This page examines the financiers marketplace, its ideology, its power, its control over other markets including health care, and its political influence.
The heart of the market
The increasing frequency and severity of corporate fraud can be related to the embrace of market ideology and its rigid implementation through legislation. It is not difficult to make the connection or to understand why this is so.
As in the health care marketplace and in health care fraud, success in making money and building empires on Wall Street was validation of market thinking and sufficient reason for ignoring all other considerations. In the 1980s and 1990s market enthusiasm was intense and at the centre of this was Wall Street. The mania spread from Wall Street across the USA and then across the world.
Large financial institutions are the incubators, the arbiters and the disseminators of market theory and practice. They are also victims in the way they respond to the pressures this theory generates.
In fact, if you have to choose the primary breeding ground for the various business misdeeds now consuming national attention, New York, I'm afraid, is the place.
No matter where they are, lines of blame for the companies' current circumstances lead straight back to our city. And it's disingenuous to pretend otherwise.
It was New York investment bankers who drove the mergers-and-acquisitions deal culture of the 80's and 90's and who most aggressively oversold the myth of synergy that justified it. It was New York investment bankers and their Wall Street brothers who trained a generation of obedient American C.E.O.'s (by means of stock-option-based compensation) to worry more about jacking up their share prices in the short term than about running their companies well for the long haul. It was they who permitted the digital-technology giddiness of the late 90's to spread beyond Silicon Valley; Palo Alto venture capitalists may have doled out most of the initial dot-com money, but it was New York investment bankers who took all those companies public for billions of dollars, thus enabling the national festival of greed. It was they who created an inherently corrupt equities research establishment. It was they -- with their lawyers at the big New York firms -- who invented the novel financial architectures of Enron and WorldCom, just as it was the New York consulting firm McKinsey & Company that provided Enron with its egregiously go-go, ultra-fast-company ideology.
At Salomon, meanwhile, Grubman was also very lucratively combining the roles of analyst and investment banker. It was he and his Salomon colleagues who engineered the improbable acquisition of M.C.I. by scrappy little WorldCom in 1997; without him, both companies, and all their investors, might be doing just fine today. Since 1997, Citigroup and Salomon have underwritten telecommunications I.P.O.'s worth $17 billion, including those of Global Crossing (whose board Grubman privately advised) and Teligent; both companies are now bankrupt. Grubman attended WorldCom board meetings and schemed with Salomon Smith Barney bankers to funnel shares of hot I.P.O.'s to WorldCom executives and directors. City of Schemes The New York Times October 6, 2002
Relevance and Health Care
This page examines some aspects of these developments. Other aspects are addressed at multiple points on other web pages about financiers and health care corporations.
The practices and beliefs described are equally relevant to health care. The market sees health as a commodity to be packaged and marketed for the benefit of shareholders. They have demonstrated that fortunes can be made and vast empires created by doing so. Even in places like Canada where health is still seen by citizens as a service provided for the community by the community they are selling Christmas health packages to people who think in the corporate package mode. The health benefits of this are minimal.
But at the Personal Health Planning Institute in Calgary, the idea is taking off. It's selling holiday packages ranging from $249 to $3,000.
Aimed at the overworked, stressed-out corporate junkie, a base package buys a personal health screening profile, including a battery of tests and a 20-page report with a rating from poor to excellent.
Tying a red bow around a $3,000 envelope gets the recipient six hours of clinical testing, X-rays, blood work, a test to determine the "actual" age of the patient's body versus the "real" age, a comprehensive health report with action plans, 12 weeks with a personal health coach and a checkup after six months.
Another private clinic in the city is offering holiday deals on MRIs, virtual colonoscopies and CT scans. Would you ask Santa for a free colonoscopy? : Clinics offer 'gifts of health' Calgary Herald December 20, 2003
In his Boyer lectures on ABC radio Australian author David Malouf described entrepreneurial capitalism as "an eye for the main chance and the weakness of others". He was describing the positive contribution these characteristics, inherited from our convict ancestors, made to the development of Australia. If he had added "weakness in the system" he would have described Wall Street financiers. His insightful comments link success in the marketplace to criminal tendencies.
