05 June 2014

Serial Killers

In the bad old days, Bill Gates would try to parry the monopolist meme by saying that MicroSoft needed to be left alone so it could "innovate". Nevermind that from day one it co-opted and/or stole everything it made. BASIC came from Dartmouth. DOS came from Seattle Computer. Office was made under contract to Apple. Windows came from Apple, which stole it from PARC. Apple's operating systems are cadged from BSD, in the main (BSD, unlike linux, permits its own theft). So much innovation, yet so few places to steal it. The hypocrite's dilemma.

What's worser, sometimes, is to read a turn of phrase that impels one to slap one's face with vigor. "I wish I'd said that!!" It gets worser, still, if the kernel of the statement has been in one's lexicon and musings for sometime, just not as elegantly. Oh, the horror. Much more heft in that slap. Damn, my face is sore.

Today is such a day. Sigh.

Jesse Eisinger weighs in on Valeant/Allergan, and opens with this sentence:
On Wall Street, financial engineering masquerades as vision.

Boy, do I wish I'd said that. Of course, I have. Just not quite.

The story of Valeant's assault on Allergan is worth understanding in its own right, so please go read the story. If not, here's the crux of that matter:
J. Edward Ketz, an accounting professor at Penn State University, took the company's cash flow and adjusted it for all the spending from acquiring companies and paying the restructuring costs. By Professor Ketz's reckoning, Valeant has sent more than $1 billion in cash out the door each of the last four years and was negative $5.4 billion in 2013 alone.

This strategy isn't unique to Valeant or bio-pharma generally. But it does highlight a recently repeated lament: these corporate CEOs are paid the big bucks, supposedly, for their ability to allocate capital productively. Fiduciary manipulation, which is what financial engineering really is, can have short term micro benefit, but doesn't increase either micro or macro productivity, since it's just a case of moving moolah from Peter to pay Paul. But, as your Good Mother used to yell at you when you did something stupid and foolish, "What would the world be like if everybody behaved like you??!!". An economy based on finance and tax evasion and big fish eating little fish (and then spitting out the bones and guts) fails spectacularly soon enough.

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