MoveOn Bulletin
Wednesday, July 31, 2002
Edited by Eli Pariser (eli.pariser@moveon.org)

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http://www.moveon.org/moveonbulletin/

 
CONTENTS

1. Introduction: The Problem
2. One Link
3. The Causes
4. The Team
5. The Pitch
6. The Real Solutions
7. Update: Operation TIPS
8. About the MoveOn Bulletin and MoveOn.org

 
INTRODUCTION: THE PROBLEM
"CORPORATION, n. An ingenious device for obtaining individual profit without individual responsibility."
--Ambrose Bierce, The Devil's Dictionary

So much for the notion that accounting's a boring profession -- the best illusionist in the world could not have "disappeared" billions of dollars as well as the recent spate of corporate criminals did. WorldCom, for example, "discovered" $3.8 billion in expenses. That's nearly five times the budget of the entire Securities and Exchange Commission, the government agency that's supposed to be watching for these crimes.

The WorldCom announcement came after months of revelations about accounting malpractice. Starting after the Enron scandal broke, lawmakers made a lot of noise about corporate reform, but no new laws were in place over half a year later when WorldCom went down. It wasn't until the stock market tanked that politicians and business leaders finally recognized the magnitude of the scandals' impact.

Although attention has focused on Wall Street and the Dow Jones Industrial Average, the economic fallout from corporate wrongdoing has been widespread. It's been especially painful for the middleand lower-class Americans who can't afford top-of-the-line stock brokers and well-managed mutual funds, and for those who work for the fallen companies or their vendors. The telecom sector faces record job losses in the hundreds of thousands this year, largely due to the collapses of Adelphia and WorldCom.

When all is said and done, WorldCom, Enron, Tyco, and Adelphia (to name a few) could cost the United States over a trillion dollars this year. That's a fifth of the Gross Domestic Product. The FBI estimates that white collar crime costs more than $200 billion in a typical year, over 46 times the cost of street crime and burglary. Yet while millions of low-level thieves have been imprisoned in the last ten years, the SEC has jailed only 87 executives for corporate wrongdoing.

The term "kleptocracy" was coined to refer to the regime of an African dictator, Mobutu, who used his power to amass an enormous fortune. The recent actions of CEOs and CFOs are similar: the people at the top abused their authority to steal from the little guys.

To make things worse, the upper echelons of the Bush Administration are packed with people who have engaged in this type of corporate misbehavior. They've shown a marked resistance to any proposals for serious reform, although sliding poll numbers have pushed them to retreat.

Alan Greenspan blamed the scandals on a culture of "contagious greed." Many of our government leaders -- the men and women who are supposed to solve this mess -- prospered in and emerged from that culture.

 
ONE LINK
Originally titled "Flavors of Fraud," this short article by economist and New York Times columnist Paul Krugman explains the recent corporate scandals in the context of an ice cream parlor. If accounting jargon has you confused about who did what to whom, or where all that money went, the explanation below will make things crystal clear.
http://www.dallasnews.com/opinion/viewpoints/stories/063002dnedikrugman.c4fed.html

 
THE CAUSES
Ever since the Enron scandal broke, pundits have been grappling with the meaning of the current spate of corporate crime. Critics on both sides of the political spectrum know that the "lesson" of this crisis -- what happened and why it happened -- will determine its impact on the private and public sectors.

Here are a few of the favorite positions:

The Hangover
"America must get rid of the hangover that we now have as a result of the binge, the economic binge we just went through," Bush said on July 15th. The theory goes as follows: history shows that after speculative bubbles burst, newly sobered investors often look more closely at the ventures they've been throwing money at. This scrutiny often brings to light fraudulent activities that kept the bubble growing.

Of course, if you accept this analysis, then almost everyone shares the blame for the plummeting stock market and the teetering economy. After all, investors, stock brokers, and corporate folks alike joined in "talking the market up" in the late 1990s. Conservatives like this theory because it takes the heat off corporate executives and their political friends.

Deregulation
Corporations and the accounting industry brought the scandal upon themselves by eroding all of the existing safeguards. In a decades-long campaign, lobbyists pushed for increasing deregulation. The checks and balances that kept corporate directors and CEOs accountable were destroyed; accounting auditors were allowed to develop ever stronger relationships with the companies they were auditing. By the 1990s, corporations were operating with few external controls; executives turned the lack of independent scrutiny to their own advantage.

An examination of the enforcement arm of the Securities and Exchange Commission certainly bolsters this viewpoint. According to the General Accounting Office, the SEC's workload grew by 80% between 1991 and 2000 while its staff grew just 20%.

Stock options
The ascendancy of stocks as a keystone in the finances of both companies and individuals is responsible. Increasingly, executives have received part of their pay in stocks or stock options, and companies have made financial arrangements that are based on the value of their stock. The resulting incentive to inflate the prices of a company's stock often conflicts with the goal of building a strong company that will deliver real profits.