Malouf might also have added that, in Australia, society's subtle control of these entrepreneurial criminal tendencies successfully harnessed and directed them for the benefit of its acquisitive white colonial citizens. Overtly aggressive, competitive and criminal tendencies were frowned on so holding them in check and limiting their negative impact. While the taming of the land was an accepted objective the other characteristics Malouf praises were not sanctioned in the way they are today.
Community control and its subtlety might be the key to a more balanced view, and to a more livable society in civilisations based on capitalism.
The adverse experience of Australia's Aborigines in confronting Malouf's white entrepreneurs in their self-certain world would suggest the need for definitions of citizenship and society to be far more inclusive than at that time.
The parallel with Aborigines is that the financier's market, for all its importance for the physical well being of society, is in its "malignant self-certainty" equally blind to the adverse impacts it has on much of the rest of that society - a society which it looks down on.
Self regulation of an industry presupposes a high degree of professionalism, and a supportive environment. Professionalism has a history of bending before strong social pressures. This has happened in health care under fascism, apartheid and more recently market corporatisation in the USA.
The same thing seems to have happened in the financial markets. The intense competitive pressures generated by modern market thinking leaves little room for professionalism. As a consequence the regulatory process has been captured by the industry itself. The following is from an article about the US stock exchange. The article deals with its failures and its conflicts of interest.
Supervision of the markets by the industry itself was a cornerstone of the Securities Exchange Act of 1934 that arose out of the market crises during the Great Depression and also created the Securities and Exchange Commission.
The intellect behind the concept that Wall Street was in the best position to police itself was William O. Douglas, whose brief tenure as head of the commission before becoming a Supreme Court justice is generally regarded as the most productive and innovative in the history of the agency.
Douglas maintained that it was "impractical, unwise and unworkable" for the government to try to directly regulate the thousands of brokers, dealers and specialists of all of the stock markets, which were decentralized - - - - -
But Douglas also concluded that the great danger of an industry-imposed regulatory apparatus might be doomed to failure because the regulators could, in effect, be "captured" by the industry itself.
He thus proposed that the industry oversight be closely monitored by the commission to keep it from becoming too passive or laden with conflicts of interest.
But it has not always worked that way. Market failures in the 1950's and again in the 1970's and 1990's resulted in overhauls of some of the markets' police, and now the issue has arisen again.
The current review of the structure of the stock exchange follows growing criticism of the exchange for attempting to simultaneously police and promote itself, a practice that other experts and institutional investors say poses an inherent conflict of interest.
New York exchange officials have denied the existence of a conflict, saying that the recent compensation issues leading to the departure of Mr. Grasso had no bearing on the ability of the exchange to prosecute brokers and specialists who trade on insider information or who manipulate stock prices. Growing S.E.C. Role In Big Board Reform The New York Times September 26, 2003
"If you go back into history, this is hardly the first time securities firms have had to deal with serious damage to their reputations. There were the 1930s and the years after 1912 that led to the creation of the Federal Reserve," says Raphael Soifer, a veteran Wall Street banking analyst who now heads his own consulting company. "But if you go back and look at them all, the loss of public confidence did more damage to the industry than anything the courts and Congress were able to do. I think this will be no different. For many public investors it will be many years before they come back into the market." Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals: Financial Times (London,England) October 4, 2002
What happened during the DotCom era, and was exposed during the waves of scandals which followed should come as no surprise when the past conduct of these companies is examined. On the three previous pages I looked at the skeletons in the cupboards of the John Reed run Citicorp/Citibank arm of Citigroup, the Sandy Weill run Salomon Smith Barney/Travellers arm, and the continuation of theis conduct after the merger. Both exhibited cultures which would grasp any opportunity for profit and not look too closely at the morality or consequences for others.
