointed out, this is no fault of Microsoft that they are good at it.

Procto-compiling

[GungaDan]

"a very bugger compiler"

Small wonder gcc's such a pain in the arse.

Re:Bill made a hack

[forgoil]

Who said I liked the rules to begin with? I sure didn't. I don't like the way business is conducted in the world today, it hurts human beings. I don't like the way the major countries are run, they hurt their people. I dislike the legal systems of all major countries, they are corrupt and doesn't protect the individual from the superior force of large companies and goverments.

I am over 20, yes. Could you ever have a clue about who I am, what kind of capacity I have for empathy or not? I do know how to look at things from other perspectives, but I tend to write from just one at a time, as I would be percived as having split personalities otherwise.

Why would I ever cheat while playing networked games? I'm sorry, but you trying to make a funny point failed.

To say it again, don't blame Microsoft for acting like many other companies does today. Feel free to blame the whole thing, but don't single one company out. They are not NSDAP.

I have no solution I'm afraid.

Re:Bill made a hack

[Beliskner]

I don't like the way business is conducted in the world today, it hurts human beings. I don't like the way the major countries are run, they hurt their people. I dislike the legal systems of all major countries, they are corrupt and doesn't protect the individual from the superior force of large companies and goverments

So you believe you are God with high morals and the ability to pass judgement on all world legal systems. Mullah Mohammed Omar is just as convinced as you that he's got the high morals what with massive crimes in the US who protects the victims? Chop off their hands, on Jenny Jones transvestites get sex changes and have lesbian bisexual sex with dogs and cats. Mullah Mohammed Omar sees this as evil and enacts laws to prevent this and other things women seem prone to. You are a Mullah Mohammed Omar, you also believe you have higher morals than anybody else. I'd love to lock you in a room with him and hear you indoctrinate each other, each of you constantly believing that you alone are right.

Now if companies are small like you want, what happens if someone nukes the US and all telephone and electricity get knocked out, what centralised mechanism will restore order and repair the damamged systems? Small companies will just go "Bzzzzzzt, that's not part of our business model, we're declaring chapter 11".

I have no solution I'm afraid.

Cute. I bet you said that as an afterthought to conform to the expression "The first step to knowledge is knowing what you don't know" to make yourself look benevolent. Well done, but your $10 ethics don't wash with me I'm afraid.

My censored comments...

[NeuroManson]

See http://slashdot.org/comments.pl?sid=33571&cid=3629 298 , to see the point of the post, because some people are too godd@mned stupid to use their moderation scores properly...

What the...?

[Rogerborg]

• The SEC called off its investigation in exchange for Microsoft's promise that it will not break the rules in the future, though the company is not admitting that it broke rules in the past

Sorry, but what the fuck? They're "agreeing" to what exactly? To obey the law? To continue doing exactly what they're doing right now (whatever that is)? What kind of "agreement" is this?

Quo custodiet ipsos custodes? I'd be very interested in knowing how many of the SEC people involved in this "investigation" have suddenly found themselves able to pay off their mortgages, or fund their kids through college. And no, I am not joking. When you're dealing with a company with $40 billion in the bank and bad accounting practices, squirreling a couple of million in a slush fund is trivial. I mean, how many people at Microsoft actually believe that they know exactly how much money Microsoft has - and how many different figures would you get if you asked all of these "authoratative" figures?

This "nothing to see here, move along" investigation is a farce. They are either innocent, in which case there's no "agreement", or they are guilty, in which case they should get reamed. This stinks.

Re:What the...?

[Salsaman]

Yes, and we all know how good Microsoft are at keeping their promises (remember the Win95/IE trial)...

Re:What the...?

[SuiteSisterMary]

Translation: SEC can't prove anything, but they know Microsoft did something naughty. And they can make life difficult for MS, but can't ultimately do anything about it. So, they agree to call off the dogs, and Microsoft publicly (and legally) states that they'll be EXTRA careful in the future. Mistakes are made, after all. But, in the future, the SEC will be able to come down extra hard, with this as a precident.

SEC Stupid or Corrupt?

[Bob9113]

The settlement does not involve any fine, with Microsoft agreeing to accept a cease and desist order.

This means it will not engage in unspecified accounting practices that the SEC had been investigating. The agreement does not involve an admission of wrongdoing by Microsoft.

Microsoft has repeatedly settled with the DoJ by agreeing to cease and desist it's anticompetitive practices, and subsequently continued to engage in the exact practices identified in past trials. Is the SEC stupid or corrupt?

