Chapter Ten. How Finance Works
DETROIT—The General Motors Corporation reported today that it lost $64.6 million in the first fiscal quarter.
“We have no idea what happened to the money,” said top GM officials, in unison. “One moment it was lying on the dresser, and the next moment it was gone! We could just kick ourselves! Ha ha!”
Who Should Read This Chapter
At some point in your rise to the top, you may find yourself appointed to a job where you have to know something about finances, such as as Controller or Treasurer or Chairman of the Federal Reserve Board. If this happens, you should read this chapter. But I warn you: this stuff is deadly dull, as is illustrated by accountants. You never hear people say: “Let’s have some fun tonight! Let’s go find some accountants!” So unless you have no choice, you should skip this chapter. I myself am going to require powerful illegal stimulants to write it.
How Corporate Finances Work
You look at a big corporation, with giant expensive buildings filled with tasteful carpets and big desks and rental plants and well-paid employees making Xerox-brand copies of the crossword puzzle, and you wonder, “How on earth do they make any money?”
The answer is, they don’t. They lose money hand over fist. Read the business section of any newspaper, and just about every day you’ll see a story like the one reproduced above.
The reason these executives can afford to be so cavalier is that they know they can always get more money—any amount, any time—by means of a process so simple you are going to laugh when I tell you about it, unless you have already fallen asleep at this point. All they have to do is print up some “stock.” A stock is basically a piece of high-quality paper, similar to what certificates of appreciation from bowling leagues are printed on, except it has a nice border and a statement such as the following printed on it in an attractive and historic type style:
Whe bearer, hereinafter beknownst as “the bearer,” is, excepting those provisions which shall causeth “the bearer” to be excepted from these provisions, notwithstanding, hereby—and we are by the way also talking about “the bearer’s” heirs and assigns here—entitled to one (1) share (share) of (of) “stock” in
“the corporation,” and all that this doth entail, such as the VIP lounge, if any, and of course profits insofar as and to the extent that there are any profits after executives of “the corporation” shall returneth from
“meeting” “Brazil.”
Now you’re thinking: “Yes, but who would be so stupid as to exchange money for this piece of paper?” Well, I realize it makes very little sense to a person of normal intelligence, but it turns out there is a major financial institution devoted to this very purpose.
The Stock Market
The Stock Market is what they are talking about on television when they tell you the “Dow Jones Industrial Average” is “up” in “active trading.” Sometimes they show you a picture of it: you see a lot of men with bad armpit stains yelling and waving their arms. These men are ordering lunch. The actual trading of stocks is done by computers:
FIRST COMPUTER: HOW @lUC-’Il-l YC@U F’Gf—@ ‘i’HCJSE S[4ARE,@ OF’ STDCj,,.
SECOND COMPUTER: ‘THESE:—’)RE VEF@@Y SH@)F,E@:’ ()I\4E@ T3ECAU(:jE WE P.F@E F@’F@IEI\lr.)S I @l@-’iclass="underline" :@E r-O.-@, f)E:AL—:t6(:%,(:)
FIRST COMPUTER: YDLJ C@’,,@,ILL. A F—RIE@ND f.)NL) l-4ERE YC.)LI ARE L’-31NG @lE IN “I-HE i73ACI—’@ Tjt-iESt—SL-IAREE-@, I WCj’(JLI) NC)-i—FEED —1”O 0 IS—’.-[-!E i-:iES-1—I DO
SECOND COMPUTER: 1,—FHE@ L-OWES’r I CAN GO I,!A’@ GC@D ME DE@@AD IF I ()!,’ I.-YING
Of course all this takes less than a billionth of a second. At the end of the day, the computers divide the total prices of all stocks sold by the number of stocks, then they take the numbers of the horses that won the first three races, and.... No, wait a minute. That’s the “Trifecta” I’m thinking of. Well, somehow, they figure out the Dow Jones Industrial Average, and they tell the television news people about it.
Common Financial Questions
Q. What makes one corporation’s stock more valuable than another one?
A. The most important factor is what kind of hors d’oeuvre the corporation serves at its Annual Stockholders Meeting, which is when all the stockholders get invited to a hotel ballroom to hear highly paid executives attempt to explain how come the corporation is making less of
a profit than it would if it had just sold all of its factories and machines and put the money in Christmas Clubs. If the corporation serves
a cheap hors d’oeuvre, such as crackers and cheese, its stock will drop; if it switches over to, say, shrimp, the stock will rise. Of course the people on Wall Street don’t want to admit this, which is why they’re always making up preposterous explanations as to why stock prices rise and fall, such as “tension in the Middle East,” when of course there is always tension in the Middle East. When we finally have a nuclear war and there is no life left on Earth except cockroaches, the cockroaches in the Middle East will be tense.
Q. Who is “Dow Jones”?
A. A dead person.
Q. What is the “options” market?
A. This is a special market for people who are too stupid even to buy stocks. The way it works is, let’s say a farmer or somebody realizes he has 500
pork bellies. Now I think we can all agree that no sane person would want to have even one pork belly, let alone 500 of them, so what this farmer does is look around for the stupidest person he can find, and he sells him a porkbelly “future,” which means that the stupid person gives the farmer some money and agrees to take delivery of the pork bellies at
a later date. I know you think I’m making this up, but believe me, people actually do this. When the stupid person realizes what he has done, he of course tries to find an even stupider person to buy the
“future,” and this person sells it to an even stupider person, and so on until the big day arrives and a person with no discernible brain whatsoever has 500 pork bellies dumped on his lawn and is immediately arrested by the Board of Health.
Afterword
And so, here you are. Just a dozen or so chapters ago, you were a recent graduate or some other kind of low-life scum, and now, thanks to this book, look what you have become! A highly paid corporate executive! Or a convicted felon!
I do not ask for your gratitude. I seek no reward. No, for me it is enough simply to know that I have, in some small way, helped to make you the kind of executive who can provide much-needed leadership as the corporation of today faces the challenges of tomorrow; the kind of executive who will not be afraid to meet these challenges head-on by means of innovative and far-reaching new management techniques such as bringing me in as a consultant
for $2,000 per day plus lunch money. I’ll be calling you real soon.