is of no significance, because nothing in the real world is altered. cash flows, for example, are unaffected. the upshot of this reasoning is that stock prices should be unaffected by whether option grants are expensed or not. clearly, most high - tech executives believe otherwise. how else does one explain their vociferous negative reaction to expensing if its only effect were to change the book profit reported to shareholders? i fear they may be right. indeed, most american businesspeople must believe expensing is more than bookkeeping. current accounting rules encourage firms to expense option grants. however, only two of the s & p 500 firms reportedly chose to do so in the year 2000. if expensing does indeed matter, at least some of the unsustainable euphoria that surrounded dot - com investing at its peak may have been exacerbated by questionable reported earnings. the measure of diluted earnings per share currently reported by corporations partially reflects the number of shares that employees could obtain with vested but, as yet, unexercised options. some have maintained that this is all that is required to capture the effects of option grants. clearly, this adjustment corrects only the denominator of the earnings per share ratio. it is the estimation of the numerator that the accounting dispute is all about. some have argued against option expensing on the grounds that the black - scholes formula, the prevailing means of estimating option expense, is approximate. it is. but, as i indicated earlier, so is a good deal of all other earnings estimation. moreover, every corporation already implicitly reports an estimate of option expense on its income statement. that number for most companies, of course, is exactly zero. are option grants truly without value? as i noted earlier, critics of option expensing have also argued that expensing will make raising capital more difficult. but we need to remember that expensing is only a bookkeeping transaction. to repeat, nothing real is changed in the actual operations or cash flow of the corporation. if investors are dissuaded by lower reported earnings as a result of expensing, it means only that they were less informed than they should have been about the true input cost of creating corporate revenues. capital employed on the basis of misinformation is likely to be capital misused. expensing stock options is required to record the economic cost of labor services purchased with option grants

alan greenspan : banking evolution remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, at the 36th annual conference on bank structure and competition of the federal reserve bank of chicago, chicago, on 4 may 2000. * * * the final decades of the 20th century witnessed remarkable advances in financial engineering, financial innovation and deregulation. as recently as 35 years ago, the universe of financial instruments was composed almost exclusively of deposits, short - and long - term plain vanilla debt and equities. financial institutions, by and large, specialized in relatively narrow portions of these markets. in the intervening years, significant developments in technology and in the pricing of assets have enabled innovations in financial instruments that allow risks to be separated and reallocated to the parties most willing and able to bear them and the degree of specialization by financial intermediaries changed dramatically. in the case of debt instruments, investors may now choose among structured notes, syndicated loans, coupon strips and bonds secured by pools of other debt instruments. but of all the changes we have observed in the past three decades, two of the most dramatic have been the growing use of financial derivatives and the increasing presence of banks in private equity markets. today i should like to evaluate the scope of these latter progressions, the risks they entail and some of the challenges in managing those risks. it seems undeniable that in recent years the rate of financial innovation has quickened. many in fact argue that the pace of innovation will increase yet further in the next few years as financial markets increasingly intertwine and facilitate the integration of the new technologies into the world economy. as we stand at the dawn of the 21st century, the possible configurations of products and services offered by financial institutions appear limitless. there can be little doubt that these evolving changes in the financial landscape are providing net benefits for the large majority of the american people. the rising share of financial services in the nation ’ s national income in recent years is a measure of the contribution of the newer financial innovations to america ’ s accelerated economic growth. derivatives and private equities have been in the forefront of the recent financial expansion, fostering the financing of a wider range of activities more efficiently and with improved management and control of the associated risks. fear of change nonetheless, some find these developments worrisome or even deeply troubling. the rapid growth and increasing importance of derivative instruments in the risk profile of many large banks has been a particular concern