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Options and Perpetual Motion
Letter to the Editor
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In his Aug. 8 editorial page commentary, “The Real Value of Options,” Harvey Golub, the former CEO of American Express, argued that the issuance of stock options should not be treated as an accounting expense because no outlay of corporate cash is required. Profits per share might fall, but total profits should not. This reasoning has several interesting implications.

The same argument could be applied to new issuance of stock itself, which also involves no direct cash outlay.

Since both stock and options have a clear market value, workers and executives could receive their entire compensation in this form, which they could then sell to pay their living expenses. According to Mr. Golub, this stratagem would allow corporations to completely eliminate all their salary costs from an accounting perspective, since no cash is spent. Corporate profits would soar.

Similar financial engineering would allow corporations to barter their shares or options for rent, raw materials, advertising, capital equipment and everything else, thereby completely eliminating all these drags on profit margins since not a single actual dollar could change hands. Corporations could quickly reduce their total accounting expenses to zero, allowing profits to equal revenues.

Finally, if the issuance of options should not be an accounting expense, companies could abandon the difficult task of providing actual goods or services, and instead switch their business activity to merely issuing and selling options directly into the marketplace, generating enormous cash revenue at no accounting expense whatsoever.

It appears that Mr. Golub has stumbled onto a wonderful perpetual-motion device for financial activities. Perhaps he should now work to develop a similar engine that would allow us to run our cars without fuel and our lights without electricity.

Ron Unz, Chairman
Wall Street Analytics, Inc.
Palo Alto, Calif.

(Republished from The Wall Street Journal (Letters) by permission of author or representative)
• Category: Economics • Tags: Wall Street 
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