More on the Meaning of the Crisis:

Bob Borosage of the Campaign for America's Future argues against the "hangover" theory: "This bubbleology would allow conservatives to shirk responsibility for what they have wrought. The fact is that after the 'excesses' of the 1920s drove us into the Great Depression, there was no equivalent epidemic of financial and political corruption for 50 years until the current crime wave. That's because Franklin D. Roosevelt's New Deal put cops on the beat to police corporations and regulate their behavior."
http://www.ourfuture.org/readarticle.asp?ID=1468

A commentator at TomPaine.com suggests that Borosage doesn't go far enough: "The issue is not simply one of saving capitalism from itself; it's also a question of saving us from capitalism's extremes of exploitation and inequality. We don't want to 'restore confidence in the stock market,' as both parties' leaders keep intoning. That's like restoring confidence in the casino after the little guys discover that the house and the big bettors always win. We need to restore the real economy, not the hyper-speculative stock market."
http://www.tompaine.com/feature.cfm/ID/6012

 
THE TEAM
The Bush Administration has been widely described as the most business-friendly administration in American history. Since Eisenhower's presidency, no president has had more than one former chief executive in his cabinet; Bush has four. At lower levels, an overwhelming proportion of the appointees come from backgrounds in business rather than public service or academia.

White House spokespeople have long argued that the depth of business experience reflected in Bush's cabinet allows for an intimate understanding of the corporate world and a corresponding ability to make the necessary fixes. But many of the former businesses of Bush's appointees have histories of fraud and corporate crime. There are serious questions about whether the administration is sufficiently distanced from the recent scandals to offer real solutions.

Here's a rundown of the corporate connections (and past wrongdoings) of Bush's top brass:

President George W. Bush: Bush himself has recently come under attack for his actions as a director of Harken Energy, a small oil company in Texas. After Bush sold millions of dollars' worth of stock shortly before bad news sent the price plummeting, the SEC opened an investigation. As economist Paul Krugman put it, the investigation was "peculiarly perfunctory," but SEC officials promise that the fact that Bush's father was president at the time had nothing to do with it.

Vice President Dick Cheney: Our previous Bulletin on Cheney (http://www.moveon.org/moveonbulletin/bulletin1.html) offers an in-depth description of Cheney's corporate ties. Halliburton, the company Cheney ran between 1995 and the time he started working for Bush, is currently under investigation by the SEC for illegal accounting practices.

Secretary of the Army Thomas White: As the former head of Enron's energy-trading department and an 11-year Enron employee, White may have known about the accounting tricks that led to Enron's disastrous collapse. White only left Enron in May 2001; the division he headed now appears to have hidden more than $500 million in losses. (See http://www.newsday.com/news/nationworld/nation/ny-uswhit282567672jan28.story for more.)

SEC Chairman Harvey Pitt: Appointed with the express approval of Enron CEO Ken Lay, many prominent Democrats and Republicans (Senate Majority Leader Tom Daschle and Senator John McCain, for example) have called for Pitt to resign. Pitt was the accounting industry's lead lobbyist until only a few years ago; his work was key in watering down proposed SEC regulations that would have strengthened auditors' independence. Pitt also continued to meet with several former clients after he was appointed SEC Chair, which further blurred the line between Pitt's old job as a lobbyist and his new one as a supposed enforcer.

Larry Thompson, Deputy Attorney General and head of Bush's Corporate Fraud Task Force: In a bizarre twist, even the leader of Bush's new white-collar crime task force has ties to corporate fraud. While he was a board member of Providian Financial Corporation, state and federal police investigated Providian for gouging consumers. The company ended up settling the cases and investigations for more than $400 million. (See
http://www.nytimes.com/aponline/national/AP-Thompson-Providian.html .)

These are just a few of the Bush Administration officials with ties to corporations that are in hot water. Those with corporate ties (although not necessarily to criminal ones) in the upper echelons of the Bush Administration include Treasury Secretary Paul O'Neill, former CEO of Alcoa; Defense Secretary Donald Rumsfeld, former CEO of General Instruments; Commerce Secretary Don Evans, who ran the oil company Tom Brown; Secretary of the Navy Gordon England, who worked for General Dynamics; and Secretary of the Navy James Roche, who worked for defense contractor Northrup Grumman.

 
THE PITCH
Worried about the political ramifications of looking soft on white-collar crime, President Bush stepped up his efforts to promote "corporate accountability" in the month of July. In a major speech on July 9, Bush delivered a ten-point proposal for dealing with corporate fraud. The wall behind Bush was emblazoned with the phrase "Corporate Responsibility" in large white letters on a field of blue. The Dow Jones Industrial Average dropped more than a thousand points in the following two weeks, demonstrating that the speech had hardly reinstalled confidence in the markets.

Although many of the reforms Bush suggested were enacted in the Sarbanes accounting reform bill discussed below, the general tone of the speech hardly cast Bush as a corporate crime crusader. The central argument went as follows: "A few bad people have unleashed a series of scandals on us. By and large, most corporate executives are good people, but they've been caught up in a culture of greed that has made them complacent. Corporate execs need stronger moral fiber -- and as for those few bad people, we need to catch 'em and jail 'em."

In his speech, Bush argued that "corporate leaders who violate the public trust should never be given that trust again." But given the number of high-ranking members of his administration who have been involved in corporate scandals, it's difficult to take this exhortation seriously.

Bush's speech did have several interesting ideas: