Matthew Hoy
By Matthew Hoy on June 27, 2002

Surprise! The New York Times' Paul Krugman provides an excellent and concise primer on the different methods certain unsavory corporations have used to inflate their profits. [Odds that the previous statement has given Jeff Hauser a heart attack: 2 to 1. The rest of you will be reading on.]

Wall Street is in serious trouble, and you don't have to be following the Dow Jones Industrial Average or the NASDAQ index to figure it out. Worldcom was just the latest of a string of Fortune 500 companies that have fessed up to their sins. Krugman says there very well be more, and I don't necessarily disagree with him.

Worldcom wants more money to be able to stave off bankruptcy, but it has obstacles to overcome.

In order for them to get more money they would have to verify their financial statements, which they cannot do," a different banking source said.

Worldcom's troubles, and those of the other companies Krugman mentions, are cause for concern. There is a systemic problem -- and though I'm usually an optimist, I wouldn't put money on Worldcom being the last company to come out with a mea culpa.

What Krugman has been pressing for is for Congress to pass a slew of new laws to prevent the kind of accounting scandals that have exploded over the last year or so. I'm skeptical that new laws will do much good, because there were laws in place before any of this happened that were designed to prevent it. That's why Worldcom is facing a lawsuit from the SEC and its executives are being delivered congressional subpoenas.

The long rollercoaster ride on Wall Street is not over. But I have a little more faith than Krugman that before all is said and done Wall Street will work it out. Those who steal from investors will be visiting Lompoc, Calif. Accountants who can't be trusted will cease to exist (witness Arthur Andersen). The old accounting standards are no longer satisfactory, because they counted on corporate honesty. That sort of moral grounding can no longer be taken as a given.

Krugman's column is excellent, if you ignore his parenthetical attack.

(Even while loudly denouncing WorldCom, George W. Bush is trying to appoint the man who drafted the infamous "Enron exemption" � a law custom-designed to protect the company from scrutiny � to a top position with a key regulatory agency. And some congressmen seem more interested in clamping down on New York's attorney general, Eliot Spitzer, than in doing something about the corruption he has been investigating.)

I wish Krugman would name names, it would be much easier to do research and fact-checking if I didn't have to do guesswork. I don't get a name, and I don't even get the agency that this guy is supposedly appointed to. (If anyone knows who he's talking about, send me the name.) For a different look at the "Enron exemption," which wasn't specifically made for Enron -- other companies benefited too, click here.

As far as Eliot Spitzer goes, he's a Democratic version of former New York Mayor Rudy Giuliani. According to Fortune magazine's Rob Norton:

So why does it matter if the attorney general is a highly ambitious character? Look at the weakness of the Merrill Lynch settlement. If Spitzer had really been interested in reforming Wall Street and protecting small investors, he would have brought Merrill to trial to force real institutional change, and demanded that substantial damages be paid to investors (none of the proceeds of the fine are going to them). Instead, having grabbed the headlines he sought, Spitzer let Merrill off with a slap on the wrist--a promise to try to do better in the future and a $100 million fine. (That sounds like a lot of money only until you consider that Merrill is taking in about $20 billion per year, making the fine exactly as onerous as a $750 fine for an individual making $150,000 per year. Inconvenient? Sure. Something to put the fear of God into you? Nope.)

If Krugman wants rail about the lack of meaningful government oversight of the Wall Street giants, maybe he should write a column about Spitzer.

But then, that's always been my complaint about Krugman. Krugman sees much of the world as black and white. Good and Evil. Democrat and Republican. There appears to be little room in Krugman's worldview for good Republicans, or for evil Democrats. Some of both exist. It would be nice if Krugman would recognize that fact a little more often.


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June 2002



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