Orgy of greed winds down

Hey there, time traveller!
This article was published 14/06/2002 (8742 days ago), so information in it may no longer be current.

It feels like the party is over on Wall Street. Nobody believes corporate financial statements any more.

Every day brings fresh news of a chief executive officer going to jail or getting caught with his hand in the till. Stock prices on the New York Stock Exchange have sagged close to the low point they reached right after Osama bin Laden’s killers levelled the World Trade Centre and blasted a hole in the Pentagon. The problem now is not fear of Osama bin Laden. It’s mistrust of the masters of U.S. industry.

Stock market commentary lately commonly refers to concerns about integrity of financial reporting and corporate ethics as a way of explaining why the Dow Jones Industrial Average declined yet again. I was brought up believing that integrity and ethics were good in themselves, and I still believe that, but the market has found a way of putting a monetary value on them. Another CEO caught publishing fake earnings reports? Another 50 points off the Dow. Today’s insider trading scandal? Mark the average down another 100 points.

The curious thing about this market, however, is that misconduct in one company undermines confidence in others. This was seen a few weeks ago in the case of El Paso Corp. whose stock dropped sharply when word spread that the treasurer had committed suicide. The stock price of El Paso, a pipeline company that also does energy trading, had been dragged down by the scandalous bankruptcy of Enron because El Paso was in some of the same lines of business. Clifford Baxter, who resigned as chairman of Enron a year ago, while it spiralled toward bankruptcy, was found dead in his car in Houston in January. When word spread, on June 3, that Charles Dana Rice, vice-president and treasurer of El Paso, had shot himself dead in his Houston home, the stock promptly dropped 16 per cent in price. The company issued a statement saying that they had not been lying about the money, but it did no good. Markets are in a doubting mood and there is no statement you can make to counteract a corporate treasurer’s suicide.

That little flurry established that the treasurer’s tragic death — possibly related to his own chronic health problems — was worth about $4 US on the price of the stock. The agony of mind and spirit that led to his suicide and the resulting torment to his friends and family would have to be considered in any full telling of the story of Charles Dana Rice, but in the world of markets, the simple equation is that his death knocked four dollars off the stock price.

Similar stories are unfolding all around us. ImClone CEO Samuel Waksal, who claimed to have found a cure for cancer, has been charged with insider trading because he and his family sold just before the company announced its drug was not approved by government drug regulators. Paul Frame quit as president and CEO of oil-well services company Seitel after the board caught him reporting inflated profits. Porn film star Kathryn Gannon this week pleaded guilty to federal charges that she traded stocks on confidential information leaked to her by former Keefe, Bruyette & Woods Inc. chief executive James McDermott. Mr. McDermott, the first CEO of a Wall Street investment bank to be charged with insider trading, admitted last year that he tipped Ms Gannon to pending bank mergers. L. Dennis Koslowski resigned last week as chairman of Tyco Corp. and was charged by Manhattan prosecutors with evading more than $1 million in sales tax. On Monday, Tyco fired Mark A. Belnick, its general counsel, saying he used company money to buy or refurbish a vacation home in Utah. And that’s just the highlights of the last few days.

Amid such a deluge of crookedness and accusations, you’d have to be a fool or an optimist to invest in the stock exchange. The crooks look pretty much like the honest administrators, and they all use the same auditors. If there are profits to be made, the CEOs and their porn-star girlfriends will pocket them. If there are losses, the other investors will bear them.

That is the nexus that links virtue to reward — or in this case links vice to punishment. The sins of greedy and unscrupulous operators have shaken confidence in all the others so that companies can’t raise money any more. The industrial economy is doing just fine, but no one wants to invest because trust is broken. The Ontario Tories have wisely decided that this isn’t the time to be selling their hydro utility. The privatization plan, conceived when the romance of markets was at its height, has turned sour. The spectacle of the Tories’ favourite Bay Street operators lining their own pockets as hydro administrators gave the game away. This was never free markets at work. This was just greed gone berserk.

terry.moore@freepress.mb.ca