John McCain

Mr. McCAIN

Mr. McCAIN. I thank the Senator from Nevada. Again, I thank the Senator from Massachusetts for getting this bill through the committee. I thank Senator Gregg from New Hampshire for his willingness to work with us, even though he has a couple of concerns that I think we could work out. I urge my colleagues again, if the Medicare prescription drug issue is not resolved, to go back to the underlying bill, pass it, and perhaps we can give the American people at least some relief between now and next year. This issue is not going away. Maybe after this year's elections we could try to address it in a more nonpartisan fashion. On another issue, very briefly, in this morning's Washington Post there is an article by Mr. Andrew Grove, who is the chairman of the Intel Corporation. I believe he is one of the most respected men in America. He makes a case that is very important. He outlines some of the changes he thinks need to be made in the area of increasing corporate responsibility. I think it is worthwhile to be included in the Record. I ask unanimous consent that the article appearing in the Washington Post by Andrew S. Grove called ``Stigmatizing Business'' be printed in the Record.

Mr. McCAIN. I am glad to yield to the Senator from New York.

Mr. McCAIN

Mr. McCAIN. Will the Senator yield for a question?

Mr. McCAIN. Mr. President, I will be very brief, due to the shortness of time. I wonder if the Senator from Michigan remembers my comments last Thursday when I referred to an old boxing term, ``the fix is in.'' There was no vote allowed on my amendment, which is a clearcut, absolutely unequivocal statement about the use of stock options for accounting. Does the Senator really believe that, since my amendment was blocked by that side, his amendment is not going to be blocked by this side? The fix is in, I say to the Senator from Michigan. I hope he knows that. This is a terrible mistake, a terrible mistake, because we are not addressing what every observer knows is a vital and critical aspect of reforming this system, which continues to so badly erode the confidence of the American people, the investors, which is over half of the American people. I wonder if the Senator from Michigan remembers what I said last week, that the fact is the fix is in. I didn't get a vote on my amendment and the Senator from Michigan won't get one on his. Very frankly, since that side blocked my vote, I can understand them blocking this vote. I think it is wrong on both sides. The American people deserve to know how we stand on the issue of stock options. Does the Senator understand that?

Mr. McCAIN. If the Senator will yield, that is not correct. Mine was a motion to recommit.

Mr. McCAIN. Mr. President, I rise today as a proud cosponsor of amendment No. 4283 that is being offered by Senator Levin. The amendment says that the standard-setting body for accounting principles that is set up in this bill shall review the accounting treatment of employee stock options and shall within a year of enactment of this act adopt an appropriately generally accepted accounting principle for the treatment of employee stock options. Unfortunately, this body is not going to get the opportunity to vote on this reform or the reform I proposed last week requiring the expensing of stock options. We want to help restore investors' confidence for the long run, but we are being denied an opportunity to do this. A simple vote on this amendment is all we ask. And yet, we are being denied, and that is truly regrettable. I see no reason that a vote should not be permitted on this amendment, but let's face it--the fix is in. I want to talk more about the expensing of stock options. Americans have heard from the President and practically every Member of the Senate about the vital need to restore trust and transparency in business practices so we can begin to repair investors' faith in the honesty of our companies and in our markets. We need more transparency on a company's books so that any person wanting to invest their hard- earned money has a true financial picture of the company they are planning to invest in. This issue of expensing stock options is not going to go away. Look at what has just happened. Coca-Cola, a Fortune 100 company, just announced that it will begin in the fourth quarter to treat all employee stock options as an expense. And I believe more companies will follow Coca-Cola's lead. It is only a matter of time. Before I yield the floor, I would like to read a quote from a July 22, 2002 Weekly Standard article, ``Big Businesses Bad Behavior,'' in which economist Irwin Stelzer, Director of Regulatory Studies at the Hudson Institute, eloquently explains why governmental action is needed to restore faith in our financial institutions. The ``opposition of important segments of the business and accounting communities to reform,'' he writes, ``means that government must take on the burden of revising the institutional framework within which business operates-- setting the rules of the game that will allow markets to do their job of allocating human and financial capital to its highest and best uses. As Milton Friedman, no fan of big government, has written, society needs rules and an umpire `to enforce compliance with rules on the part of those few who would otherwise not play the game.' '' I couldn't agree more. I ask unanimous consent that the following articles be printed in the Record.

