High & Low Finance: The Hefty Yoke of Student Loan Debt

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Bits Blog: Microsoft Names First Female Finance Chief

Microsoft Amy Hood, Microsoft’s new chief financial officer.

Microsoft named Amy Hood, an executive at the company, as its chief financial officer, the first woman to hold the top finance job at Microsoft.

Ms. Hood, 41, joined Microsoft in late 2002 and was most recently the chief financial officer of Microsoft’s business division, the unit that oversees its lucrative Office suite of applications. She replaces Peter Klein, Microsoft’s chief financial officer who announced recently that he was resigning to spend more time with his family.

A number of women have risen to Microsoft’s top ranks, but like most technology companies, its senior leadership is still dominated by men. One exception is Lisa Brummel, who, as chief people officer, runs the company’s human resources department. Late last year, Microsoft appointed two women, Julie Larson-Green and Tami Reller, to run the engineering and finance operations of the company’s Windows division, one of its most important units.

As chief financial officer, Ms. Hood will play a bigger role in helping Microsoft adapt to major changes in its business, most notably the shift to mobile devices from PCs and the transformation of traditional software into cloud services. In a sign of these changes, for the last six months, Steve Ballmer, the chief executive officer, has begun talking about Microsoft as a devices and services company.

Ms. Hood will also serve as Microsoft’s ambassador to Wall Street, which has for years looked skeptically at the company’s efforts to enter new businesses like Internet search. After a recent solid earnings report from Microsoft, investors have become more bullish on the company’s prospects. Its shares now trade near their 52-week high.

In an e-mail to Microsoft employees on Wednesday, Mr. Ballmer said Ms. Hood had helped lead the change of Microsoft Office into a cloud service. He said that he worked closely with her on two big acquisitions, that of Skype and Yammer, and that her critical thinking would be an important skill in her new job.

“Amy is a great collaborator with a history of successful cross-group projects, and I am looking forward to having her as a member of my leadership team,” Mr. Ballmer wrote.

Bits Blog: Apple’s Peter Oppenheimer Is Highest Paid Finance Chief

Apple Peter Oppenheimer, Apple’s chief financial officer.

Being a tax ninja pays off at Apple. Its chief financial officer, Peter Oppenheimer, who has helped the company sidestep billions of dollars in taxes, was the highest paid chief financial officer of 2012, according to data compiled by Bloomberg News.

Mr. Oppenheimer was awarded a $68.6 million package, much higher than the $4.17 million that went to Tim Cook, Apple’s chief executive, says Bloomberg. Oracle’s financial chief, Safra Catz, was the second highest paid with $51.7 million; Google’s Patrick Pichette was third with $38.7 million.

Of course, all corporations do their best to minimize taxes. Apple’s Mr. Oppenheimer has done an exceptional job managing the company’s cash, finding legal ways to side step billions of dollars in taxes, allocating about 70 percent of its profits overseas, where tax rates are often much lower.

Last month, Apple’s Mr. Oppenheimer raised a bond deal of $17 billion to fund a $100 billion payout to shareholders. By borrowing money, or issuing debt, Apple avoided $9.2 billion in United States taxes.

High & Low Finance: How Apple and Other Corporations Move Profit to Avoid Taxes

A decade ago, that was a question some short-sellers were asking about Parmalat, the Italian food company that had seemed to be coining money.

It turned out that the answer was not a happy one: The cash was not real. The auditors had been fooled. A huge fraud was being perpetrated.

Now it is a question that could be asked about Apple. Its March 30 balance sheet shows $145 billion in cash and marketable securities. But this week it borrowed $17 billion in the largest corporate bond offering ever.

The answer for Apple is a more comforting one for investors, if not for those of us who pay taxes. The cash is real. But Apple has been a pioneer in tactics to avoid paying taxes to Uncle Sam. To distribute the cash to its owners would force it to pay taxes. So it borrows instead to buy back shares and increase its stock dividend.

The borrowings were at incredibly low interest rates, as low as 0.51 percent for three-year notes and topping out at 3.88 percent for 30-year bonds. And those interest payments will be tax-deductible.

Isn’t that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further.

Could this become the incident that brings on public outrage over our inequitable corporate tax system? Some companies actually pay something close to the nominal 35 percent United States corporate income tax rate. Those unfortunate companies tend to be in businesses like retailing. But companies with a lot of intellectual property — notably technology and pharmaceutical companies — get away with paying a fraction of that amount, if they pay any taxes at all.

Anger at such tax avoidance — we’re talking about presumably legal tax strategies, by the way — has been boiling in Europe, particularly in Britain.

It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain.

Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States relative to the profits it makes, thanks to what Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff at the Congressional Joint Committee on Taxation, calls “stateless income,” in which multinational companies arrange to direct the bulk of their profits to low-tax or no-tax jurisdictions in which they may actually have only minimal operations.

Transfer pricing is an issue in all multinational companies and can be used to move profits from one country to another, but it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights. There is unlikely to be a real market for that information, so challenging a company’s pricing is difficult.

“It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”

The United States, at least theoretically, taxes companies on their global profits. But taxes on overseas income are deferred until the profits are sent back to the United States.

The company makes no secret of the fact it has not paid taxes on a large part of its profits. “We are continuing to generate significant cash offshore and repatriating this cash will result in significant tax consequences under current U.S. tax law,” the company’s chief financial officer, Peter Oppenheimer, said last week.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

High & Low Finance: Dell’s Ups and Downs With Options - High and Low Finance

Now, nearly 25 years after it went public, Dell Inc. is reported to be considering leaving the public arena by going private in what would be the largest leveraged buyout in years. The company is no longer viewed as a leader, and its share price is less than it was a decade ago.

For most of its history, Dell appears to have followed advice from investment banks — advice that ill-served long-term shareholders to the benefit of corporate executives. The company paid out billions of dollars to buy back stock, and only last year began to distribute some of the money to shareholders who chose to stick with it rather than bail out.

It has spent more money on share repurchases than it earned throughout its life as a public company. Most of those repurchases were at prices well above current levels.

Here’s the breakdown so far: Cash paid by the company to shareholders who were bailing out: $39.7 billion. Cash paid in dividends to shareholders who chose to hold on to their shares: $139 million. Current market value of the company: about $22 billion.

Along the way, profits for Dell executives from stock options soared to amazing levels, and Michael S. Dell, the founder, chairman and chief executive, evidently concluded he had erred by not taking options during the company’s early years.

In 1994, the company’s proxy stated “Mr. Dell does not participate in Dell’s long-term incentive program because of his significant stock ownership.” That changed in 1995, and in 1998 he received more than 20 percent of the options the company issued. His options eventually produced profits of more than $650 million for him.

This column is not about Dell’s business successes and struggles, which have been well covered elsewhere. It instead looks at the company as an example of financial management and mismanagement — and at the impact foolish accounting rules can have on corporate policies and behavior.

The primary accounting rule involved here was for stock options, but the general rule that companies do not need to record profits or losses on transactions in their own stock also played a role, allowing companies to routinely sell low and buy high without ever reporting a loss.

Until 2005, companies could pretend that stock options they handed out to employees and executives were worthless, and therefore not show them as an expense, as they would if they paid the employee in cash or even in shares of stock. The logic to the rule was that since the options would in the end be valuable only if the share price rose, there was no need to record an expense when the options were issued. Anyway, the companies said, this was a cashless expense. The company would not have to pay a penny, so why record an expense?

Accountants realized years ago that made no sense, and in the 1990s the Financial Accounting Standards Board, which sets American accounting rules, moved to change the rule. Companies, particularly technology companies, reacted as if capitalism itself were under attack. Make them account for options, they said, and people would stop buying their shares and America’s technological innovation would come to an end.

That argument did not persuade the accountants, but it — and a lot of campaign contributions — had more impact on Capitol Hill. In 1994, the Senate voted 88 to 9 in favor of a resolution threatening to put the accounting standards board out of business if it did not back down. The board surrendered, and it was another decade before it recovered its nerve.

One trouble with the argument that no cash was involved was that in practice it was far from true. Many companies, Dell among them, sought to reassure shareholders that they would suffer no dilution through the issuance of stock options, vowing to buy back as many shares as they issued through options.

Floyd Norris comments on

finance and the economy at nytimes.com/economix.

City Room: Technology Leaders Endorse Effort to Overhaul Campaign Finance

A group of more than 30 technology industry leaders has endorsed an effort to overhaul the state’s campaign-finance laws, and is urging Gov. Andrew M. Cuomo to push for a system of public financing for state elections.

The technology industry leaders include Dennis Crowley, a founder of Foursquare, and Kevin P. Ryan, the founder of Gilt Groupe. The effort has also won the support of the venture capitalist Fred Wilson and his partners at Union Square Ventures, which has invested in start-ups including Meetup, Etsy, Twitter, Tumblr and Zynga.

Arguing for a campaign fund-raising system that would provide public matching funds to candidates who solicit small donations from individuals, the technology leaders pointed to the success of crowd-funding platforms like Kickstarter, through which people can pool resources to support projects.

