By Kollengode S. Venkataraman (January 2003)
The U.S. free enterprise system periodically suffers man-made upheavals, often driven by greed among those willing to skirt—or even break—the law. In the past two decades, the savings-and-loan collapse cost taxpayers billions, while figures such as Ivan Boesky and Michael Milken inflicted serious damage on the economy. Once wealthy enough to employ private armed guards, they later spent years in secure taxpayer-funded facilities that protected their privacy but deprived them of freedom: prison.
The commercial real estate boom followed, helping bring down once-mighty companies such as Westinghouse, now reduced to a marker along I-376 in Churchill. Then came the derivatives market, where speculators and analysts—including some math and physics PhDs—used complex models originally developed during the Cold War to track projectiles in space. Instead of relying on company or industry fundamentals, they wagered on the probability of small market movements, worsening market volatility.
During the dot-com boom, day trading was promoted as a virtue, though it was little more than gambling on stocks from a home computer. I wondered then whether stocks had always been traded during the day, while “night trading” sounded like something illicit—drugs, prostitution, or gambling. Many people who had never reviewed their 401(k) statements or understood basic Wall Street measures such as P/E ratios entered the day-trading frenzy. They did not need to worry about earnings ratios because many dot-com companies had no earnings at all.
Then came Enron, Arthur Andersen, Tyco, WorldCom, Global Crossing, Adelphia, and others. Between March and August, the Dow Jones Industrial Average fell from 10,500 to below 8,500 amid wild daily swings, while the NASDAQ Composite dropped over three years from its peak of 5,200 to about 1,300.
A financial planner and unapologetic defender of an unregulated free market recently told me, “Venkat, what is greed to you is ambition to me.” That may be so, but when the ambition of a few destroys the lives of many, even staunch free-market Republicans and pinstriped Wall Street types object. The very people who championed an unfettered market called for government punishment of corporate offenders. On the day the U.S. Senate passed the Sarbanes bill, giving the Justice Department greater power to pursue corporate criminals—MBAs, PhDs, and CPAs among them—the Dow Jones rebounded by more than 400 points.
Even Federal Reserve Chairman Alan Greenspan, long an advocate of market self-regulation, sounded contrite. In a congressional hearing, he acknowledged that he had been wrong to oppose government oversight of corporate auditing.
On July 17, the New York Times business section captured the mood on Wall Street in a series of headlines. One asked, Who should mete out punishment—Washington, Wall Street, or investors? Another declared, Fed chief blames corporate greed for investor woes.
A third headline stretched across six columns: Is uncertainty the only thing in the current financial world that is certain? It seemed as though the copy editor was echoing the Buddha’s observation from 2,500 years ago: “Change is the only thing that is permanent in the world.”
Stockbrokers quoted in the story lamented that no one wanted to buy stocks tied to accounting firms. Regarding those firms, the article emphasized that trust must begin with their financial reports and concluded that America was losing its aura of invincibility.
The cynicism of the moment was captured by Eric Schmidt, then CEO of Google, in comments to a New York Times reporter amid another scandal unfolding within the Catholic Church.
As Wall Street fraud was being exposed, the Catholic Church in the United States faced a crisis unlike any it had experienced in years: persistent sexual misconduct by priests, which outraged Catholic laypeople. The Catholic hierarchy, led by powerful U.S. archbishops, worsened the crisis by trying to shield the Church and its offending priests through cover-ups.
Schmidt told the reporter, “I find that all of a sudden, I am a member of a class — CEOs — that is held in lower esteem than the Catholic priest.” It was a sad but revealing reflection of the values of the time.
Do these scandals serve as a warning to us? END