Mr. McCAIN

Mr. McCAIN. Thank you. I ask unanimous consent that the McCain amendment be allowed postcloture.

Mr. McCAIN. I would like to respond. I understand that. I did know it is part of the bill. I also know what has happened in the past. The fact is that we have not made the changes which are necessary because of enormous pressures that have been brought to bear. The Senate should be on record on this issue. This is not a minor issue. This is not a small item. The Senate should be on record on this issue, and it apparently will not be at this time. I thank my colleagues, though I do think that it is an important step forward. But I also believe this is something that we could address in a straightforward fashion.

Mr. McCAIN. I still have the floor. I thank the Senator from Maryland. I appreciate his hard work managing the legislation. I have managed bills in my time. I know that sometimes it gets very frustrating and difficult. I have some suggestions. One is that the Senator oppose cloture so that we can address all of these issues and prevail on his colleagues to do so so that we can have relevant amendments considered. I also think--it is not just in this Senator's view but in the view of almost everyone, in the view of Alan Greenspan, in the view of Warren Buffett, in the view of the Washington Post and the New York Times, and everybody--that this is a serious and vital issue. So my suggestion is that we not have a cloture vote, and that we go ahead and take up the amendments in an orderly fashion. The Senator from Nevada, obviously, will not allow my amendment to be considered postcloture. The Senator from Michigan has a question. Would the Senator from Nevada, the distinguished whip, like to wait until the Senator from Michigan is finished, or would you like to go ahead?

Mr. McCAIN. I would be glad to yield, if the Senator from Michigan would be glad to yield.

Mr. McCAIN. I would like to respond to the question of the Senator from Michigan, if he would like.

Mr. McCAIN. I thank the Chair. I think I have made my point.

Mr. McCAIN. I have the floor.

Mr. McCAIN. So you see.

Mr. McCAIN. I apologize to my colleagues for taking as much time as I have on this subject. As I said, I believe it is one of transcending importance in the minds of average American citizens. Yes. I would support the Senator's amendment postcloture. But I would also have to add that it doesn't address the issue completely. Here is why. The Senator from Michigan just talked about how these boards have been intimidated and bullied into backing off of a position they had before. I can't have the confidence that any board that is subject to the kind of intimidation and bullying that has happened in the past would properly carry out what is a pretty simple operation. I understand the Senator's point. I will support his amendment postcloture. I think it is an important one. But there has to be a clear signal sent. That clear signal is this: As Mr. Buffett says, if it isn't compensation, what is it? If options are not a form of compensation, what are they? If compensation is not an expense, what is it? If expenses shouldn't go into the calculation of earnings, where in the world should they go? This answers Mr. Buffett's question. We know where it should go--as an expense. Again, I am not trying to do away with stock options but how it is treated so the American people can restore their confidence.

Mr. McCAIN. I am glad to.

Mr. McCAIN. I say to my friend from Michigan, first of all, it was the Senator from Michigan who first initiated discussion with me on this issue several years ago. We were treated as virtual pariahs for having the audacity to challenge what was then, as we now know, a high- tech bubble in the way stock options were being disbursed. By the way, let's do away with the myth that these stock options are for the average worker. The fact is the overwhelming majority of the stock options have gone to the chief executives. That is just a matter of record and fact. But I think the Senator is correct. I think the Senator has also an additional, I think important, corollary to this amendment, that we could have certain direction from FASB, as it is known. But I think it is also a clear-cut, black-and-white issue as to how stock options should be treated. I would be glad to agree with the Senator from Michigan that some of these aspects of it can be better handled by the experts. Finally, the Senator from Nevada and the Senator from Maryland are in the Chamber. I hope they will reconsider and allow a vote postcloture at some time on this important amendment. I do not see how you can possibly go to the American people and say: Look, we have discussed and debated all these issues, but we wouldn't allow a vote on the issue of stock options. There is no observer who does not believe that the issue of stock options is one of significant importance in this entire scenario of returning trust and transparency so we can regain the confidence of the American investor. Again, I assure my friends, we will have a vote on this issue at some time, whether it be now on this bill or whether it be the next bill or the bill after that. So I hope my colleague from Nevada and my colleague from Maryland will allow an up-or-down vote on this amendment.

