Well, Novell's case is somewhat apt. It's still generating revenue, has one billion in cash on hand, 1.8 billion in assets, but it's struggling to stay relevant. A rather great deal of its liabilities are basically various attempts at becoming relevant again - its value as a single, monolithic entity as is certainly questionable.
I'm going to read between the lines here (not being an expert on Novell) and guess that "struggling to stay relevant" means "stagnant," "not innovative," "few growth prospects..."
Buy the company, pocket the cash, cut out all the exploratory crap it's doing and sell of the individual units - Netware licensing, Unix copyrights, etc. and let the husk fall into bankruptcy. The ability to let a corporate husk fall into bankruptcy like that while pocketing insane bonuses ought to be fraud.
Yeah, it usually is fraud and at any rate creditors have certain rights too. The Enron guys were prosecuted for that (among other things).
A lot of financiers see their goal these days is to MAKE MONEY. PERIOD. Not to build business, sell a product or grow a company into something. Simply.. to line their pockets.
That's not necessarily bad. There is a reason that they get paid for this, and I'm trying to communicate that reason to you: the financier - you're right - probably doesn't give a flying fuck about building a business out of the company if he's buying it to dismantle it. But the reason he's making money dismantling it is because he's freeing up the company's resources to be used in other
businesses for better purposes. Do you see the value in that?
Nowadays, those numbers seem like chicken shit compared to government indebtedness.
Government indebtedness is overrated. The debt levels by the federal government relative to GDP is the same as it was in the 80s.
The problem is that governments are starting to sell of assets, like essential service utilities, to the highest bidder. These utility sales gain a short term liquidity but provide a long term head-ache when the owners fail to maintain asset currency and eventually services fail. They then hold the country to ransom, remember that these are essential services, by upping prices to pay for asset replenishment and the governments do nothing but accept the situation and watch the inflation bar rise like a Saturn rocket. This is a major ailment that will yet come to bite us all.
The whole point of deregulating utilities is to make it so that one utility can't
hold the entire system for ransom, whether it's a government utility or a private one, because people can choose to go to another utility - which is exactly why utilities will be under competitive pressure to invest. If this is not the case, the government did not deregulate properly.
Secondly, how many times have you heard the boss tell everyone that 'we have to cut costs'? Well the law of diminishing returns suggests that as we keep on reducing costs, the measures we take will yield fewer savings. Now you don't have to be a Nobel prizewinner to know that we have well and truly passed the point of cost reduction sustainability. Organisation CEOs are measured on ROI and Cost/Revenue ratios, amongst other things. Well let's face it, any fool can reduce costs...sack that team over there...but sustainability is the key.
CEOs are (usually) paid based on the value of the company's stock directly or indirectly. If they cut costs so aggressively that future profits (which is what the price of the stock is based on) falls...well, they end up suffering because analysts are going to see this and start selling the stock because they recognize that the company's going straight to hell.
And btw...financial derivatives are still out there and bloody dangerous. The main failing is that no-one monitors the underlying risk to the level and frequency needed, plus they cannot be priced accurately...even managed funds have pricing issues themselves so how can a compounded product like a derivative stand up?
My turn to rant:
"Financial derivatives" includes a very
broad class of financial instruments. Most of them (like basic options, forwards/futures, and swaps) are not hard to understand or hard to value. When people talk about the ones that are "hard to value" they're probably talking about "collateralized mortgage obligations" which were the securities with which mortgages (subprime and otherwise) were packaged and sold off to banks...and also muncipalities.
I don't think the CMO's were
hard to value. The value is derived (hence "financial derivative") from the underlying securities. The thing people misunderstood was not the derivative but the underlying market - there was a bubble in housing, and people were mistaken in thinking which way housing prices would go. That's not new - bubbles and "irrational exuberance" can happen without derivatives - but it will make you misprice the derivatives, but it's not because of the derivatives.
And I also know that from time to time derivatives have been used to perpetrate fraud, where complex financial instruments have been used to hide the underlying risk. Well...that's fraud, but I think that's a separate issue from "financial derivatives."
(ps my job basically exists because of stock options so you will pardon my self interest in this matter)