Global Policy Forum

By Andrew Neil

American business currently occupies an unprecedented "position of low repute", Hank Paulson, the chief executive of Goldman Sachs, said last week. Confidence in American companies was the lowest "in my lifetime." What is more, added this financial master of the universe, the lack of confidence and a reputation in the dirt was "deserved." Even a cursory glance at the business news illustrates what he means.

Take the four main stories on the front page of last Friday's Wall Street Journal (US edition). The lead story was about a New York prosecutors' probe into allegations that corporate executives at Tyco, the troubled conglomerate, had used company funds to buy themselves homes and expensive artwork. Earlier in the week Tyco's chief executive, Don Kozlowski, was forced to quit after he was charged with sales tax evasion on the aforementioned artwork. Tyco's stock plunged, dragging the rest of the stock market with it. The next story revealed that Adelphia, a cable TV company, had claimed up to 500,000 fictitious subscribers while keeping two sets of accounting books, one of which inflated the amount it was spending on upgrading its cable systems. No wonder the company is being investigated by the Securities and Exchange Commission (SEC) and is the subject of criminal investigations by two federal grand juries. Adelphia's auditors, Deloitte & Touche, also have a lot of Enron -style questions to answer.

Story three involved no corporate shenanigans but was more bad news nevertheless: Intel had cut its forecast for second-quarter sales and profits; Wall Street duly tumbled some more. Back to corporate wrongdoing for story four: RJ Reynolds, the tobacco giant, was ordered to pay a 20m dollars fine after being found guilty of targeting young folk in cigarette ads.

Last Friday's business news was not untypical: the financial news wires now march to the constant drumbeat of corporate malfeasance. Adelphia has already had more than its fair share of headlines in America after it was revealed that its main shareholders, the Rigas family, treated the company like their personal bank. Shares in Tyco, one of the go-go stocks of the 1990s, had already fallen 75 per cent even before Mr Kozlowski's arrest amid growing doubts about its corporate governance and accounting standards.

Those who thought Enron an untypical one-off have been proved wrong. Some of the most respected names in corporate America, from General Electric to Xerox, are being investigated for Enron-style accounting practices which puffed up bottom lines (often to trigger lucrative stock options) and sidelined debt into off-budget balance sheets. Even those tasked with looking after investors' interests have been found sorely wanting: the culpability of Arthur Andersen in aiding the Enron cover up is pretty well-established; and, again, no aberration. Deloitte & Touche did not seem to think there was anything wrong in the Rigas family dipping regularly into Adelphia's funds; they certainly did not bother to inform the company's directors.

The litany of Wall Street's wicked ways has shoved most other business news off the front page. Merrill Lynch was forced into a $ 100m out-of-court settlement when it was revealed that its analysts were pumping up stocks to suit the requirements of the firm's investment bankers, while privately describing their recommendations to investors as "crap" (or worse). Citigroup's star telecoms analyst, Jack Grubman, got so close to Global Crossing, a telecoms stock he was touting, that he masterminded two of its acquisitions and became personal finance adviser to its boss. These are not cases of Chinese walls between analysts and bankers being too thin or transparent: contrary to everything investors were told, there were no Chinese walls.

Ordinary American investors have been lied to, cheated and treated shabbily; their anger, resentment and desire for revenge is palpable. They have deserted markets they no longer trust: the American economy is recovering briskly (second quarter growth will be only one percentage point or so below the first quarter's annualised growth rate of almost 6 per cent) but America's stock markets are still on their knees as investors place their money elsewhere. This crisis of trust in America is in danger of leading directly to a crisis of American capitalism. The gap between Main Street and Wall Street is wide and growing, albeit it is not as great as it was in the Thirties.

Corporate skulduggery has combined with executive greed to undermine capitalism among the investing classes of America, hitherto its greatest supporters and a broadly-based bulwark against those who would destroy it. We are witnessing the unravelling of the excesses of the Nineties boom. During the go-go years investors were too inclined to look the other way when it came to dodgy accounting or extravagant executive perks. Now investors are feeling the pain and in a less forgiving mood when it comes to executive excess or wrongdoing. Prolonged booms generate excesses and end in tears: the challenge is how to manage necessary reform in the post-boom doldrums.

America has a pretty good record in this regard. The "robber barons" of the late 19th century, whose excesses brought American capitalism into disrepute towards the end of the 19th century, were tamed by a series of anti-monopoly laws which restored law and order to the market place. The excesses of the Roaring Twenties, which produced the Great Crash of 1929, resulted in a new financial framework in the 1930s, including Wall Street's very own "cop on the corner", the SEC. Last week the New York Stock Exchange produced new proposals for better corporate governance in the wake of the recent scandals. They are a step in the right direction, especially the demand that all listed companies have a majority of independent directors, as are the SEC's plans for better accounting standards, including greater legal obligations to be transparent and honest in financial reporting. But they are only a start.

The current climate is tailor-made for a populist politician of the left to exploit, by railing against the extravagance, cupidity and even criminality of the money men. It is tells you something about the sorry state of the Democrats that none has yet emerged. But these are early days in this latest crisis of American capitalism and an assortment of congressmen are already jockeying for the limelight as each fresh scandal is unveiled. As yet, neither the Wall Street establishment nor its Republican allies in Washington has shown any indication that they are up to the required scale of voluntary reform - coupled with a renewed emphasis on integrity and business ethics - essential to restoring trust and confidence on Main Street. Unless they put their own house in order in determined and far-reaching ways, they will find others doing it for them in far more unpleasant and destructive ways.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.