Re:

[account_deleted]

Comment removed based on user account deletion

Re:SEC Stupid or Corrupt?

[Bob9113]

If the SEC had no case, would Microsoft have accepted the cease and desist? Don't you think Microsoft sees a lot of value right now in being granted carte blanche in a federal case? Wouldn't that provide Microsoft with some much needed ammunition for use in their "we're being oppressed" campaign?

I would submit that what actually occured is closer to your reason number 2, though tainted with reason number 3: Corruption (surely you don't deny that corruption does exist, at least in theory if not in this specific case). To wit:

The SEC sees that Microsoft will invest an enormous amount of money into it's defense. Therefore, the SEC will have to invest comparable resources to make the case. Instead they succumb to the siren song from the Bush administration: "Drop this thing, it's a no-win situation, the DoJ is already putting Microsoft in their place." The SEC weighs it's options: 1. Pursue the case at huge expense and disappoint the President - potentially winning nothing more than a cease and desist. 2. Put on the blinders and issue the cease and desist - keep repeating, "this time they'll play by the rules" to yourself until you believe it - or at least until you can get to sleep.

Bear in mind I'm not talking about corruption in the snidely whiplash twisting his mustache and handing over a satchel with a dollar sign on the side sense. That sort of corruption is far more rare than some /.ers would have us believe. I am talking about corruption of the type I just mentioned. The "what will George's reaction be next time if I don't do what he wants this time?" kind of corruption - the "if Microsoft isn't here to support me next time, will I have any friends at all?" kind of corruption. Bending with the wind so that you can save your strength for the next battle (and never reaching the battle that is worth fighting). Maybe this isn't even corruption so much as it is weakness, but it is clearly born of friendships and knowing which side your bread is buttered on, and it is surely not in the public interest.

Collaborate or Cooperate?

[gi-tux]

"We always collaborate fully with the SEC and take our accounting very seriously,"

I like this statement made by Microsoft. I believe they really meant what they said also. They thought that most folks wouldn't pick up on the slight difference between collaborate and cooperate. Just goes to show you what you can do when you are a monopoly that the government fears. What we need is a good trust-busting president. Someone not afraid to stand up to Bill Gates and crew and let them know that it is time to quite walking on the American people.

Or perhaps they don't make money at all..

[Lord Kenja]

Heh. Just thourght it was a good time to bring up good old Bill Parish who spend some time a couple of years ago looking into MS accounting pratices and claimed they don't really make money at all... Haven't been updated since November 1999 tho.

http://www.billparish.com/msftfraudfacts.html [billparish.com]

conspiracy theory

[terrymr]

This may just be me but something isn't right here:

Last week the wall street journal quoted a source at the SEC as saying that MS would face charges for misrepresenting its revenues.

Now the matter is settled in return for "A promise not to do it again" essentially the same terms that the Antitrust case was settled on.

If I didn't know better I'd think somebody in the higher levels of governement was pulling some strings here. (sarcasm mode off)

Do you believe in lying?

[3seas]

It's a simple question that really has a simple yes or no answer. Anything else is just an deceptive excuse.

Different Interpretation

[OaITw]

The slashdot blurb focuses on Microsoft's delaying earnings to smooth out earnings reports and make sure they keep better expectations. Here is an article that explores the hypothesis that Microsoft is hiding earnings because as a monopoly they want to control the impression of success. "Well, when you're a
monopoly, churning out what some anti-capitalists believe are obscene
earnings year after year, you just might find it in your best
interests to hold back a bit, this analyst says." I think that this hypothesis is more severe than the smoothing hypothesis. Smoothing earnings is somwhat benign, your just covering up volatility. Hiding earnings over the long term to descrease the bad taste of being a monopoly is more corrupting.

MS's promise that it won't break the rules

[AntiNorm]

The SEC called off its investigation in exchange for Microsoft's promise that it will not break the rules in the future

You have got to be fucking kidding me. Microsoft is already a convicted criminal; calling off an investigation of them like this is no different than calling off all charges against a wanted criminal in exchange for their promise that they won't commit any more crimes in the future.

what?

[AdamBa]

Although you could argue that the shareholders own the $40 billion (and Bill Gates works for them too), it's not like they can get their hands on it. If people sell the stock, they won't be selling it back to Microsoft, they will be selling it to other saps in the stock market.

In fact the $40 billion in cash puts a floor on how low the stock can go, since the stock shouldn't drop much below the breakup value of the company (what you would get if you bought the whole company, sold off the buildings, etc and took the $40 billion for yourself). Of course with a market cap of $275 billion the breakup value is a long way down.

