Paying for corporate fraud — All
told, we're down about $5.6 trillion in market capital that's vanished from the
American economy since March 2000. Measured against peak values, what's gone is
more than 75% of the Nasdaq and about 40% of the Standard & Poor's 500. On
average, that works out to roughly $60,000 per U.S. household.
Speaking
before Congress, Federal Reserve Chairman Alan Greenspan pointed to a corporate
way of life corrupted by "infectious greed," a culture of cooked books and
insider dealing that's caused a breakdown in confidence among investors and hefty
drops in the market.
Coming on top of sharp cuts in investment spending, a
recession, lagging profitability and the terrorist attacks of Sept. 11, Greenspan
warned that recent revelations of tricky corporate accounting and fake profit
reports are extraordinarily threatening to an economy that depends on straight
shooting when it comes to the numbers. Simply stated, investors who can't trust
earnings reports will be reluctant to buy stocks.
"Poorly structured"
stock options have "perversely created incentives to inflate reported earnings in
order to keep stock prices high and rising," explained Greenspan, undermining the
proper alignment of "the long-term interests of stockholders and
managers."
With options, an executive is given the opportunity of buying
shares of his company's stock at some time in the future. If the stock price goes
up, he buys at the previously fixed lower price, often with a company loan, and
automatically pockets a profit. If the stock falls, he doesn't buy. It's no-risk
capitalism. Heads I win, tails you lose.
In theory, options are meant to
motivate executives to improved levels of performance, with the benefits flowing
across the board to customers, employees, and shareholders. Instead, we're seeing
"pump-and-dump" schemes where stock prices are artificially pumped up by
exaggerating sales and hiding costs, followed by option purchases and then a
dumping of the overvalued stocks before the prices collapse.
"The entire
system caused the people who run companies to focus on the short term: get the
stock price up, cash in the options, make your quick bucks and make your numbers,
instead of building fundamental values," says Securities and Exchange Commission
Chairman Harvey L. Pitt. "People think that folks can rob the public and get away
with it."
Greenspan's warning: "Our market system depends critically on
trust."
As it now stands, Americans trust Catholic priests twice as much
as they trust stockbrokers and CEOs of large corporations, according to a new
CNN/USA Today/Gallup poll. Some 45% of Americans say that priests can be trusted,
while 48% say you can't be too careful in dealing with them. In contrast, only
23% of Americans say they trust CEOs and stockbrokers.
Ranking at the top
in the Gallup survey are "teachers," "people who run small businesses," "middle
class people," "military officers," and "police officers," with 84, 75, 75, 73
and 71% of Americans, respectively, saying those groups can be trusted. None of
those groups, of course, are in the driver's seat when it comes to calling the
shots at places like Enron, Global Crossing, and WorldCom.
And so, with
$5.6 trillion down the drain and the most trusted folks in the country off on the
sidelines, it's the politicians — with a trust ranking of only 26% in the
Gallup survey — who've stepped up to the plate to establish a system of
honest accounting and clean things up in corporate America. Given the record of
Congress, that's not unlike putting mass murderers in charge of rehabilitating
shoplifters.
"The level of creative accounting, deception and lies in
Congress make the actions of Enron and WorldCom seem like child's play," asserts
George Mason University economist Walter Williams.
Sen. John McCain
(R-Ariz.) doesn't disagree, saying that politicians are playing a weak hand when
it comes to lecturing anyone about straight-forward accounting: "Too often, we
have cooked the books, exploited off-balance sheet accounting, fudged budget
numbers and failed to disclose fully the nation's assets and liabilities."
With Social Security, for instance, there's not a dime in the "trust" fund,
nothing in the "lock box." The politicians have simply spent the "surplus" on
other things, guaranteeing an increasingly bad deal as the number of workers per
retiree declines. The National Taxpayers Union projects the outcome: "While a
worker born in 1915 who retired at 65 in 1980 collected $71,390 more than he paid
into Social Security, a worker born in 1975 can expect to collect $93,486 less
than he contributed."
Writes Detroit News columnist Thomas J. Bray: "If
you thought WorldCom accounting was outrageous, you have to be panic-stricken by
the way the federal government accounts for your 'guaranteed' benefits under
Social Security. When it comes to cooking the books, the feds are
gourmets."
The latest word from Capitol Hill has politicians calling for
20-year jail terms for executives found guilty of cooking the books, i.e., twelve
and 15 more years behind bars than the average time served, respectively, by
America's convicted murderers and rapists. Applying this new crackdown on phony
accounting to themselves, not many members of Congress would find themselves out
of jail before 2022. — Ralph R. Reiland
| Barry Loberfeld
is a freelance writer living on Long Island |
|
Voucher logic — It's always painful
to witness the performance of someone who's not even half as clever as he
imagines. After the High Court's pro-voucher decision, the Rev. Barry Lynn went
on show after show suggesting (with what he no doubt thought was the greatest of
wit) that perhaps the next step was to hand out police vouchers to people. Heck,
if we can separate one function from the state (well, sort of), then why not
separate all functions from the state? This is a remarkable argument
coming from the executive director of Americans United for Separation of Church
and State. Its locus classicus is Edmund Burke's "A Vindication of Natural
Society," which said that if we separate the church from the state, we
might as well separate the state from the state. This premise was drawn
out so consistently and so rigorously that the book was actually taken seriously
by Murray Rothbard, who hailed it as the first presentation of free-market
anarchism — all of which serves as yet another demonstration that one man's
reductio ad absurdum is another man's logical conclusion. — Barry
Loberfeld
| Dave Kopel is
research director at the Independent Institute. |
|
The Turkish experience — Americans
justifiably view President Wilson's role in negotiating the Treaty of Versailles
as one of the most disastrous failures of American diplomacy. But let's
not forget the great success achieved by his successor, President Harding, in a
different peace treaty following World War I. In 1923, the Allies signed the
Treaty of Lausanne, establishing peace with Turkey. The treaty was an adjustment
of the more punitive Treaty of Sevres, which had been signed in 1920, but which
was not recognized by Kemal AtatŸrk's government. The Lausanne Treaty set
the modern boundaries of Turkey, and guaranteed that Turkey would respect the
rights of non-Muslim minorities. The treaty recognized Turkish sovereignty over
parts of Kurdistan and Armenia, and the Allies abandoned claims to a sphere of
influence in Turkey. The Allies also abandoned their 19th-century "capitulation"
rights to exercise extraterritorial jurisdiction over their nationals within
Turkey. By treating Turkey fairly, the Lausanne Treaty helped bring Turkey into
the modern community of nations. While German blandishments had induced the
Ottoman Empire to enter World War I against the Allies, Lausanne's fairness
helped Turkey resist pressure to join with Germany during World War II.
Although modern Turkey is not a perfect democracy, it's the world's best example
of a democratic Muslim nation; and since Lausanne, Turkey has treated its
minorities much better than have the Arab dictatorships. Not surprisingly, the
Lausanne Treaty is a continuing source of resentment for bin Laden and other
Islamonazis. Given Turkey's continuing pro-gress towards freedom and
democracy — and the continuing regression of Arab dictatorships toward
barbarism — perhaps it is time to consider whether a Turkish protectorate
should be re-established over terrorist Syria and its colony in Lebanon. Surely
the Turks would rule those unhappy nations with more decency than does the
hereditary tyrant Bashar Al-assad, and certainly Turkey would reverse Assad's
program of using those nations as staging grounds for terrorist. — Dave
Kopel
| |
