Randomly Noted

Brown Forman became the latest company today to return money to shareholders before any increase in dividend taxes possible kick in.

The maker of Jack Daniels whiskey and other alcoholic beverages decided to give holders a $1 special dividend that would count in this tax year – not next year. That’s somewhat significant for shareholders because under tax cuts enacted under former President George Bush, dividend income was taxed at a 15% tax rate. Next year it jumps to a 40% rate unless Congress extends the tax cut. No word on that yet.

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You would think, given the onslaught of studies and rulemaking about to come their way thanks to financial reform legislation, the leaders of the Securities and Exchange Commission wouldn’t look  for new things to take on.

Give the commissioners credit. They voted 5-0 today to get the ball rolling on a fundamental review of the basics of corporate democracy in the U.S.

SEC Chairman Mary Schapiro modestly terms the issue “proxy plumbing,” and some of the issues do have eye-glazing characteristics. But this goes right to the heart of actual shareholder rights, issues such as who gets to vote and how the companies that advise those votes are regulated.

The numbers make it look like corporate democracy is alive and well in America. The SEC reports 600 billion shares are voted at more than 13,000 shareholder meetings each year. But behind the numbers are activities such as “empty voting,” which turns on its head the notion that a voting shareholder has an economic interest in seeing his company succeed.

Technically, what the SEC did today was approve the issuance of a “concept release,” a broad call to the interested public to comment on some fundamental questions related to the proxy voting process. The public has 90 days to make their views known. After that, there may or may not ultimately be any action taken by the SEC. If there is action, it likely won’t come for a good while.

Given the technological changes and advances in human cleverness about using market structures in ways they were never intended, and given the salient fact that the last comprehensive view of these issues took place some 30 years ago, you can say it’s about time.

Even for the SEC to recognize the “empty voting” issue has taken a while. An alarm-ringing legal article that outlined the issue quite well (the lead author, Henry T.C. Hu, now works for the SEC) was published in January 2008.

The article said this: because of the growth of derivatives, share lending and other factors, we “permit decoupling of voting rights from economic interest to occur quickly, at low cost, on a large scale, and often hidden from view.”

Certain investors have the legal right to vote on such crucial issues as mergers when their market maneuvers mean their economic interest can be in direct opposition to that of traditional shareholders.

“Empty voting” isn’t the only issue sure to draw comments. The SEC also wants comment on the growing role of proxy advisory firms and whether there’s a case for “enhancing regulatory oversight.”

The abacus, like the one pictured above, was a simple tool devised centuries ago to help people count and add.

The ABACUS 2007-AC1, a synthetic collateralized debt obligation at the center of Wall Street’s latest scandal, was created not that long ago and is anything but simple. Earlier today, the Securities and Exchange Commission charged Goldman Sachs and one of its executives with fraud surrounding the sale of ABACUS. Investors lost at least $1 billion and hedge fund operator Paulson & Co. picked up that amount. The charges and scandal will lead to renewed calls for tough regulation on Wall Street. And may lead to more debate about whether structured products are good or bad for financial markets.

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Famed investor Warren Buffett, as is his wont, talked about some corporate governance issues in his recently released annual letter to shareholders.

Though typically not the comments that grab the headlines when stories are written about the much-anticipated letter, Buffett over the years has said some smart and provocative things about boards of directors.

Buffett has been a director, so he speaks from personal experience. And his views have sometimes gone against conventional wisdom. When the independence of directors was the consensus favorite governance play in the aftermath of the late 1990s corporate accounting scandals, defined as separation from management, Buffett said real director independence came in the form of significant ownership of the company’s shares.