Mr. McCAIN. I would be glad to yield to the Senator from Maryland for a comment without yielding my right to the floor.

Mr. McCAIN. I could not agree more with the Senator from Michigan. I think he knows how strongly I believe that options should be expensed because they are compensation and they have value and there is no other form of compensation that is not expensed. It is a stealthy form of compensation and has driven the excesses of the 1990s. These options have driven the deceptions that make these financial statements for corporations look better than those corporations' situations really are because they have created so much value in those options that then executives--mainly executives--were able to cash in on these options and make tens of millions of dollars based on financial accounting which was deceptive. Would the Senator agree with that and agree that ideally these standards should be set by an independent financial accounting standards board?

Mr. McCAIN. Yes.

Mr. McCAIN. Yes.

Mr. McCAIN. Yes.

Mr. McCAIN. I would say to my friend, yes. I think there is another important organization, the Federal Accounting Standards Board--I believe it is--the international.

Mr. McCAIN. I am sorry my colleague will not allow a vote. I will be glad to respond to my colleague from Michigan.

Mr. McCAIN. I thank the Senator. I especially thank him for agreeing because the Senator from Texas--we have had our agreements, mostly agreements and occasional disagreements--has never, in all the years we have known each other, which goes back to our days in the other body, wanted to deprive anybody of a vote on an issue, no matter where he stood on that issue. I regret deeply that it is clear, as I said earlier, the fix is in; there is not going to be a vote on this issue before cloture is invoked, but I want to again assure my colleagues there will be a vote. There will be a vote on this issue, just like when I was blocked for a long time on the line-item veto, I was blocked for a long time on campaign finance reform, I have been blocked on a lot of other issues but we always got a vote because that is my right as a Senator to get a vote. It is not my right as a Senator to determine the outcome, but it is my right as a Senator to get a vote on an issue, particularly when, in the view of any observer, stock options are a key issue in this entire debate. Again, I respect the views of the Senator from Texas who disagrees with my position. I think it is a respectful disagreement that we have. I look forward to debating him. I do so at some disadvantage because he is a trained economist and former professor of economics. I can also see why he would want to do away with that million-dollar cap because I am sure the Senator from Texas will make more than a million dollars when he leaves this body, and justifiably so given his talent, expertise, and experience. I wish him well. I wish him every success in doing so. At least the Senator from Texas is in agreement that we should have a vote on this issue. The question is going to be raised by me and others, time after time: Why did we not have a vote on this issue? If we are truly committed to reforming the system, restoring trust and transparency to the system, why do we not have a vote on it? That is a very legitimate question. There will be a vote. I will return to Mr. Broder's editorial. He talks about that: The Federal Accounting Standards Board said that when options are granted, they should be treated as an expense. And the Senate passed a resolution telling the watchdogs, forget it. And that has had a truly wondrous effect. On average, the Federal Reserve Board estimates, the ruling has boosted the reported earnings growth of corporations by 3 percentage points from a realistic 6 percent to an inflated 9 percent. Enron, it is estimated, used that same ruling in 2000 to inflate its earnings by more than 10 percent. Overstated earnings, of course, boost stock prices, thus benefiting the executives who have been given stock options. By the way, I might add, not only stock options but it increases compensation because the stock value is inflated. But that is not the end of it. Because these stock options are deductible for tax purposes, and their cost can be carried forward for years, they also enable companies that hand out a lot of options to stiff-arm the IRS. In Enron's case, they allowed the company to cut its tax bill by $625 million between 1996 and 2000. Especially on my side of the aisle, there is this continuous drumbeat: Let us make the tax cuts permanent; let us do away with the death taxes; let us make the tax cuts permanent; let us help the American taxpayer. Should we not try to make a corporation pay its legitimate taxes? In Enron's case, because of the use of stock options, they allowed the company to cut its tax bill by $625 million over a period of 4 years. Amazing. Thanks to Enron, another push is under way to stop the double-dealing. But it faces tough sledding. The Coalition to Preserve and Protect Stock Options, which includes 