In other words, a good chunk of the “New Economy” was something very old–ripping off shareholders, just as Warren Buffett and Alan Greenspan always said. Insiders got obscenely rich while regular investors bought into phantom profits. This is not a few bad apples; it’s practically the whole barrel.
But don’t hold your breath waiting for reform. John McCain took to the Senate floor last week to end this racket; his amendment wouldn’t outlaw options, just the phony accounting of them. Senate Democrats–and the tech industry–want the charade to live on. Even so, Democrats are still well ahead of key Republicans on the broader reform agenda, who are in turn ahead of President Bush and his feeble attempt to address the crisis of confidence. Politicians are tripping over each other to look tough, waiting for attention to wane so they can once again serve their corporate paymasters, which is what got us into this pickle in the first place.
The last time we faced a hangover like this one, the president didn’t just talk, he acted. In 1934 Franklin D. Roosevelt created something called the Securities and Exchange Commission to regulate Wall Street. This was arguably the heart of the New Deal–to save capitalism from itself. But FDR’s choice for the first chairman of the SEC outraged his wife, Eleanor, and other liberals: Joseph P. Kennedy, the Wall Street buccaneer who had built a fortune with speculative tricks. He figured Kennedy had “made his pile” and was now interested in public service. “Set a thief to catch a thief,” Roosevelt said cynically, but he had read Kennedy right. The businessman was a tough regulator who helped clean up the markets he knew so well.
Harvey Pitt–you’re no Joe Kennedy. The problem is not that Pitt represented the accounting industry and corporate defendants as a lawyer (and thus has recently had to recuse himself 29 times from pending SEC cases). That background actually gives him a strong knowledge base. The problem, as crusading New York Attorney General Eliot Spitzer says, is that Pitt has “internalized the values of his clients.” He came in talking about a “kinder, gentler SEC,” and held cozy meetings with the folks he should be regulating aggressively.
Under pressure, Pitt has stepped up enforcement, but he still doesn’t get it. He clings to the fiction that there’s no inherent conflict of interest when supposedly “independent” accountants audit a company’s books while pocketing millions in consulting fees from the same company. And Pitt’s new oversight board specifically “exempts foreign accountants,” a loophole that will encourage accounting firms to try their luck with offshore affiliates.
Of course Bush, who needs Pitt as a lightning rod, hasn’t helped enough. Last week he proposed increasing funding for the strapped agency by $100 million–after starving the SEC in his budgets. This was typical of the Bush speech. Everything he proposed was necessary but not sufficient. Contrast that with Bush’s old nemesis, McCain, a Johnny-come-lately on the issue who nonetheless gave a terrific speech that included the tough reforms few others will touch, like making outside directors on corporate boards truly independent.
Democrats are calling Bush a hypocrite because he wants to outlaw corporate loans to board members, when he profited from one he received at Harken Energy in 1989. Their idea of justice is to see Whitewater-style drip-drip torture against the other side. But the GOP obsession with ancient Arkansas land deals was cheap in the Clinton years, and a Democratic obsession with ancient Texas oil deals would be cheap now. (Cheney’s business record at Halliburton is more current.) And “Harkengate” wouldn’t even serve the political interests of Democrats; the country has no appetite for it. They should keep the question about Bush more general: whose side is this guy on?
Barring a major terrorist attack, this story isn’t going to die. “People a lot smarter than I am think there’s plenty more criminal activity out there,” McCain told me. But until we see true structural reform–and some pictures of CEOs trading in their pin-striped suits for the prison variety–all the talk of “confidence building” will be just another con.
