August 5, 2002; Expense the General Partner Greed Option

We have likened accounting for high greed partnerships to not counting the dilution from convertible securities as companies once routinely hid.  At the same time we sense the “tipping point” has been reached on the expensing of stock options.  Corporate officers with integrity may have a hard time certifying past financial statements as honest without changing the treatment of options, at least for the future.  Such certifications are required from the 1000 largest companies by August 14.  That gives us an idea.  Why not expense the general partner greed option?

The next question is what is the option worth?  On a conservative basis we would say it is worth the share of book value of equity that corresponds to the general partner’s current share of income and principal distributions.  Where the general partner has a higher share of reported income, we would use that fraction in the calculation.  That would go a long way to lessening the deception of high greed partnership accounting.

We don’t know of any corporation that granted stock options to executives potentially as dilutive as the general partner greed option.  Of course, expensing the general partner greed option could lead to curtailing the incitement of general partner greed.  That would not be all bad.  In fact there might be a surprising capital market advantage to a partnership seeking to raise new money on better terms for investors.