32 influential trade associations, is flooding Congress with `talking points' claiming that `stock options are a vital tool in the battle for economic growth and job creation . . . (and) to attract, retain and motivate talent.' The coalition is trying to kill a bill that would not end stock options but simply specify that companies could not use them to reduce their taxes unless they also report them as an expense in their financial statements. The bill has bipartisan sponsorship: Democratic Senators Carl Levin of Michigan, Mark Dayton of Minnesota and Dick Durbin of Illinois; Republican Senators John McCain of Arizona and Peter Fitzgerald of Illinois. Fitzgerald is particularly interesting. He is from a wealthy banking family and is a staunch conservative, but Enron has made him almost a raging populist. It has had no such effect on President Bush. Concerned as always for the deserving rich, he told the Wall Street Journal he opposes this kind of legislation. . . . But Federal Reserve Board Chairman Alan Greenspan testified recently in support of expensing stock options. The only issue, he said, is whether under current rules, ``is income being properly recorded? And I would submit to you that the answer is no.'' That is what Alan Greenspan says: Is income being properly reported? And I would submit to you that the answer is no. And superinvestor Warren Buffett, who hands out bonuses but not stock options to his employees-- By the way, I have not heard of any bad morale or failure to attract employees out at Berkshire Hathaway out in Omaha, a lovely place to live--for years has been asking three questions: ``If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?" That is what Mr. Broder has to say. Paul Krugman, on May 17, 2002: On Tuesday Standard & Poor's, the private bond rating agency, announced that it would do something unprecedented: It will try to impose accounting standards substantially stricter than those required by the federal government. Instead of taking corporate reports at face value, S.&P. will correct the numbers to eliminate what it considers the inappropriate treatment of ``one-time'' expenses, pension fund earnings and, above all, stock options--a major part of executive compensation that, according to federal standards, somehow isn't a business expense. S.&P.'s estimate of ``core earnings'' for the 500 largest companies slashes reported profits by an astonishing 25 percent. Why does S.&P.--along with Warren Buffett, Alan Greenspan and just about every serious financial economist--think that current accounting standards require a drastic overhaul? And if such an overhaul is needed, why doesn't the government do it? Why does S.&P. think that it must do the job itself? To see the absurdity of the current rules, consider stock options. An executive is given the right to purchase shares of the company's stock, at a fixed price, some time in the future. If the stock rises, he buys at bargain prices. If the stock falls, he doesn't exercise the option. At worst, he loses nothing; at best, he makes a lot of money. Nice work if you can get it. Yet according to federal accounting standards, such deals don't cost employers anything, as long as the guaranteed price isn't below the market price on the day the option is granted. Of course, this ignores the ``heads I win, tails you lose'' aspect; executives get a share of investors' gains if things go well, but don't share the losses if things go badly. In fact, companies literally apply a double standard: they deduct the cost of options from taxable income, even while denying that they cost anything in their profit statements. So how could it possibly make sense not to count options as a cost? Defenders of the current system argue that stock options align the interests of executives with those of investors. Even if that were true, however, it wouldn't justify ignoring the cost--no more than it would make sense to deny that wages, which provide incentives to workers, are a business expense. Furthermore, it's now clear that stock options, far from reliably inducing executives to serve shareholders, often create perverse incentives. At worst, they handsomely reward managers who run their companies as pump-and-dump schemes, executives at Enron and many other companies got rich thanks to stock prices that soared before they collapsed. I hope the opponents of this provision, including my friend from Texas, will put it into the real-world context. It is nice to talk about economic theory. I know of no one better at that than the Senator from Texas. What happened at Enron? What happened at Enron when it cashed in $600 million worth of stock options and the stock tanks and there are 10,000 or so employees out of work? And there was a period of time where the employees were not allowed, because they were undergoing some managerial change of their portfolio, to cash in their stock options. But the executives were not prohibited from doing so. They kept on doing it. They kept on doing it. So I hope we can have this debate not in the world