Salomon Brothers was criticised in the 1980s Maxwell scandal in the United Kingdom. It barely survived the bond rigging scandal in 1991 yet was back indulging in allegedly illegal share 'spinning' in 1997. Its staff were active in Smith Barney's unsavoury practices following the mergers with Smith Barney and then later in Citigroup when it embraced Smith Barney.
After all, this wasn't the first scandal for many of these firms. Financial regulators have stood the likes of Salomon Brothers in front of an open grave before. After a bond-trading scandal in the early 90's, Mr. Buffett, a shareholder at the time, was summoned to save the firm from its own sharp practices. He then gave Salomon traders some advice about integrity: "If I hear of an employee losing the company money, I'll be understanding. However, if I hear of any employee losing Salomon one shred of reputation, I'll be ruthless!"
Though the admonition was widely quoted and admired, careful readers will see the Salomon name now embedded in Citigroup's Salomon Smith Barney, one of the firms regulators have accused of fraud. A Fraud by Any Other Name The New York Times May 4, 2003
Mr. Ebbers's biggest winners came before Salomon merged with Smith Barney in 1997. He made $4.6 million on 100,000 shares of Metromedia Fiber, a telecommunications company whose shares were underwritten by three investment firms, including Salomon, in October 1997. Ebbers Made $11 Million on 21 Stock Offerings The New York Times August 31, 2002
It is a mistake to consider the pressures of the DotCom bubble as the cause of the frauds. It merely exposed what had been happening. It exposed the growing trend for the market, one of society's structures, to misuse the citizens that structure should have served -- and to undermine the basic value systems through which society controls its members. The DotCom bubble was simply another opportunity seized by those with an "eye for the main chance" and the weakness of investors who depended on advice.
The tawdry behaviour by these financial institutions is representative of what had been happening in the heart of the market over many years. In a context where economic success was its own validation no one was interested in looking, or asking questions. That the problems became worse and worse as time went by can be seen as a reflection of intensifying competition and an unchallenged ideology being applied ever more rigorously.
As financial institutions have spread across the world, the market has become supremely arrogant and self righteous. Their dominance and success has fuelled an omnipotent view of the world - a view hardly dented by their misconduct.
The tone and style of the US financier spread across Europe like margarine
With the Asian financial system in ruins, the US financier has moved in and is being embraced as never before.
The Goldman Sachs partner is the late 20th century equivalent of the colonial administrator. He is the man who moves into weaker countries and tells them how to behave.
The Goldman Sachs partner is freed from whatever self doubt he might have felt; the entire industrialised world now recognises his essential superiority.
The rule is that if you don't know who the bully in the global economy is, you're the bully. As US bankers look down upon the world with malignant self-certainty, they ought to keep this rule in mind. The Industrial World Bows to the US financier: The Ways of Wall Street by Michael Lewis The International Investment Week May 18, 1998
Mr. Oxley (chairman of the House Financial Services Committee) is more likely to line up with the industry than to combat it. A conservative Republican from a mostly rural district, he says free markets operate best when they are undisturbed by government regulation. He came to Congress in 1981.
Since January 2001, according to Federal Election Commission filings, accounting firms, brokerage houses, banks, insurance companies and their employees have poured $1.16 million into his coffers and those of his political action committee. Pipeline to a Point Man The New York Times November 3, 2002
Self Regulating Markets
At the same time as technology fever increased during the 1990s "market think" in political and academic business circles was becoming more intense and more ideological. In order to improve competition and increase competitive pressures government legislated to repeal older legislation that imposed restrictions designed to avoid conflicts of interest and limit market excesses. These were seen to restrict the markets and limit mergers and takeovers. Past experience was ignored in the unfounded belief that markets were self regulating.
