The 9/11 option grantee fund

In response to my post about the 9/11 options, Big Picture says

I elect not to put money with people who I do not believe will respect my dollars, nor give me a lot of confidence in their ability to make me money. But for others -- the apologists for this contemptible behavior -- I hereby propose that you should invest. Let's assemble the 9/11 Options Grantee fund (that's a catchier title than the "Apologist Fund"). Then, I propose that Bainbridge and Ribstein and Elfenbein put their actual money at risk with this collection of fine, fine human beings and outstanding corporate executives. I say less talk, and more actual money at risk. Its time for the chattering class to step up and prove they have the right stuff. Few things focus the mind like hard earned cash at actual risk. Under those circumstances, will the apologisms somehow become less glib than the what we have seen so far? (That's my suspicion). Gentlemen: Are you willing to put your monies where your opinions are (Hey, I do everyday)? Or, is all this just so much empty theoretical chatter? What say ye?

Clever ploy, Big Picture, but it doesn't work.

To begin with, what I complained about was blowing into a scandal the fact that the executives took "unseemly advantage" of 9/11. I'll stick to that position – that is not, in itself, a scandal. At this point I don't know if the executives were backdating, or if they made proper disclosures. There may well be a problem on both scores, but the 9/11 aspect is just not a story. I wouldn't even have bothered to write about it had it not been for the WSJ's "unseemly advantage" statement.

Another big problem: I invest mostly in index funds, and my exceptions are almost as diversified. I'm not a stockpicker. Your proposed fund would require me to make a judgment on particular share attributes that I don't view as consistent with my efficient market based investment philosophy.

Moreover, even if I were to make an exception to my usual philosophy, your judgment about these guys may be right. There is a pretty good chance they were backdating and not disclosing. While I don't believe this is a major scandal, I also don't choose to invest in a fund that may be heavy in companies managed by law breakers.

And as I pointed out in my initial post, I view it as a problem that the managers probably thought their stock was a "bargain," and deplore the fact that these guys don't "believe more in efficient markets" or in "the notion that stocks go up because real things change, not because of graphs on stock charts." As it happens, they were hoist by their own petard. As a commentor to my initial post pointed out, the market didn't hit a low until the summer of 2002.

Finally, the fact that I won't invest in the proposed fund is not only not inconsistent with my position, but supports it. All the stories about these options imply that there's a huge problem that requires regulation. BP's post shows that, instead, investors like him can read the stories and make their own investment judgments. Regulation can only create more uncertainties and misincentives, without adding to this market fix.

Indeed, according to Heron and Lie, the academic progenitors of the backdating stories, regulation has already mostly fixed the problem by requiring faster reporting of option grants. This, in fact, is the basis of their conclusion that there was backdating here, and not just stockpicking – if there were no backdating, the SOX provision that required faster reporting would not have had the effect they observed.

So I would suggest that BP stick to stock-picking.  His proposed fund won't work either as a fund or as a rhetorical device.

Update:  Steve Bainbridge questions the day job of the would-be manager of the 9/11 options grantee fund -- technical (or as BP prefers to call it "quantitative") analysis.  I'm with Steve.

Comments

[Barry Ritholtz]

Its not much of a ploy, but you raise a fair point.

My key concern is what was revealed of management's beliefs and behaviors by their 9/11 option grant.

I like to invest in companies where there is a real watchdog -- not a lapdog -- Board of Directors.

[Robert Schwartz]

Barry: T-Bills.

If they really wanted to pick the bottom, they would have repriced/new issued in Q402/Q103. At that point they looked like real heros taking options in 9/01.

[Barry Ritholtz]

Rob,

Heros have to take risks. So do investors. The 9/11 option grantees took no risks, so what they did can hardly be considered "heroic."

Switching gears, T-bills are a riskless investment, and are geared towards income. During periods of modest inflation (like now), T-bills could lose real purchasing power, if their rates are below actual inflation. (So they are not truly riskless -- there's also reinvestment risk).

Equities are an investment with more risk and therefore potentially more reward. They are one of the best performing asset class over very long periods of time -- i.e, 30 years or so.

Unfortunately, there have been long periods of time where equities returned very little -- i.e, 1929-1954, 1966-1982, and perhaps, 1999 - 2010 or so.

Buying after the break works -- the lows of 1932, 1974, and 2002 -- but you have to be extremely pateint and disciplined.

[Robert Schwartz]

What Ritholz wrote:

"The 9/11 option grantees took no risks, so what they did can hardly be considered "heroic."

What I wrote:

If they really wanted to pick the bottom, they would have repriced/new issued in Q402/Q103. At that point they looked like real heroes taking options in 9/01.

You are just plain wrong.

No decision can be judged outside the context in which occurred (Unless you are Gretchen Morgenson). 9/11 was a real world event that affected everyones calculations of risk and reward. The 90s bubble was the result of expanding valuations. The bubble began to deflate in Q100. In Q401 it seemed that a different world had come into place, one characterized by more volatility and risk, and concomitantly low valuations.

But, those investors who hung on (I am one) were pleased to see the market recover so that it traded above 10,000 by the end of Q102. Then the bad stuff hit the fan.

In mid Q202, the market began a sharp plunge that dropped it to less than the Q401 low by early Q302. The market remained in that slough through the end of 02 into Q203, at which point it began to move up.

At any point in that slump, I or any number of other investors, could have easily been convinced that our optimism in Q401 was misplaced. Equity commitments made in Q401 looked then (i.e. Q202 through Q203) like they were based on foolish hope and that we were in for a replay of the era 1973 -- 1981.

Indeed, if you had told me then that oil would now be $75/bbl, I would have been sure that 70s show had gone into syndication.

Bottom line there was enormous risk in the market in Q401 and it got worse over the next year and a half.

As for my other comment, I should have been more discursive.

What I should have said is that if you wish "to invest in companies where there is a real watchdog -- not a lapdog -- Board of Directors," you will have nothing to invest in. So you should preserve your capital by invest in in Treasury securities.

There are not now, nor have there ever been "watchdog" boards of directors. No one joins a board of directors because he wants to be a watchdog. Expecting that a board will act as a watchdog is like expecting dogs to be vegetarians.