of theories of economics. I am not a CPA, nor am I a professor of economics, nor am I as smart as most of the Members of this body, but I know what happened to these people. I know of the thousands left penniless. I know of the thousands whose retirement savings were wiped out. Meanwhile, the very people this whole stock option deal was supposed to be protecting were not protected, and yet somehow the executives all made out like bandits. Perhaps my colleagues, as they oppose this legislation, can talk about the real-world examples--not the theoretical world of economics, which I will immediately grant them a distinct advantage on. I would like for them to have the opportunity to meet some of these employees, as I have, who were told by the executives of the corporation the stock was in great shape, while they were dumping the stock. I would like for them to talk to the employees or the retirees who invested enormous amounts of their money and their life savings, in some cases in a stock, and were told by their employers and executives that everything was great, things could not be better, estimates of double the stock value over the next few years. That is the framework of this debate, not the framework of whether certain economic theories are valid or not. Options are only part of an accounting system in deep trouble. As David Blitzer, S.&P.'s chief investment strategist, recently wrote, ``Financial markets are as much a social contract as is democratic government.'' Yet there is a growing sense that this contract is being broken, undermining the trust that is so essential to the operation of financial markets. Clearly, major reforms are needed. And bear in mind that this isn't a left-right issue; it's about protecting investors--middle-class and wealthy alike from exploitation by self-dealing insiders. So who could possibly be opposed? You'd be surprise. Harvey Pitt, the accounting industry lawyer who heads the Securities and Exchange Commission, has clearly been dragging his feet on reform. Bear in mind, this is not a left-right issue. It is about protecting investors, middle class and wealthy alike, from exploitation by self- dealing insiders. So who could possibly be opposed? You would be surprised. Harvey Pitt, the accounting industry lawyer who heads the Securities and Exchange Commission, has clearly been dragging his feet on reform. Mr. Blitzer of S&P points out that in previous periods of corporate scandal, legislatures and prosecutors took the lead with public concerns over the market. It is a sad commentary on our leadership that this time he believes he must do the job himself--referring to Standard and Poors--and announced that it would impose accounting standards substantially stricter than those required by the Federal Government. Boston Globe, June 10, 2002: Stock options have become the currency of choice to reward high ranking executives in part because under current rules the company need not count them as an expense with much of their compensation. Depending on the difference between the option price of the stock and the market price, it is no wonder that some executives have used trickery to show quarterly growth and inflate the worth of their companies. Excessive reliance on stock options is a license for some executives to drive their companies along treacherous roads. I have a number of other views, but I think I have made my point. The point is this: Why should we, in the name of restoring confidence, trust, and transparency to the American people on an issue of this import, not have a vote? That is the first question. The second question that needs to be answered is Mr. Buffett's question, not mine; not mine because I don't claim to have a corner on expertise and knowledge on this issue. But I believe that Mr. Buffett does. I believe that Mr. Greenspan does. I believe that literally every outside observer and economist does. If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go? I know what I will hear in response. In fact, most of those have already been responded to so I don't intend to engage in extended debate about it. We all know where the majority stock options have gone--to the executives, not to the workers. Mr. Buffett, and many others, have been able to attract good and talented employees and retain them without having to resort to stock options. But the real question is not whether stock options are good or bad because the intent of the amendment is not to do away with stock options. The intent of the amendment is simply to give an accurate depiction of what stock options are. And that is clearly compensation. Depreciation is listed as an expense. In the view of many, that is much harder to calculate than a stock option. Another argument I anticipate will be, how do you treat it taxwise? Frankly, I would be glad to treat it taxwise as to how the smartest people at the SEC would say it should be treated. I would leave that up to the two experts. But to not treat it as an expense, as Mr. Buffett says, of course is just Orwellian. It is Orwellian.