- adam

Re:The $40 billion fallacy

[line-bundle]

People seem to forget that Microsoft is a publically traded company. All of that $40 billion is owned, not by microsoft, but by the shareholders.

If Microsoft stock starts to go down, and people panic and sell their stock, that $40 billion evaporates. As that $40 billion disappears, their stock will drop even faster, and more people will sell.

You do not understand how stocks work. The 40 billion really is there and has nothing to do with the stock. Stock prices can drop to zero, but that forty-bill will still be there.

If people panic then they will sell stocks to each other. Microsoft is under absolutely NO obligation to buy those stocks. If it (microsoft) wants to buy the stocks then it will make a public announcement of a buyback.

Re:The $40 billion fallacy

[ProfMoriarty]

The magic of accounting 101 ...

The $40B in the bank is NOT owned by the shareholders. Period. It IS owned by Microsoft, a government recognized entity.

Your argument is that since Microsoft is public, the shareholders "own" whatever Microsoft owns ... this is fallacious reasoning, since if YOU owned ... let's say $89 worth of Microsoft, you don't get a copy of Windows for free, in exchange for your shares.

What is owned by Microsoft, cannot ever, be "magically transferred" to the shareholders, just by holding stock.

Now ... lets say that Microsoft decides to throw in the towel, and close operations. The stocks would plummet, and the assets would be sold off to cover the debt. ASSUMING that there was money left over, the rest THEN would go to the shareholders, based on the amount of you have/total shares ...

Usually companies in Microsofts position pay dividends, Microsoft decided not to ... it has that right, and keep the $40B in the bank for a "rainy day" ...

BTW, the $40B doesn't "evaporate" if MS's stock goes down ... ever ... since its shielded from the stock market in banks. Kind of like money laundering. :)

Re:The $40 billion fallacy

[The Cat]

let's say $89 worth of Microsoft, you don't get a copy of Windows for free, in exchange for your shares.

Sure you could. Provided that Microsoft had some mechanism to accept stock as payment for goods. Since they probably don't, most people just sell the stock and use cash.

It IS owned by Microsoft, a government recognized entity.

Which has issued n shares of stock representing ownership of the company, which are in turn owned by shareholders.

The shareholders *own* EVERYTHING. They own the money, the buildings, the IP, the trademarks, the source code, the chairs and the coffee maker.

The reason Microsoft doesn't pay dividends is because the directors haven't approved them, and the directors are elected by the shareholders. If the shareholders (of voting stock) decide they want dividends, then they shall have dividends. If the shareholders decided they wanted that $40 billion to form a picture of a GPF dialog on the floor of the Superdome, the trucks would leave Redmond the next day.

In any corporation, public or private, everything that happens is at the pleasure of the shareholders of voting stock. If one owns a majority of the voting shares, they run the company. Simple as that.

Re:The $40 billion fallacy

[mikeee]

If one owns a majority of the voting shares, they run the company. Simple as that.

Well, not quite that simple; they have to run the company in a way that's at least arguably to the equal benefit of all shareholders.

You can't buy 55% of a company and then sell all of its assets to yourself for $1; that would be fraud, as well as probably breaking a bunch of other laws I don't know about. (And probably wouldn't be profitable anyway, but there are exceptions where it would be.)

Re:The $40 billion fallacy

[mikeee]

Good points, but:

Usually companies in Microsofts position pay dividends, Microsoft decided not to ... it has that right, and keep the $40B in the bank for a "rainy day" ...

Actually, there is an obscure law that says corporations which have liquid assests above and beyond what they might reasonably need for business purposes must return them to the shareholders as dividends.

This law is regularly ignored; Ralph Nader was complaining about MS and this recently, but so far as I know nothing has come of that.

Re:The $40 billion fallacy

[pitcrew]

Close but no cigar. It is a tax law. It is a tax on accumulated profits which are profits that are accumulated in excess of the reasonable needs of the business. This law is on the books to keep (generally)private companies from accumulating profits for the owners so they can sell the stock and pay tax at capital gains rates rather than distributing the money and having it taxed at ordinary income tax rates (approximately double the capital gains rates). See IRC sec. 531 to 536 and pertinent regs. This law makes directors distribute excess profit since if a public company were assessed this tax the directors would likely have personal liability for the amount of the tax as any fool should see the situation developing and distriute the money. But for this forum you were pretty close!

Re:Friends in high places.

[ObviousGuy]

Yeah, nothing [cnn.com] quite like it.

Re:Tax trouble?