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Good for GM and its board for tapping former Microsoft CFO Chris Liddell as the auto maker’s long-sought CFO. It’s a sign GM’s Chairman and CEO, Ed Whitacre, is thinking big for GM – and doing so in a smart way. “Big” in the GM world used to be a problem: the company made cars that were too big to suit a fuel-conscious era; its white- and blue-collar workforce was too big; it had way too many factories across the globe (it still does, but they’re being whittled down.) But GM most certainly needs a big-time CFO to unravel its finances, which are complexly linked to those of the U.S. government. Liddell, a 50-something native of New Zealand, has a good reputation with Wall Street analysts and investors, and of course valuable experience with the books of the world’s foremost tech company. It will be interesting to learn what Liddell will get paid; I reckon it’ll be a so-so salary with a substantial stock component tied to GM’s eventual IPO. Is Liddell a potential CEO candidate? Yep, I wager if he does a good job and clicks with Whitacre and the board, he’ll be a contender.

He left the helm of the Federal Reserve more than 20 years ago. He’s in his 80s.

And yet Paul Volcker has lost none of the fire and brimstone, moral indignation and personal authority that helped him lead the successful fight  in the 1980s against real, entrenched inflation in the U.S.

That thunder was on display today in Horsham, England, as Volcker addressed 100 or so leading bankers, investors and regulators gathered for The Wall Street Journal’s Future of Finance Initiative.

He scolded the gathering for a lack of industry leadership on compensation. He said no one has ever shown him any link between financial product innovation and a benefit to real economies. He said economic growth was higher at times when there was a lot less innovation.

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How badly does Bank of America want to get out from under government supervision? Enough to have its bankers working overtime to dream up a way to do it ASAP with a clever financing structure that sidesteps a little share authorization issue. The company negotiated with the Treasury and the Fed to repay its $45 billion of government bailout money and to do so through an equity offering, existing cash and  an asset sale. It also agreed to pay some executives bonuses in restricted stock rather than cash.

It has been reported, though, that ever since Ken Lewis announced he was resigning from Bank of America, the bank has had an extremely difficult time finding a replacement – in part because of government intervention on pay packages for executives. So, getting out from under the government’s supervisory hand should make that hiring process a little easier.

But here’s the rub:

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After the market closed on Sept. 16 (this past Wednesday), Eastman Kodak Co. announced a plan to refinance $575 million of its 3 3/8% convertible notes through two separate private placements. Good news for the holders of these bonds because they would get paid par, or the full $1,000 for each bond they held. But somebody may have known something about this deal before others.

The plan to retire these bonds would be especially good news for holders because these bonds were what are called broken convertibles. Convertible bonds do just what the name sounds like – they convert into a company’s common stock at some point in the future if the holder elects to do so. They become broken when the conversion price is significantly higher than the common stock price, making it very unlikely to convert. So, the bonds then trade more like a bond rather than the equity.

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With the “Cash for Clunkers” auto-purchase incentive plan about to wind down tonight, some dealers are turning to good, old fashioned marketing to keep the public interested in buying new cars. Two dealers have unveiled programs they call “Cash For Cream Puffs.” Town Porsche in Englewood, N.J., is running radio ads in the New York metropolitan area offering to drop the price on a new Porsche by $4,500 if you trade in a “cream puff” – car parlance for a used car in excellent shape. And a Honda dealer in Chicago is offering top dollar for cream puffs on a trade in for a new car.

A side note regarding Cash for Clunkers – it sounds like used car dealers have suffered from the program because it hurts their supply. Cash for Clunkers cars were supposed to be turned in for scrappage. That could mean a spike up in used car prices, which could benefit new car sales if the spread between new and used tightens. And it would be good news for dealers who have cars coming off lease – it holds the residual values steady or higher, which allows dealers to make money rather than lose money as falling used car prices did earlier.

The U.S. government, and that means ultimately tax payers, have a lot of skin at risk in the auto industry. Two major car companies went bankrupt and are owned by the government. And a major auto-mortgage finance company, GMAC, that was at one time wholly-owned by GM can now call the U.S. one of its biggest shareholders.This investment may well turn out to be one of the most difficult for the government.

We’ve heard a lot about the investment banks and commercial banks that borrowed from the government last fall to gut it out during the credit crisis – and how some of those have paid back what they borrowed and with it, billions in interest payments. A net plus for the taxpayer. GMAC has a long way to go and could becosting taxpayers money for some time.

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