Vol. 12, No. 3,009 - The American Reporter - October 19, 2006

On Native Ground

by Randolph T. Holhut
American Reporter Correspondent
Dummerston, Vt.

Printable version of this story

DUMMERSTON, Vt. -- Corporate integrity may sound like an oxymoron, but it's the current lack of it in American financial markets that is causing a crisis of confidence that may ultimately be a bigger threat to the nation than anything Osama bin Laden's crew can pull off.

Consider these financial tidbits:

  • According to The Economist, after-tax profits for companies in the Standard & Poors 500 stock index fell by nearly 50 percent in 2001. Yet total executive compensation of CEOs was down by only 2.9 percent.
  • In 1980, the average CEO made 42 times what the average worker earned. Today, CEOs earn 531 times what the average worker is getting paid.
  • The Internal Revenue Service estimates that at least $70 billion is lost annually because of U.S. companies that are reincorporating in places such as Bermuda to avoid paying U.S. taxes. Not surprisingly, U.S. corporate tax payments have dropped to nearly the lowest level in 60 years.
  • Conflicts of interest among auditors, stock analysts and consultants flourished while regulators looked the other way. Enron, aided by Arthur Andersen's "aggressive accounting," may be the high profile example of this. But other companies such as Global Crossing, WorldCom, Haliburton, Adelphia and Tyco have also engaged in less than legal accounting practices.
  • A recent survey of brokerage firms found that 47 of 50 that were covering the stocks of companies that would go bankrupt continued to recommend investors to buy and hold these stocks even as the companies were going under. Little wonder that there are dozens of investigations underway into stock analyst misconduct. The most lurid is the Merrill Lynch case, where internal e-mail showed analysts ridiculing the Internet stocks they were selling as "crap," while extolling their virtues in investor newsletters.

Capitalism needs trust to survive. But where is that trust when investors see CEOs getting big paychecks and profiting handsomely from the sale of their stock options while the company nosedives? Or when investors see accounting practices that falsely inflate a company's values? Or when stock analysts lie about the true health of a company?

Without trust, the markets fall apart. If you have money in the stock market and you've been watching the value of your investments plummet while watching the insiders walk away with your money in their pocket, you will undoubtedly feel that the game is rigged and will stay away from the stock market in the future.

It is this feeling, more than the possibility of another terrorist attack, that is threatening the economic health of the U.S.

The speculation bubble that led to the 1929 stock crash resulted in Wall Street falling into disrepute for decades. It also led to Congress passing several laws that regulated the world of finance and - despite Wall Street's objections - restored public trust in financial markets. But most of those regulations have been repealed and the Securities and Exchange Commission has shown itself to be a toothless watchdog when it comes to policing the markets. Much of the crookedness and shady practices now coming to light are a direct result of the now-diminished federal oversight of corporations and the markets.

A big reason for the diminished oversight is the amount of campaign donations that corporations give to politicians of both parties. The chances of seeing the federal government re-regulate the markets are slim as long as the current system of legalized bribery is in force. But it has to step back in. The stakes are too high not to.

Today's investors may think that 1929 is ancient history and that things are different now. They aren't. People talked about "the new economy" in the 1920s, and how the spread of new technologies such as radio, motion pictures, aviation, automobiles and electricity changed everything. It changed everything except human nature. Blind faith in the infallibility of capitalism obscured the reality that speculation had driven the values of stocks beyond rational levels.

We heard the same talk in the 1990s and it got even louder when the tech-heavy NASDAQ hit the 5,000 mark in the Spring of 2000. The Internet had changed everything and we were in a golden age where recessions would be a thing of the past.

Today, the NASDAQ hovers around the 1,500 level - a loss in value that parallels the drop in the Dow Jones average between 1929 and 1932. The June issue of the newsletter Bank Credit Analyst states that retail investors have lost most of the profits that were made since the mid-1990s. And we haven't seen the bottom yet.

If the financial sector collapses under the weight of its own duplicity, the ripples will be felt by everyone. And unlike 1929, we don't have a manufacturing sector to fall back on anymore in the U.S. We've gone from being a country that makes things to a country that specializes in shuffling money around. We've gone from investing for the long term to always looking for the quick buck. The U.S. is now the world's biggest debtor nation and beholden to the rest of the world for our financial well-being. All our military might means little once the IOUs are called in.

Men aren't angels. That's why the federal government clamped down on Wall Street after the wild speculation that led to the 1929 crash and the Great Depression. If we wish to avoid a repeat of that economic collapse, it's time to rein in the markets and restore the trust that has been broken by the crookedness and greed of a new generation of speculators.

Randolph T. Holhut has been a journalist in New England for more than 20 years. He edited "The George Seldes Reader" (Barricade Books).

Copyright 2006 Joe Shea The American Reporter. All Rights Reserved.

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