[iamplasma]

Easy, they noticed the report was written by Arthur Andersons. Though yeah, you do have to wonder how they got caught given how big their accounting division must be. You'd think they could pull something like this off.

Re:Karma Trolling for $500

[Zeinfeld]

Those put options are two things. Stock splits and stock in employee buy back/employee stock options. Look at his own charts and you will see two obvious things.

The MSFT puts are neither of those things as you would know had you read their annual report. Stock splits have no effect on options, most employee stock plans eork from stock issued for that purpose.

The real purpose of the MSFT puts was as a means of fulfilling their promise to buy back MSFT shares. The way that MSFT did this was to sell in-the money puts for the shares in question. This is a highly efficient method of buying back company stock as it means that the purchase price of the stock is discounted by the option price.

This is the method used by almost all the companies that have done stock buy backs. The only time when it is a really bad idea is when a company is buying back stock using capital rather than income. RSA made a major blunder when it decided to use half its reserves to buy back stock at what turned out to be the peak of the market. Investment bankers tend not to like companies accumulating money, especially if there is a financial bubble, they would like to be the only ones left with cash at the trough so they can buy back stuff for cheap.

Re:It's all Politics

[slow_flight]

Why are you blaming Bush for this? This is nothing new! This type of thing happened under Clinton, Reagan, Carter, the other Bush, etc. I remember H&R Block doing this almost 15 years ago.

Beating estimates.

[Lemmy Caution]

The trouble is also that everyone was doing just this - lowballing the estimates to come out on top. And the analysts noticed it, and started coming out with external estimates based on their own data (which was often wrong.) The whole comedy of errors really started getting rolling when companies started trying to influence the perceptions of the analysts into lowering their initial expectations - sandbagging the numbers, to pull out "end of quarter surprises." This was not only common, it's become standard operating procedure in a lot of otherwise respectable companies. And none of it is per se illegal yet, AFAIK (IANAL).

hold the phone...

[morgajel]

we crucified enron but we're letting microsoft go?!
W T F?!
they're a known criminal who uses underhanded business tactics.

I'm a bit out of the loop, but with wallstreet looking into everyone who looks fishy, shouldn't microsoft be on top of the heap?

Cooking the books Enron-style

[SgtChaireBourne]

This would explain some of Microsoft's actions in regards to their new licensing and their BSA extortion-like activities. Perhaps it is not unmitigated greed, but greed plus the panic that they won't be able to find a new cash flow before the world finds out that their company is in the red.

According to an article in the Economist from August 5, 1999 entitled " Share and share unalike [economist.com]."

"

For instance, Microsoft, the world's most valuable company, declared a profit of $4.5 billion in 1998; when the cost of options awarded that year, plus the change in the value of outstanding options, is deducted, the firm made a loss of $18 billion, according to Smithers."

Microsoft Financial Pyramid [billparish.com] covers some of the issues up to Nov 1999. I can only assume that these practices have continued and that MS probably would tank [portlandtribune.com] if subjected to a proper audit. That's just the book keeping.

Also keep in mind that not only are OpenSource/Free Software breathing down their neck with increasingly viable desktop alternatives, but Oracle, Sun, IBM as well. Plus an increasing number of governments, lately Peru, China and Germany, are getting tired of their busness practices.

Now think about the software situation. Linux, QNX and others have them beat in the embedded OS market. Windows as a server OS is beat by Solaris, Linux, *BSD. Windows as middleware is becoming decreasingly competetive with Gnome and KDE. Aqua has it beat hands down, you can even run legacy apps like Ms-Word, which is about the only thing currently holding GNU/Linux back from the general desktop. However, OpenOffice and others are filling the gaps left by Lotus-123, Borland's Quattro, WordPerfect.

Then there are indications that there is no improvment on the horizon. For example the shift from software, to marketing to legislation. The way MS is working the punishment phase of the antitrust trial it looks that their products are unable to compete in a free market. Even die-hard MS fans cannot refute EWeek's report that "[Allchin] later acknowledged that some Microsoft code was so flawed it could not be safely disclosed. [eweek.com]" Maybe coincidentally, Bill has been shifting investment money out of Microsoft [theregister.co.uk]. If the rest of the top execs are offloading also, (this is speculation and it would be nice to see some real figures, but where can that type of info be looked up) then it would indicate no confidence.

So with out a cash flow or at least investor confidence, all Microsoft's troubles would bite them hard. Death by a thousand small bites, plus a few medium sized ones. Perhaps the SEC backed off to avoid popping Microsoft's baloon like just another overratted dot-com.

Or would it turn out to be a collapse more like Enron's.