The year of the
$6,000 shower curtains Simon
English reports from New
York on the chaotic test of
America's business system
and asks if the lessons have
been learnt The stench of
scandal hangs over corporate
America, perhaps like never
before. Although every
decade has its financial
scams - from 1920s-style
Ponzi schemes to the 1980s
excesses of the junk-bond
king Michael Milken - no
year has affected the
American public's faith in
the system like 2002. Just as America
showed signs of recovering
from the
collapse of Enron in late
2001, its biggest
telecom business, WorldCom,
and its grandest accountants,
Arthur Andersen,
were embroiled
in sleaze that
led to their
quick demise. Tyco International
turned out, prosecutors
said, to be a piggy
bank for its chief executive
Dennis Kozlowski,
who used company
money to fund $2m birthday
parties and $6,000 shower
curtains. Wall Street looked
little more than a marketing
machine for the most dubious
shares, as the banks'
conflicts of interest
prevented them from asking
the right questions. As the
year progressed, scandals
emerged at businesses of
every size and the stock
market took fright
and went
into freefall. The former chief
executive of Actrade
International, a small
technology company, went
missing along with $31m. Sandy Weill, the
chairman of Citigroup, the
world's biggest bank, is at
the centre of allegations
that his firm bribed top
businessmen with
free shares. It has also set
aside $1.4 billion to cover
fines and litigation
arising from inquiries into
conflicts of interest
between investment banking
and equity research, and
Enron. Martha Stewart, the
home-making queen, is embroiled
in an insider-dealing
scandal. No one
was above suspicion as the
uncomfortable feeling took
hold that America's economic
miracle was built on a lie. The telecoms
industry in particular
looked a sham, as rival
companies revealed they did
little more than sell each
other the cable equivalent
of air and book the revenue
as profit. The end of a
ten-year bull market was
bound to be painful - but no
one realised quite how
painful. Investors blamed
the losses on the swindles
that always emerge when a
boom turns to dust. This
being America, only the
lawyers benefited as
everyone sued each other. Some of the legends
of American business such as
General Electric's Jack
Welch and IBM's Lou Gerstner
avoided the worst of the
fall-out, mainly by retiring
before the shares tumbled. Other careers and
lives have not escaped. The
Enron crisis led a senior
and apparently blameless
executive to commit suicide
in shame. Harvey Pitt, the
Securities & Exchange
Commission chairman, was forced
to resign for misjudging the
public anger and
for repeated gaffes. America's
vice-president, Dick Cheney,
was named in a lawsuit
alleging accounting fraud at
Halliburton, the oil
business where he was chief
executive. Seemingly, every
attempt to calm investors
became a public relations
disaster. William Webster,
chosen to lead a new
accounting watchdog, turned
out to be the audit chairman
of a company accused of
fraud. President Bush's
links to Enron
continued to be embarrassing
- though not, it has to be
said, damaging at the polls.
The Republican party, which
is most closely associated
with big business, swept the
mid-term elections, though
the President did sack his
economic team in response to
public disquiet. Although the
September 11 terrorist
attacks would have led
inevitably to weaker share
prices, the speed of the
market's collapse can only
be attributed to fright
among investors. The Dow Jones is
close to its first
three-year losing streak
since 1941, sliding from a
peak of 11,700 in January
2000 to about 8,500. On the
way, investors lost a
staggering $8,000 billion (£5,000
billion). To understand the
anger this has caused, you
have to realise that many
Americans effectively manage
their own pension funds.
Investors who planned to
retire on the strength of
their gains now fear they
may have to work until they
die. Americans are
encouraged to be stock
pickers on the dubious logic
that it is possible to
outperform the market. But
the end of the legitimate
boom and beginning of the
frauds coincided with an
explosion in trading by
small investors as the
internet bug caught on. Millions
frantically bought shares on
the basis of website tips,
gossip in bars, and reports
from analysts that now look
doubtful. As the pressure on
profits increased, some
finance directors found new
tricks to make two plus two
look like nine, so they
could keep their shares high
while they and their
colleagues sold them.
Investors who believed that
markets were controlled were
shocked to find that they
can be chaotic. Many attempts have
been made to explain how
such a catalogue of fraud
could have happened. There
was certainly a failure by
auditors and lawyers to
fulfil their role as
gatekeepers. Saul Cohen of the
New York law firm Proskauer
Rose believes a more
ruthless breed is now in
charge of corporate America. He said:
"There has never been
anything at the level of
these scandals and it is
symptomatic of cultural
issues. The people who were
managers in the 1950s, 60s,
and 70s came out of the era
of depression. They weren't
selfless, but they weren't
greedy either." But that was then.
In the year of WorldCom, the
salary of the average
leading chief executive -
and some turned out to be
very average - rose by $10m. Twenty years ago,
US chief executives got 40
times more than their
worst-paid employee - now it
is 100 times more. Almost everyone
thinks this is wrong, but no
one is sure what to do about
it. Even Alan Greenspan,
Federal Reserve chairman, is
worried about the
"infectious greed"
that grips boardrooms. James Fisher, a
professor at Saint Louis
University, sees the ability
of the market to absorb
corruption as a sign of its
strength. He said: "The
rapidity with which Enron
failed and Arthur Andersen
has gone shows the
self-corrective capacity of
the market. It happened so
much more quickly than the
wheels of government can
move." Despite a year of
sordid details that at times
seemed to threaten the
fabric of American society,
the world's largest economy
is slowly turning round.
Gilbert Dwyer, a dean at
Wheeling Jesuit University,
explains it like this: "The
underlying pattern is that
clever people find new, or
recycled, ways to make a lot
of money and other people
jump on the train. In the
early stages these ideas
look great and many early
followers make a lot of
money. "Then more and
more people join in. They
create an excessive demand
for participation, and the
system implodes. This leaves
a lot of people - mostly
latecomers - broke, angry,
and looking for someone to
blame." Politicians
then scurry to invent new
rules to deal with problems. Mr Dwyer says
sceptically: "New laws
require more personal
certification of corporate
results. Lawyers are
mounting 'ethics training'
programmes. Professors are
writing books. These are all
good things, but will they
head off the next round? Not
likely." ·
"There
has never been anything at
the level of these scandals
and it is symptomatic of
cultural issues. The people
who were managers in the
1950's, 60's and 70's came
out of the era of
depression. They weren't
selfless, but they weren't
greedy either". Saul
Cohen, New York lawyers
Proskauer Rose Information
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(Filed: 27/12/2002)