Executives cooked the books to get rich quick
July 5, 2002 | Page 5
ERIC RUDER looks at Corporate America's crime wave and how it will affect the economy.
"PHONY EARNINGS, inflated revenues, conflicted Wall Street analysts, directors asleep at the switch--this isn't just a few bad apples we're talking about here," wrote Joseph Nocera in last week's Fortune.
"This, my friends, is a systemic breakdown. Nearly every known check on corporate behavior--moral, regulatory, you name it--fell by the wayside, replaced by the stupendous greed that marked the end of the bubble. And that has created a crisis of investor confidence the likes of which hasn't been seen since--well, since the Great Depression."
Nocera, the editor-at-large of Fortune, wrote these words even before WorldCom announced last week that it had overstated its profits by an incredible $3.8 billion.
With the list of corporate scandals ballooning, the world's stock markets got hammered last week, from London to Tokyo. But corporate executives and U.S. officials are looking beyond today's stock prices. They fear that the U.S. economic model, which they've aggressively exported to pry open markets and extend their global reach, will now face growing opposition.
"You tell us to do this and do that, but look at your own house," Rizal Ramli, Indonesia's former chief economic minister, told the Wall Street Journal. "The moral power of the one who lectures developing countries will be much reduced."
Especially at risk will be the mantra of deregulation and privatization that U.S. officials preach around the world. When California's energy markets were deregulated, for example, Enron and a handful of other energy firms manipulated supplies to drive prices through the roof--and then pocketed billions in profits.
Enron generally used accounting tricks to hide losses. But during the California crisis, Enron hid as much as $1.5 billion in profits--so it could claim that price spikes were having little effect on its finances.
Another pillar of the so-called "American model" is the supposedly "strict accounting procedures" to root out the "cronyism" that was blamed for the 1997 Asian economic crisis. But now it's clear that lots of corporations fudged their numbers, while insider trading made a few executives at the top filthy rich--the very definition of "cronyism."
All of this is causing problems for George W. Bush. His administration's ties to Corporate America are as close as any White House in history.
Bush has tried to beat the heat for the corporate meltdowns with tough talk. For example, his Treasury Secretary Paul O'Neill, the former CEO of Alcoa, argued for stiff penalties for executives convicted of fraud, saying that "we ought to hang them from the very highest branches." But most people aren't buying it, according to the opinion polls.
Leading Democrats are hoping to focus on corporate scandals as the best way to challenge Bush without criticizing the "war on terrorism." But the deregulation and tax cuts for the rich carried out during the last decade largely happened on Bill Clinton's watch--and with his blessings.
And while Senate Majority Leader Tom Daschle (D-S.D.) sought the spotlight last week to denounce the WorldCom meltdown, he didn't say anything about withdrawing legislation to spread California's energy deregulation to the whole country.
"Senators are publicly flogging Enron executives, but meanwhile they are quietly implementing Enron's agenda," explain Harvey Rosenfield and Doug Heller of the Foundation for Taxpayer and Consumer Rights. "It's business as usual with the politicians, who are willing to cater to their donors in the energy industry as it seeks to enrich itself at the public's expense."
Democrats and Republicans alike have backed the agenda of Corporate America. We need to fight for an alternative to their policies of Robin Hood in reverse.
Why Washington has looked the other way
ENRON PREFERRED Republicans, while Global Crossing liked Democrats. But WorldCom didn't discriminate and instead bought influence without regard to political party.
Three years ago, WorldCom execs gave $1 million to the Trent Lott Leadership Institute at the University of Mississippi. No doubt its generosity was motivated purely by respect for the Senate minority leader--and had nothing to do with Lott's drafting of legislation that cleared legal obstacles to WorldCom's entry into new telecommunications markets.
But Sen. Ernest Hollings (D-S.C.) is also near and dear to WorldCom--especially considering his view that WorldCom should be allowed to compete directly with regional telephone companies in their markets, without facing competition in its own.
Lott and Hollings are just two of many lawmakers who took contributions from WorldCom. "They were certainly trying to develop good relationships with members of Congress and other power players," said Steven Weiss of the Center for Responsive Politics. "That's what any big company does, especially one subject to regulation by the government. And WorldCom definitely played the game."
The tame watchdog
THE JOB of policing Wall Street falls to the Securities and Exchange Commission (SEC). But it's no surprise that the SEC didn't uncover fraud, whether at Enron or WorldCom.
That's because the SEC has about 100 lawyers to study the financial documents of 17,000 public corporations. In addition, the SEC monitors mutual funds, approves brokerage firms, oversees accounting firms and looks for market manipulation and insider trading.
What's more, the SEC has a 30 percent turnover rate among employees--because its lawyers are paid 25 to 40 percent less than their counterparts at comparable federal agencies.
The politicians have spent billions building prisons and hiring cops. But it's clear that they're far less interested in crime in the suites.
On the road to economic recovery?
The stock markets hit the skids as word of WorldCom's accounting fraud spread. But Wall Street's free-fall ended soon enough after economists celebrated new reports of blistering economic growth in the first three months of the year. Is the U.S. economy on the road to recovery?
The robust 5.6 percent growth rate in the first quarter won't be sustained. First, when economists factor in the replenishing of inventories that were allowed to shrink after September 11, the economy grew by just 2 percent. Second, business investment declined by 8 percent in the first quarter--and shows no signs of recovering soon, since unused factory capacity is still running at 25 percent.
In other words, while the economy is propped up by consumer spending and a still-growing housing market, corporations are still acting like they're in a recession. "Desperate to reassure nervous investors about their balance sheets, corporate executives are slashing costs, selling divisions and using free cash to pay down debt," wrote the Washington Post last week. "Although such strategies are helping to restore corporate profits, they tend to come at the expense of rebuilding inventories, hiring new workers and investing in new equipment."
A few of the top executives at Enron or WorldCom may go to jail for their most outrageous frauds. But the truth is that most crimes aren't considered crimes at all--just business as usual.
Throughout the "miracle economy" of the 1990s, corporate executives seeking to pump up stock prices--so that they could cash in their stock options for even more--laid off thousands of workers. Even Business Week--with a sneer--noted in its article "Why corporate crooks are tough to nail" that Corporate America earns popular rage for its perfectly legal activities. "Executives are also allowed to enjoy outrageous incomes and baronial perks without breaking any laws at all--so long as the board approves," the magazine wrote.