The craze (ie DotCom boom) had its roots in the Telecommunications Act of 1996, which deregulated the industry and swept out rules limiting competition. Soon, entrepreneurs saw a chance to build huge networks crisscrossing the globe to serve the big jumps in demand for data transmission. Telecom's Pied Piper: Whose Side Was He On? The New York Times November 18, 2001
Three years ago Congress dismantled the Depression-era wall separating commercial from investment banking. Underwriting Fraud The New York Times August 25, 2002
Mr. LaFalce (ranking Democrat on the House Committee on Financial Services) also asked the committee to examine whether the Gramm-Leach-Bliley Act of 1999, which eliminated barriers for banks from certain securities businesses, added to the potential for conflicts. Regulators Find MoreRed Flags In Another Analyst's Optimism The New York Times September 12, 2002
Turning the tables on Congress as the hearing moved to the historic causes of the scandal, Mr. Spitzer (the New York attorney General who is criticised because the US $1.4 billion fraud settlement is too low) attacked "an overarching effort to deregulate the financial services industry over the last 20 years." Senators Question Effectiveness of $1.4 Billion Settlement The New York Times May 8, 2003
Consolidation and Diversification
By manipulating the market abstraction, consolidation which reduced the number of competitors became desirable and was seen to be more efficient - even more competitive. Diversification which increased the conflicts of interest was seen to be more competitive and to increase productivity. Building empires was a greater marker of success than running them. Legislation was repealed specifically to allow the 1998 merger of Reed and Weill's empires to form Citigroup. What all this did was to create ever larger empires, and ever more powerful individuals with ever greater conflicts of interest - a potent witches brew.
The fluid nature of the Grubman-Weill (Market Analyst for SSB and Chairman of Citigroup) relationship underscores as well the regulatory pitfalls that arise when financial conglomerates the size of Citigroup try to please such diverse constituencies as retail investors and investment banking clients, all with their conflicting interests. Citigroup's Chairman Is Barred From Direct Talks With Analysts The New York Times April 29, 2003
SOME of the nation's biggest banks are being challenged for serving in dual roles as lenders and advisers to troubled companies.
The situation gives rise to conflicts, say the companies' creditors, adding that it is the inevitable result of banks' increasingly diverse roles, particularly in the two years since legislation eliminated the separation between investment banking and commercial lending businesses.
"Since the repeal of the Glass-Steagall Act, this has been an issue," said David Friedman, a partner with Kasowitz, Benson, Torres & Friedman, which frequently represents the bondholders of companies in distress.
Potential conflicts have arisen at commercial banks that have been expanding into investment banking, including Citigroup, J. P. Morgan Chase and Bank of America, Many creditors are increasingly worried that big banks have conflicting roles as both lenders and advisers. The New York Times June 13, 2002
A lawsuit filed by a former high-level broker in Salomon's (part of Citigroup) office in Atlanta indicates that different, ostensibly independent, businesses within Salomon shared significant information about WorldCom employees' investing plans, putting Salomon in a position to profit at the expense of those customers. Notebooks and diaries kept by the broker also contain more examples of how Salomon's star research analyst, Jack B. Grubman, served as a nexus through which privileged information flowed between telecommunications companies and Salomon, and among nominally distinct units within Citigroup.
The notes also show the potential conflicts of interest that can arise at huge financial conglomerates and the perils that consumers may face when they entrust these companies with control over many aspects of their lives. In a Broker's Notes, Trouble for Salomon The New York Times September 22, 2002
Jeffrey E. Garten, dean of the Yale School of Management and a former investment banker who was Under Secretary of Commerce for International Trade in the first Clinton Administration, wrote an article for Business Week in January 1999 soon after the Citigroup merger. While his article does not predict the problem of socially immoral behaviour and regulatory failure, its prophetic comments about the potential problems for society created by the shifts in power in these massive mergers are well worth reading. Much of what has happened is a consequence of this shift in power.
The wave of megamergers washing over the U.S. cannot be held back. But that's no reason why we should ignore its impact on American society. The past two years have seen some of the largest combinations in history: Citibank and Travelers, WorldCom and MCI, Daimler and Chrysler, and British Petroleum and Amoco, to name a few. Many more huge transactions are pending, including Deutsche Bank and Bankers Trust, Exxon and Mobil, and Aetna and Prudential Health.
But the mergers raise a broad issue that goes beyond traditional concerns. For example, antitrust issues could be a worry -- but happily the Justice Dept. and the Federal Trade Commission are alert to their responsibilities.
