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Cooking books, federal gourmets

| Monday, July 22, 2002

All told, we're down about $5.6 trillion in market capital that's vanished from the American economy since March 2000. Measured against peak values, what's gone is more than 75 percent of the Nasdaq and about 40 percent of the Standard & Poor's 500. On average, that works out to roughly $60,000 per U.S. household.

Last Tuesday, Federal Reserve Chairman Alan Greenspan pointed to a corporate way of life corrupted by "infectious greed," a culture of cooked books and insider dealing that's caused a breakdown in confidence among investors and hefty drops in the market.

Coming on top of sharp cuts in investment spending, a recession, lagging profitability and the terrorist attacks of Sept. 11, Greenspan warned that recent revelations of tricky corporate accounting and fake profit reports are extraordinarily threatening to an economy that depends on straight shooting when it comes to the numbers. Simply stated, investors who can't trust earnings reports will be reluctant to buy stocks.


"Poorly structured" stock options have "perversely created incentives to inflate reported earnings in order to keep stock prices high and rising," explained Greenspan, undermining the proper alignment of "the long-term interests of stockholders and managers."

With options, an executive is given the opportunity of buying shares of his company's stock at some time in the future. If the stock price goes up, he buys at the previously fixed lower price, often with a company loan, and automatically pockets a profit. If the stock falls, he doesn't buy. It's no-risk capitalism. Heads I win, tails you lose.

In theory, options are meant to motivate executives to improved levels of performance, with the benefits flowing across the board to customers, employees and shareholders. Instead, we're seeing "pump-and-dump" schemes where stock prices are artificially pumped up by exaggerating sales and hiding costs, followed by option purchases and then a dumping of the overvalued stocks before the prices collapse.

"The entire system caused the people who run companies to focus on the short term: Get the stock price up, cash in the options, make your quick bucks and make your numbers, instead of building fundamental values," says Securities and Exchange Commission Chairman Harvey L. Pitt. "People think that folks can rob the public and get away with it."

Greenspan's warning: "Our market system depends critically on trust."


As it now stands, Americans trust Catholic priests twice as much as they trust stockbrokers and CEOs of large corporations, according to a new CNN/USA Today/Gallup poll. Some 45 percent of Americans say that priests can be trusted, while 48 percent say you can't be too careful in dealing with them. In contrast, only 23 percent of Americans say they trust CEOs and stockbrokers.

Ranking at the top in the Gallup survey are "teachers," "people who run small businesses," "middle-class people," "military officers" and "police officers," with 84, 75, 75, 73 and 71 percent of Americans, respectively, saying those groups can be trusted. None of those groups, of course, is in the driver's seat when it comes to calling the shots at places like Enron, Global Crossing and WorldCom.

And so, with $5.6 trillion down the drain and the most trusted folks in the country off on the sidelines, it's the politicians - with a trust ranking of only 26 percent in the Gallup survey - who've stepped up to the plate to establish a system of honest accounting and clean things up in corporate America. Given the record of Congress, that's not unlike putting mass murderers in charge of rehabilitating shoplifters.

"The level of creative accounting, deception and lies in Congress makes the actions of Enron and WorldCom seem like child's play," asserts George Mason University economist Walter Williams.

Sen. John McCain, the Arizona Republican, doesn't disagree, saying that politicians are playing a weak hand when it comes to lecturing anyone about straightforward accounting: "Too often, we have cooked the books, exploited off-balance-sheet accounting, fudged budget numbers and failed to disclose fully the nation's assets and liabilities."

With Social Security, for instance, there's not a dime in the "trust" fund, nothing in the "lockbox." The politicians have simply spent the "surplus" on other things, guaranteeing an increasingly bad deal as the number of workers per retiree declines. The National Taxpayers Union projects the outcome:

"While a worker born in 1915 who retired at 65 in 1980 collected $71,390 more than he paid into Social Security, a worker born in 1975 can expect to collect $93,486 less than he contributed."

Writes Detroit News columnist Thomas J. Bray: "If you thought WorldCom accounting was outrageous, you have to be panic-stricken by the way the federal government accounts for your 'guaranteed' benefits under Social Security. When it comes to cooking the books, the feds are gourmets."


The latest word from Capitol Hill has politicians calling for 20-year jail terms for executives found guilty of cooking the books. That is 12 and 15 more years behind bars than the average time served, respectively, by America's convicted murderers and rapists.

Applying this new crackdown on phony accounting to themselves, not many members of Congress would find themselves out of jail before 2022.

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