“It is time to bring this same way of doing things to campaign finance in New York State, and create a national model that will strengthen small-d democracy,” they wrote on Thursday in a letter to Mr. Cuomo, a Democrat who has said overhauling the state’s campaign-finance system is one of his top goals.

The letter to Mr. Cuomo was also signed by a founder of Meetup, Scott Heiferman; the scholars Yochai Benkler, Lawrence Lessig and Clay Shirky; and the founder of the Personal Democracy Forum, Andrew Rasiej, who is the chairman of the New York Tech Meetup.

Mr. Rasiej, who ran unsuccessfully for New York City public advocate in 2005, said as technology leaders sought to advance their policy agenda in areas like privacy rights, broadband access and immigration reform, they were growing concerned that the political system in New York State and across the country had been “severely compromised by the influence of money.”

“It’s pretty obvious that the governor is presenting himself to the public as a reformer and as an innovator, and we as innovators believe that innovation doesn’t just stop at the computer terminal, it should continue on in our political system,” Mr. Rasiej said in an interview. “If the governor wants to be an innovator, the way to do it is not just by talking about it, but by actually doing it, and we think that comprehensive campaign-finance reform in New York State would be a validating step by the governor to show his innovation credibility.”

Advocates of public financing for state elections had hoped that Mr. Cuomo might be able to reach a deal with lawmakers in a lame-duck legislative session before the end of the year. But Hurricane Sandy and the continued uncertainty about which party will control the State Senate next year have combined to make such a session less likely, according to lawmakers. The next regularly scheduled session of the Legislature is to begin in January.

High & Low Finance: A Computer Lesson From 1987, Still Unlearned by Wall Street

On one day, the Dow Jones industrial average lost 23 percent of its value. People wondered if that heralded a new Depression. A front page headline in The New York Times asked, “Does 1987 Equal 1929?”

It did not. The next recession, a mild one, was more than two years away.

What it did signify was the beginning of the destruction of markets by dumb computers. Or, to be fair to the computers, by computers programmed by fallible people and trusted by people who did not understand the computer programs’ limitations. As computers came in, human judgment went out.

That process, then in its infancy, gained speed over the next two decades. By 2008, it really did threaten a new Depression. But we’ll get to that later.

The 1987 villain was something called portfolio insurance. It was a product that used stock index futures and options to assure institutional investors that they need not worry if market prices seemed to be unreasonably high.

Portfolio insurance would let them get out with minimal damage if markets ever began to fall. They would simply sell ever-increasing numbers of futures contracts, a process known as dynamic hedging.

The short position in futures contracts would then offset the losses caused by falls in the stocks they owned.

Portfolio insurance did not start the widespread selling of stocks in 1987. But it made sure that the process got out of hand. As computers dictated that more and more futures be sold, the buyers of those futures not only insisted on sharply lower prices but also hedged their positions by selling the underlying stocks. That drove prices down further, and produced more sell orders from the computers. At the time, many people generally understood how portfolio insurance worked, but there was a belief that its very nature would assure that it could not cause panic. Everyone would know the selling was not coming from anyone with inside information, so others would be willing to step in and buy to take advantage of bargains. Or so it was believed.

But when the crash arrived, few understood much of anything, except that it was like nothing they had ever seen. Anyone who did step in with a buy order quickly regretted the decision.

I was then the stock market columnist at Barron’s and I spent most of that October week on the trading floor at Salomon Brothers, then a leading brokerage firm in stock trading. Near the end of that Monday, I remember looking up and seeing dozens of young investment bankers lining the trading floor. There was really nothing for them to see; the ticker tape rolling across the side wall was hours behind actual trading. But many no doubt wondered if their world was coming to an end.

Stan Shopkorn, the Salomon vice chairman and chief equity trader — and a man who had not had a great day — noticed them soon after I did, and loudly suggested they must have something better to do. They didn’t, but they quickly left.

The next day, a Tuesday, the Wall Street establishment effectively came together to stem the panic, although what happened gained little attention at the time. As sell orders forced the New York Stock Exchange to halt trading in stock after stock, word came that the Chicago Mercantile Exchange was threatening to halt trading in stock index futures. With many stocks not trading, there was no way to calculate an accurate value of a stock index. The system threatened to grind to a panic-induced halt.

It was then that Mr. Shopkorn got on the phone with Bob Mnuchin, the head stock trader at Goldman Sachs, and Salomon’s principal competitor. I don’t know who initiated the call, but I heard the result. They agreed to tell their floor traders to tell the stock exchange specialists that Goldman and Salomon would submit buy orders to reopen any stock in the Standard & Poor’s 500. Within minutes, prices began to recover.