The big problem with these gigantic mergers is the growing imbalance between public and private power in our society. No one should deny the importance of free markets as the best engine for our economy and as protector of so much of our personal freedom.
But it is doubtful that Americans will equate Adam Smith forever with the total interests of society. In the gilded age of J.P. Morgan and John D. Rockefeller, for example, unchecked corporate power led to a dramatic increase in government activism -- from antitrust laws to the establishment of the Federal Reserve and the Securities & Exchange Commission.
The laissez-faire 1950s were followed by more than a decade of new government mandates on business in fields such as environmental cleanup and equal-opportunity employment.
LOCAL LAPSES. Today, the pendulum is swinging again, as markets, and particularly the megacorporations, come to dominate national and global affairs. Of course, huge multinationals are nothing new, but nowadays an era of Big Government is being superseded by the age of global goliaths.
Superlarge companies with interests and commitments stretching from Boston to Brisbane are unlikely to focus as intensely as smaller ones do on support for the local neighborhoods -- the schools, the arts, the development of research activities, the training of potential workers.
Big companies have disproportionate clout on national legislation. Our scandalously porous laws for campaign contributions leave little doubt that megacompanies will exercise huge power over politicians when it comes to such issues as environmental standards, tax policy, Social Security, and health care.
Megacompanies are almost beyond the law, too, because their deep pockets allow them to stymie prosecutors in ways smaller defendants cannot. Or, if they lose in court, they can pay large fines without much damage to their operations.
NEAR EQUALS. Corporate giants will also exert massive pressure on America's international behavior. - - - - - - - Companies like Exxon-Mobil Corp. will deal with oil-producing countries almost as equals, conducting the most powerful private diplomacy since the British East India Company wielded near-sovereign clout throughout Asia.
The American economic system is at its best when public and private needs are balanced. The sheer magnitude of mergers is skewing the equilibrium.
What can be done? The obvious priority is serious campaign-finance reform to prevent any single economic interest group from controlling national politics. There may also be a variety of tax and regulatory questions that will make Washington more effective in keeping up its end in the seesaw of public and private power.
Finding the right balance between markets and the public framework in which they operate is the most important issue of our times. MEGAMERGERS ARE A CLEAR AND PRESENT DANGER Business Week January 25, 1999
Power and Corruption
These powerful individuals and the institutions they controlled came to exert an ever greater control over the political system and a disproportionate influence in society. Society's ability to harness and direct was further compromised.
Instead of society harnessing and controlling the market, the wealth of the powerful billionaires was often used to corrupt society - even to corrupting nursery school admissions. Citigroup's billionaire chairman Sandy Weill is alleged to have made a million dollar donation to a nursery school to ensure that Grubman's children be accepted. This was in exchange for Grubman writing a suitably slanted "independent" analysts' report on AT&T. This brought Citigroup a US $45 million contract. Grubman alleged this also gave Weill the board room support he needed to oust John Reed in a board room battle for control of the company.
Helping out with school applications greases the wheels of business and philanthropy in New York and any other city where getting into private schools is difficult. Private Preschool Admissions: Grease and the City The New York Times November 16, 2002
Less overt than the naked political exchanges of United States senators or Washington lobbyists, the favor bank has long flavored the ways by which New Yorkers, especially, get into private schools, procure dinner reservations, join a golf club and find a spouse. New Yorkers rarely go to dinner just to go to dinner. They go to dinner to promote their sub rosa agendas.
From England, where Mr. Homberger (author of books about US society) lives, - - - - It reinforces his thesis, he said, that Americans don't practice democracy as often as they preach it. Doing Unto Others in a Big Way The New York Times November 24, 2002
Modern management was, at this time increasingly embracing micro-economic reform with its emphasis on linking economic performance closely to remuneration - so targeting employees self interest and harnessing them to the corporate profit mission rather than their responsibilities to society. This was in spite of the clearly demonstrated and predictable consequences of this approach in similarly sensitive areas like health. Doctors were not immune. It is hardly surprising that offering bonuses for a willingness to exploit fellow citizens for corporate benefit should be corrupting.
