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7/28/2002 (22:44) |
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Is America the ‘sick man’ of capitalism?
By Mushtak Parker
LONDON, 29 July — The cover of the latest issue of Private Eye could not have been more poignant. Under a cover banner “Latest threat to America” A turbaned Osama Bin Laden is captioned: “Forget about terrorism, I am taking up accountancy”.
Accounting failures at the core of American capitalism — Enron, WorldCom, Adelphia, ImClone, just to name a few — are fast turning corporate governance in America into a joke. Is America now the “sick man” of capitalism and American corporate governance the “unacceptable face of capitalism”? Will President George W. Bush’s recent declaration on corporate honesty have any impact, or are these mere cosmetic measures to take on the seemingly unfettered power of capitalism?
The US Senate and Congress may have jettisoned any partisanship to reach a consensus package of measures to tackle corporate fraud and malfeasance, but there are signs that the problem is much more entrenched and while these measures may be a quickfix in the short term, they may not provide solutions for the long term.
There used to be time when the words uttered by the chairman of the US Federal Reserve Bank would have immediate impact on the world markets. Judging by Alan Greenspan’s testimony to the Senate Banking Committee last week, its impact on the markets was not even a damp squib.
One of the core issue of the recent accounting failures, for instance, is the treatment of stock options, which has skewed financial reporting because they grossly inflated a company’s earnings. While Greenspan was discussing his view of the causes of corporate malfeasance, it was that real guru of the investment world Warren Buffet who was effectively setting the regulatory trend. Buffet has persuaded his fellow members on the board of two companies on which he sits — The Washington Post and Coca-Cola to treat stock options as an expense on the balance sheet. Two of the first companies in corporate America to do so. It’s a case of the regulated leading the regulators. No doubt regulators always complain that their job is enforcement and that the market are drivers of change in the rules. How many corporate failures must there be before regulators realize that they have to be more proactive in policing accounting and corporate structures, and cannot wait for a corporate scandal to materialize before they need to act.
Why, because the pace of innovation especially in derivatives and the accounting procedures that mask and wrap them is continuously hotting up because of the almost obscene desire and pressure to boost fees, incomes, bonuses, profits and shareholder dividends.
Because the wholly unrealistic ways of valuation of stocks and companies, many of whom do not even have the assets at hand but based on future potential and earnings conjured arbitrarily up by some accountant, financial director, or assessor, continues unabated despite the painful bursting of the dotcom bubble in the last few years.
Because, while capitalism has successfully tamed the excesses of the extreme left in the labor market in the West in general, it has spectacularly failed in reforming the excesses of the management, especially those die-hard anti-regulation laissez faire capitalists. Some would say that Reaganomics and Thatcherism, the two great right wing monetarist capitalist systems since the World War II, even connived in this respect to promote the laissez faire capitalists.
These unfortunately continue to be the drivers of corporate malfeasance, and it remains to be seen how effective the Senate and Congress measures are in dealing with future corporate excesses especially in accounting and financial reporting. Scant independent attention is given to EVA (share holder value) and its computation; criteria to evaluate the performance of senior executives which should include loss of earnings and bonuses for gross negligence or failures with no lock-in contractual payouts in the case of sackings and resignations irrespective of performance; opportunity costs of risk management failures, and so on.
The treatment of earnings and stock options may have been a major flaw in the past. Tomorrow the challenges are inevitably going to be the treatment of capital. Not core capital but Tier 2 and Tier 3 capital. They even call it “innovative capital” or “subordinated capital” and these are now increasingly being dabbled in high-risk derivative products. Core capital, retained earnings, reserves either with central banks in the case of banks, or otherwise with other corporates, will never be enough to cover total balance sheet exposure. In fact, it would not be realistic to expect these to do so.
By the time Basel 2 (the new set of rules and regulations that govern global banking) come into play in a few years time, some “innovative” accountant starts moving the regulatory goalposts with a new accounting or reporting innovation. It is fine when the innovation is in favor of best practice such as the Buffet stock option move. But when it is in the interests of profit, bonus, EVA maximization, then people are sorely tempted to cut corners. Unless of course they get caught out either through whistleblowing or bad luck.
Very often, it is the media that does the job that ought to be the domain of the regulators. Several of the recent accounting irregularities in the US were first exposed by the US media before the Securities & Exchange Commission (SEC) started its investigations, including perhaps the most high-profile case — the accounts probe at US media giant AOL Time Warner.
Perhaps the most disturbing development is how quickly yesterday’s corporate crooks become rehabilitated today. Two of Wall Street’s most notorious traders ‘Junk bond’ king Michale Milken, who was convicted for six counts of securities fraud in the 1980s, and former boss of the collapsed hedge fund LTCM, John Meriwhether, are currently doing very well out of the US bear market.
Milken is a joint owner of Knowledge Universe, which owns 63 percent of Leap Frog Enterprises, which ironically makes educational toys. It was floated last week in the US and soared 22 percent in value in its first day of trading. This despite the fact that the company is being sued for alleged patent infringement. Meriwhether on the other hand only three years after the collapse of LTCM, which at the time caused investor panic worldwide, is at it again — on the verge of raising $1 billion to close another hedge fund JWM Partners, which specializes in speculating on the movements in fixed-income bond prices.
This must be music to ears of tomorrow’s comeback kids — Ken Lay and Jeffrey Skilling of Enron; Bernie Ebbers of WorldCom; John Rigas of Adelphia; Sam Waksal of ImClone, to name but a few.
Here lies the chutzpah of unfettered American capitalism and corporate culture — a structure which no president, senator, congressman, Fed seem to be able to or have the combined political will to curb or reform
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