The Great Discount Rate Debate

Businesses want to base the pension-fund discount rate on corporate bonds, not the long-bond. Plus: Fastow's wife indicted, FAS 133 revised, and a probe called Qwest.

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Corporate lobbyists claim that calculations used for pension-fund contributions are flawed. As a result of the bad math, they say the faulty measures are forcing corporations to reroute cash away from business opportunities and into undercapitalized pension funds.

Apparently the Treasury Department agrees. According to an article in the New York Times, officials in Treasury think the valuation of pension contributions needs fixing.

What to do? Well, business groups want Congress to pass a law that makes company-sponsored pension funds look healthier—even though plan sponsors would contribute less to the schemes.

Such a proposal is already in the works. Sponsored by Rob Portman (R-Ohio) and Benjamin Cardin (D-Md.), the bill is now being debated by House members.

The proposal would increase the discount rate — that is, the calculation that companies use to determine pension-fund obligations. Right now, the discount rate is pegged to 30-year Treasury bonds. But that bond yield has dropped of late, thereby increasing corporate pension-fund liabilities. In practical terms, that means companies have been forced to put more cash into pension funds to keep them at required levels.

Instead, industry groups want to base the discount rate on high-quality corporate bonds.

But Peter R. Fisher, a Treasury Department undersecretary, has another idea. He wants to better align the retirement dates of employees with asset maturities. While Fisher believes using corporate bonds would help, he would rather eliminate the single discount rate and replace it with a mix of corporate bonds of varying durations.

If and until that happens, Fisher suggests keeping the current discount rate for two more years, says the Times.

Business lobbyists balked at Fisher’s idea. Mark Ugoretz, president of the Erisa Industry Committee, argues that Fisher’s two-year rule is a disincentive to retain older employees. Worse, he says, the plan “is akin to a bank announcing all 30-year mortgages would have to be paid off in 5 years.”

But consumer groups says the higher discount rate will ravage the already-underfunded pension system. The Pension Benefit Guaranty Corp., the federal agency that insures pensions, reports that during the past six months, the agency’s deficit has grown by $1.8 billion to $5.4 billion. “Pension claims for 2002 alone were greater than the total claims for all previous years combined,” Steven Kandarian, PBGC’s director, told the Times.

This Must Be the “For Worse” Part

On Thursday the Justice Department levied 31 new charges against former Enron CFO Andrew Fastow. At the same time, the DoJ added a new twist to its prosecution of Fastow: government lawyers indicted the former Enron CFO’s wife, Lea Weingarten Fastow.

The charges against Mrs. Fastow range from conspiracy to commit wire fraud to money laundering and filing false tax returns. Lea Fastow, a former assistant treasurer at the scandal-plagued energy trader, surrendered to IRS officials in Houston yesterday before DoJ attorneys announced a six-count indictment against her.

Meanwhile, at FBI headquarters in Houston, six of seven former Enron executives, including ex-corporate treasurer Ben Glisan and former finance executive Dan Boyle, surrendered to authorities. Five of the executives worked at Enron Broadband Services. They are Ken Rice and Joe Hirko, former co-chief executive officers of EBS; Kevin Hannon, EBS chief operating officer; and F. Scott Yeager and Rex Shelby, other EBS executives.

Two other EBS employees (Kevin Howard and Michael Krautz) have already been indicted for various fraud and money-laundering violations.

In another Enron-related story: According to CBS News, Defense Secretary Donald Rumsfeld last week fired Secretary of the Army—and former Enron executive—Thomas White. White worked for Enron from 1990 to 2001 and headed its trading arm—Enron Energy Services—before joining the Bush Administration.

According to CBS, Rumsfeld gave no reason for White’s dismissal. The Defense secretary had reportedly locked horns with White during the past year over military technology and strategy, however.

During a March 2002 interview, White stated he would resign his military post if he thought the Enron investigation distracted him from the war on terrorism. By July White was asked to testify about trading strategies involving Enron and the manipulation of California’s electricity market. White said he was not involved in any wrongdoing.

The Qwest 20

More bad news for besieged Qwest Communications International Inc.

The Securities and Exchange Commission and the DoJ are reportedly considering civil charges against 20 former Qwest employees, says a report in the Wall Street Journal. The legal basis of the reported charges is still unclear, however.

According to the Journal, several of the telco’s executives bought stock in companies that Qwest did business with—before the vendors went public. The so-called “friends-and-family” allocations were popular during the dot-com boom, when fledgling technology companies invited executives of big customers to snatch up pre—initial public offering shares at rock-bottom prices.

The Journal claims investigators are focusing on the oversight procedures of Qwest’s board. Reportedly they want to know if the board approved the stock purchases.

Some legal experts say a charge of bribery, if brought by government prosecutors, would be the most serious indictment. But such a charge would be very difficult to prove.

So far, regulators have not launched any major probes into the friends-and-family allocations.

Apparently government attorneys will also expand their investigation of revenue-recognition problems at Qwest. That probe will reportedly examine improperly booked “swaps” of telecom capacity.

Earlier this year, four Qwest executives were indicted for inflating revenues. Now several sales executives, including former COO Afshin Mohebbi, are said to be under investigation for clandestine swap pacts they may have helped engineer.

The purported deals allowed Qwest to book total revenue from a deal in one quarter, rather than over time.

Short Takes

  • John Chambers, CEO of Cisco Systems Inc., warns that the U.S. technology sector will be badly hurt if IT companies are forced to book stock options as a business expense. According to a Reuters report, Chambers claims “jobs would go in the first decade, followed by companies.” Reportedly, 80 percent of Cisco stock options are awarded to employees below the vice president level.
  • The Financial Accounting Standards Board released new guidance on FAS 133 to clarify derivatives accounting. The amendments require companies to reflect derivatives as a financial activity in the cash-flow statements. The new treatment should dampen the enthusiasm some companies have for using derivative contracts to borrow cash—and then use the proceeds to bolster operating cash flow.
  • Auditors at KPMG doubt that energy client Mirant Corp. will continue as a going concern, according to a report in the Wall Street Journal. The Atlanta-based operator of power plants reported a $2.44 billion loss in 2002. The hit follows a $188 million restatement for the last two years after KPMG used new accounting rules to book energy trades. Company executives are talking to bank lenders about refinancing $1.1 billion in debt that’s coming due in July, as well as another $2.3 billion that’s due next year. Mirant’s CFO, Harvey Wagner, says finishing up the audits clears the way for Mirant management to focus on its funding.
  • Video-game retailer Electronics Boutique Holdings Corp. took a $4.8 million onetime, noncash, after-tax charge after adopting new accounting rules related to vendor payments. The charge will reduce the company’s net income for the previous fiscal year by $1.5 million. The company adopted new rules that account for payments from vendors for promoting Electronics Boutique products, Reuters reports.
  • About 500,000 corporate-finance jobs at banks, brokerage firms, insurance companies, and mutual fund companies will be headed offshore in the next five years, according to a new survey conducted by A.T. Kearney. Cost-cutting initiatives at financial-services companies are driving back-office jobs—such as regulatory reporting, accounting, and financial analysis—to India, China, the Philippines, the Czech Republic, and other outsourcing hubs, says a report in the Wall Street Journal.

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