In many cases, analysts were compensated not so much on how well their advice served investors but rather how much their favorable research commentary induced companies to steer business to their firms. S.E.C. Taking Closer Look At Wall St. The New York Times June 1, 2002
According to a former analyst at the firm, Mr. Grubman's (Citigroup analyst) pay was tied specifically to the deals that the firm did in telecommunications. "I remember meeting with these guys and they would have a list of deals and they would say, 'Here's how much we're paying you deal by deal,' " this person said. "There was a formula." Telecom's Pied Piper: Whose Side Was He On? The New York Times November 18, 2001
The Witch's Brew
The pressures driving inappropriate behaviour were increased and given greater legitimacy at the same time as the structures designed to control them were dismantled. Instead of prohibiting dangerous practices they were permitted provided the intention was not commercial advantage - without asking how you could ever prove that intention. Any monkey who examined what was happening would have predicted the outcome but the hunt for market reform by intensifying competition was in full cry. None of the monkeys were looking.
Banks were entitled to give shares in hot initial public offerings to favoured clients provided there was no understanding that the share allocations were given expressly to generate further banking business.
The Securities and Exchange Commission, the US's chief financial regulator, concluded in a study three years ago that there was no case to bring against the banks, especially since there was no evidence of a promise to give business in return.
Under federal securities law, the transactions would have to be shown to be commercial bribery to be considered illegal. Arthur Levitt, previous head of the SEC, told the Financial Times recently that he abhorred the IPO allocation practices and that they looked to him "like commercial bribery". But securities lawyers say bribery is hard to prove. Wall Street under fire: daily, complaints grow of unfair treatment and unethical deals Financial Times (London,England) October 4, 2002
It is becoming increasingly obvious that the market model which financiers and others have promoted so strongly is not working. Those claiming to address the problems are only twiddling with the economic details and not the powerful social forces at work, or the belief systems driving the process.
For years, only the bottom line mattered for Citigroup. The financial conglomerate formed by the 1998 merger of Travelers and Citicorp made mountains of money - Dollars 14.6bn (Pounds 10bn) last year - and its shares consistently outperformed the competition.
But this year, the biggest US financial company seems to be losing its hold on investors. Citigroup shares have fallen 25 per cent since January, and the company commands a lower price-earnings multiple than other leading US banks.
Even investment analysts recommending Citigroup see a problem. They say investors are worried about the size and complexity of the company assembled by Sandy Weill, 69, Citigroup's chairman and chief executive.
Diane Glossman, banking analyst at UBS Warburg, said: "The company is involved in virtually every activity that is concerning investors today. They are a complicated company in a market that craves simplicity." Diversity could come back to haunt Citigroup: The US financial group's breadth of business may be a risk, Financial Times (London,England) July 1, 2002
"The political situation in America just seems to be unremitting: money talks," said John C. Nogle, founder and former chairman of the Vanguard Group, discussing donations in general. "Corporations don't make political contributions without the knowledge that they want a return on their capital. There is no corporate investment with a higher return on capital than political contributions."
"What you're seeing with Oxley is a situation where it really pays off for the industry," Mr. Noble said. "There was a lot of pressure to look at the industry, and now the reports are it's really been derailed and that's what the industry wanted. People often ask what did the industry get; show us a bill the industry got. But sometimes what's more important is the dog that didn't bark, the legislation that never got passed."
An example may be Mr. Oxley's lack of interest in the conflicts among Wall Street analysts, an issue that is front and center with investors.
