Alan Greenspan: an early critic of stock options

Holder of the second-longest tenure as Federal Reserve chair and President Ronald Reagan’s first-appointed chairman, Alan Greenspan died at 100 years old this past weekend.

Greenspan led the Federal Reserve through several key economic periods, starting soon after taking office in August 1987 with the stock market crash known as “Black Monday” in October 1987. He guided US monetary policy all the way until 2006.

Greenspan’s tenure is remembered as a time of “Great Moderation” in the US, marked by low unemployment, limited inflation, and for a period during 2001-2004, an extremely low Fed funds rate. He is known for coining the term “irrational exuberance” in 1996 to highlight the concerns over speculative bubbles in public markets.

Accounting stances. Greenspan was not shy about commenting on accounting standards developments during his Fed tenure. Among his most remembered stances were his endorsement of FASB’s proposals on the expensing of stock options and his opposition to a proposed accounting standard for derivatives.

In the wake of the Enron scandal, Greenspan formally backed FASB’s proposal on stock options expensing in 2004 and was an early critic of such options. “I fear that the failure to expense stock option grants has introduced a significant distortion in reported earnings—and one that has grown with the increasing prevalence of this form of compensation,” he told a financial markets conference in 2002.

On the other hand, earlier in his tenure, Greenspan opposed a controversial proposal by FASB to have companies list “gains and losses from derivatives used to hedge other assets” at fair value. In a 1997 letter to the FASB chair, Greenspan argued that the proposed standard “may discourage prudent risk management activities and in some cases could present misleading financial information.” FASB formally issued the standard in June 1998.

Crises. Greenspan is credited by some with bolstering and saving the tech sector in the late 1990s by implementing and maintaining low interest rates. However, economists have pointed to Greenspan’s stimulative monetary policies as a driver of the 2008 financial crisis; low interest rates gave way to the housing bubble and the subprime mortgage crisis that would contribute to the crash across global markets.

When Bloomberg asked Greenspan about his legacy in 2020, he stood by his mistakes and victories.

“I brought economic analysis in a way that was different from what it had been historically, and I think it exists to this day. I don’t say that I generated it, but I was certainly involved. I can’t be there for almost 19 years without having an awful lot of effect, so I’m proud of what I did. I’m acutely aware of the mistakes I made, and I said ‘Should I have done otherwise?’ and I said, ‘No,’” he said.