Monday, April 24, 2006

In Which LearnedFoot Attempts to Induce a Simultaneous Orgasm in KAR's Female Readership Through the Use of Accounting Terms

As I've noted before, some readers of this here blog get the screaming thigh sweats from accounting terminology. If you hear ecstatic wailing from an office cube near you, its probably some hottie reading this post. Send pictures if you can.

Letters to the Strib today, emphasis mine:

It's a broken system

I was appalled to read that UnitedHealth Group CEO William McGuire has earned over $1 billion in compensation off the backs of working- and middle-class people who struggle to pay their health care premiums as companies cut benefits and find creative ways to pass the rising costs on to their employees (Star Tribune, April 19).

What makes McGuire's behavior troubling is that he is taking advantage of a health care system that is already broken.

Whenever anyone criticizes McGuire's compensation, his defenders claim that he deserves his billions in compensation because of the rising stock at UnitedHealth Group. They then mention his charitable contributions as if that would somehow make him a "good guy" in our society. McGuire is deserving of both disdain and closer scrutiny by our government regulators.


Board lined pockets

As a former medical director, I was always embarrassed by the money Dr. Bill McGuire was sucking out of the health care system. However, I always thought the board would watch over this and keep it within reason.

Now, I understand why no action was taken. The board members were too busy lining their own pockets with millions of dollars in stock options.


Let me make this clear: I am not here to defend CEO compensation that often times runs to the obscene. There are plenty of other wailers and gnashers of teeth out there that are perfectly willing and able to heap scorn upon underperforming (or even adequately-performing) and overcompensated executives. So all you mouth-breathing moonbats out there can stow it.

Besides, it would be fantastically boring, and at the end of the day, that's not what we do here on KAR.

What we do take on here is the stultifying ignorance of the Knee Jerk Based Community. And these two letters are a prime target.

Let's review:

The CEO of United Health Group came under fire last week when it became known that his performance bonuses included stock options which are now worth around $1.5 billion.

Read that again: "stock options".

[KAR FEMALE READERS: Ooooooooooooooh.]

What is a stock option? A stock option is a contractual right to purchase a certain quantity of a given security at a set price for a period of time.

[KAR FEMALE READERS: Mmmmmmmah ohhhhhhh ohhhhhhh.]

Read that again: an option is a right to purchase a certain quantity of a given security at a set price for a period of time.

[KAR FEMALE READERS: Yes oh yesssssssssss! Don't s-stop!]

For example, let's say your employer, Everyman Visions Ltd. (Ticker symbol EVIL), grants you an option for 100 shares (a "round lot") [KAR FEMALE READERSHIP: Uhhhgh OH OH OH OH OH !!!!!] of EVIL common stock at $10 per share within the next year.

EVIL is currently trading at $9.50 per share. Do you exercise the option? Don't be silly.

But let's say that because of rumors of a hostile takeover bid by Halliburton (HAL), the price per share of EVIL shoots up to $10.25. Do you exercise the option now?

Maybe. Maybe not. It depends on what the brokerage fees are. It's entirely possible that the transaction costs may eat up a large portion of your profits from the transaction. This is known as the "strike price" -


- that is, the threshold at which it becomes profitable to exercise the option. So when those rumors about Halliburton's hostile takeover pan out and the price of EVIL shoots to $50 per share, that's when you pull the trigger on the option and retire to the Mac-Groveland or Crocus Hill neighborhoods in St. Paul.

OK. So now that you are fully educated, what happens when you exercise an option? Hmm? Hmm? What does the transaction look like?

You BUY the stock and then turn around and sell it.

When you buy stock, issued by a corporation (and most options issued by corporations are for the purchase of unissued stock held in reserve by the corporation) who gets the money?

I'll dumb it down for these of you who write letters to the Strib: when you buy a block of shares FROM a corporation, who gets paid for those shares?

THAT'S RIGHT! THE CORPORATION GETS THE MONEY! And the corporation then uses that money for, well, anything - expansion, payroll, administration, utility bills etc. The proceeds from the sale of the stock go on the balance sheet on a line item called (everybody brace yourselves for the coming orgasmo-quake) "paid in capital"...


... or "shareholder equity"...


And, at the other end of the transaction, when the person who exercises the option turns around and sells the stock to take the profit, who buys the shares?

Individual and institutional investors.

[KAR'S FEMALE READERSHIP: *Lighting cigarettes*]

So, back to today's Droolings to the Strib. Answer this question: How much money did Bill McGuire "suck out" of the health care system because of his stock options?

Answer: $0

Now I'm going to roll over and take a nap.

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