Mr. Oxley has castigated Eliot Spitzer, the New York attorney general, whose investigations into corrupt Wall Street research have made him the most aggressive instigator for change among brokerage firms. In a speech in May before the United States Chamber of Commerce in Washington, Mr. Oxley said Mr. Spitzer's $100 million settlement with Merrill Lynch, and the prospect of others, "will seriously weaken the ability of American companies to raise funds in the capital markets" and threaten to undermine the national regulatory system set up to oversee market participants. "Grandstanding by ambitious and publicity-hungry political officials will not lead to healthy and responsible securities markets, in my estimation," Mr. Oxley said. Pipeline to a Point Man The New York Times November 3, 2002
Establishment and Community
One of the weaknesses of modern democracy is its susceptibility to dominance by establishment groups and establishment figures within society. All too often they come to dominate not only the political process but also the thinking of the community. In contrast the strength of democracy is that it allows for citizens to develop alternative points of view and so return to a balanced society without violent revolution. This is never an easy or painless process, particularly when the establishment takeover holds all of the cards.
As I see it the problem for us today is that the market and market thinking has become so pervasive and embraced so many facets of our lives that there is far too little real cooperative social activity which is not market based. The building of community values and norms, and the exercise of the sort of social constraints that might contain marketplace excesses is consequently truncated.
An examination of the web pages on this site shows how little room there is in the marketplace for the expression of community values and norms. Donating to good causes is not the same as participation. Health and aged care are two areas where the exercise of values and norms has traditionally been encouraged and strongly supported - but no more.
Corporations and Politics
Political donations, personal relationships, close links with politicians, political appointments, targeted corporate marketing, and extensive lobbying in the USA, all reveal the extent to which an elite corporate "class" has come to dominate public policy. Australia is is well down the same path.
The claim made by a government official in Australia that the market is where the talent is, is valid. There are now few credible non market community activities in which citizens can exercise and reinforce values, develop talent and leadership skills, and then follow a path into the corridors of power.
Politics and Regulatory failure
The influence of the marketplace establishment is all pervasive. It gets what it wants and obstructs what citizens want if this will impact on market interests. Arthur Levitt was chairman of the SEC during the 1990s and was responsible for prosecuting many of the earlier frauds in which Salomon Smith Barney were involved. President Bush replaced Levitt with one of Levitt's strongest critics, a more corporate compliant, market focussed, and ineffective Harvey Pitt.
ARTHUR LEVITT was one of the last honest men left standing when they put out the lights on the Clinton administration. The longest serving chairman of the Securities and Exchange Commission (1993-2001), he was charged with regulating America's financial markets during an economic boom that has now gone splendidly bust.
Levitt confronted corrupt brokers and analysts who were profiting from insider information. He fought price fixing on the stock exchanges and battled to keep accountants from cooking corporate books.
The politicians who served these special interests accused him of being an obstructionist who didn't understand the New Economy. Forget about profits and cash flow, they said. We need a different kind of metrics for measuring how information flows through the new knowledge industries. Buy Cheap, Sell Dear The New York Times November 24, 2002
For years now, political reformers have been railing against the unseemly -- and rampant -- practice of former government officials pouring through Washington's golden revolving door only to return a short time later as well-paid lobbyists, auctioning off their access and influence.
Well, compared to the latest trend, turns out those were the good old days. Today's new breed of public servants prefers to cash in while still stalking the halls of power and deeply involved in the highest levels of creating public policy. Having Your Souffle And Eating It Too <http://www.truthout.org/docs_03> March 26, 2003
No sooner were the massive scandals of 2001 to 2003 over than the market put it all behind them. It was back to business as usual, minimising what had happened and networking with compliant politicians to remove restrictions on business, and get the laws they wanted passed. Wall Street is the heart of US capitalism and its interests are still seen as the interests of the USA. This "self evident" justification gets them what they want!
On March 19, when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2003, the House voted to remove a significant restriction from the bankruptcy code that has barred so-called interested parties from advising a company during bankruptcy.
The restriction on interested parties has been in the bankruptcy code since 1898. Understandably. Why should a firm earn fees advising a company that it may have helped push into bankruptcy by, say, loading on too much debt?
Jeff Lungren, a spokesman for the House Judiciary Committee, whose chairman introduced the bill, said barring investment bankers who are familiar with a company's inner workings from advising it in bankruptcy is inefficient and costly.
