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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerThe SEC is trying to stop Wall Street players from spreading rumors that sink stocks, as I posted yesterday. The reason such rumors matter is because there are many companies that are unable to defend themselves from rumors. Bear Stearns comes to mind as an example. I think if someone tried to spread a rumor that Goldman Sachs Group (NYSE: GS) or Berkshire Hathaway Inc. (NYSE: BRK.A) were heading for bankruptcy, the rumor would not get foo far.
But if a company lacks such a strong reputation, its CEO needs to be prepared to respond effectively to such rumors. And I really don't think it should be difficult to mount an effective defense. In my mind, the CEO should be able to provide credible answers to two questions:
- Cash flow. How large are the company's short- and medium-term liabilities and how many times do the market value of its short- and medium-term assets cover these liabilities?
- Debt default. What are the company's key loan terms and what specific assurance can the company provide that it is in compliance with these terms?
I think when a CEO makes statements such as "we have adequate liquidity," the lack of specificity undermines confidence. If the company cannot answer those two questions with data that would withstand an audit, then it does not deserve investors' trust. If it has such data, it should release it to the market. If the CEO is not sure how to answer these questions, the board should find a CEO who is.
The SEC's nonsense of trying to suffocate communication will -- if seriously enforced -- cut off trading just as surely as slicing a person's windpipe cuts off their flow of oxygen. And if a CEO cannot defend a company against false rumors of its imminent demise, it is not clear to me why the CEO should get the big bucks.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
7-15-2008 @ 5:34PM
william lindblad said...
Admirable concept, however this quickly brings to mind the likes of Adelphia and Enron.
In a time when ethics can amount to no more than a word in the dictionary, trust is difficult to come by. There are many commecial banks that are holding paper on contruction projects that they know are doomed if the current economic condtions prevail for any extended length of time. It is simple for the bank to make these loans look good by paying themselves out of the open loan. Do you really think that anyone in charge would give an honest report???
Marx and Engles had a good, though idealistic, idea too. This is not Huxley and the brave new world, this is the real one. People lie and people cheat.