Friday, August 02, 2002

Glass House [NYT] Corning sold off all its old-fashioned (i.e., profitable) businesses during the bubble to throw more money into... fiber optics! [The guy in charge of the fiber division made $10M in "all other compensation" (which is somehow neither bonus nor options) last year for coming up with this brilliant plan.] Anyway, they've had to do some, uh, creative financing which has destroyed the already-cratering stock price [the CFO made "only" half a million on options last year, but when you consider what he's done to the stock since, that's a pretty good deal]. Which financing, to get to the point, reveals yet another conflict of interest built into the invisible hand:
There is another factor about this offering that represents a trend. While Goldman, Sachs was traditionally Corning's lead banker, it falls to third on the cover of this deal's prospectus. The others in the top five are affiliated with commercial banks. Why use commercial banks? Corning won't comment, but it clearly has reason to be nice to the banks that will decide whether to renew its lines of credit in 2005. That the commercial banks have used their lending ability to improve their position in investment banking is well known. But one thing that is not appreciated is just how accounting can encourage banks to perhaps trade low interest rates for extra investment banking business. That would give the banks income upfront, in the form of investment banking fees, while it would provide lower reported expenses for the customer, since investment banking fees often do not show up on income statements.

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