Stock and bond issuance is down, and so are banking fees. Financial firms are naturally eager to earn money from bankruptcy advice, and their lobbyists have been working the issue hard in Washington. For the 12 months ended June 2002, the Securities Industry Association and the Financial Services Roundtable, two big industry groups, spent $10.5 million pleading their views.
Arthur Levitt, a former chairman of the Securities and Exchange Commission, said: "I haven't read a single argument made by the investment banks that would persuade me that that prohibition should be changed. What we're talking about is a significant potential conflict of interest, and I think it is outrageous that investment banks would even try to go down this road."
Outrageous, perhaps, but not surprising. Investment banks and corporate America want investors to get over the dreary corporate governance craze already. Failures at Enron and WorldCom are so five-minutes-ago. Never mind about the recent debacle at HealthSouth. It is time to return to business as usual, when corporate executives were worshipped and investment bankers revered.
Financial services firms may be able to use political influence to win relaxed legislation and a new fee source. But having the bankruptcy law changed to allow new conflicts of interest will not help these firms win back the investor trust they have lost. Advisers May Get Second Chance to Fail New York Times April 6, 2003
The Business Round Table
A typical example of corporate influence is the business round table in the USA. It is a self elected group of powerful businessmen, each a leader of a corporate empire. Citigroup's John Reed and Sandy Weill were both members as were a number of others whose companies milked shareholders in the recent market scandals.
The round table meets with the president at least once a year but connects with senior sectors of the administration far more often. It has separate groups examining different policy issues and spends large sums in lobbying.
Over the years it has successfully opposed many efforts to reform market practices. Of particular interest was the round table's obstinate stance on executive options used as incentives. This has been one of the major causes of problems in health care and a major contributor to the latest financial scandals.
It is perhaps typical that Bush should turn to the round table to address transgressions in which so many members of the round table have participated.
IN late June, with the fresh indictments of two chief executives only the latest in a seemingly endless string of business scandals, President Bush invited the 140 corporate leaders who make up the Business Roundtable to a briefing in the Old Executive Office Building. The group meets with the president most summers, but this time there was something new at the top of his agenda: corporate accountability.
"I expect you, as corporate leaders, to do everything within your power to bring back trust in corporate America," Mr. Bush told the assembled elite.
Soon thereafter, the Business Roundtable -- the only business group named by the president in his speech on Tuesday -- issued a statement saying that its members were "appalled, angered and, finally, alarmed" about the year's run of outrageous business news.
For most of its 30 years, the Roundtable has remained a small, effective, somewhat mysterious fraternity, far less visible but far more influential than, say, the United States Chamber of Commerce, and tightly focused on a few important topics on which the government can affect business.
Institutional investors, academics, consumer watchdogs and others who monitor the goings-on in America's executive suites have their doubts. What reforms can emerge from a process in which the top executives themselves all play an instrumental role, they ask?
-- the Roundtable in the past has used its considerable powers to block some of the very proposals now getting a second look in Washington.
Even today, despite the rhetoric, the Roundtable opposes any changes in the accounting treatment of stock options, the seemingly obscure issue that many governance experts say is behind exorbitant executive pay and has fueled the worst abuses of many of the current scandals. (Reed and Weill were both active in opposing this)
Founded by a handful of power brokers bent on building a pipeline between the nation's corporate leaders and its top government decision makers, its members today include - - - - , Sanford I. Weill of Citigroup, - - - - and other chief executives chosen for their wattage and corporate heft. Together, their companies boast $3.5 trillion in revenue a year and employ about 10 million people.
As a lobbying group, the Roundtable itself regularly comes in second only to the Chamber of Commerce in spending by business groups -- but even that standing understates its influence. Individually, these corporations are among the biggest check writers to both political parties and to individual members of Congress. Those donations, along with the stature that members have in their headquarters cities, gives them open-door access at the highest levels of government and adds considerable weight to their viewpoints.
Charles Lewis, executive director of the Center for Public Integrity, a nonprofit research group in Washington that monitors money in politics. "They were out there lobbying against any reforms throughout the 1990's."
Only chief executives of selected companies can be members of the Roundtable, - - - , Mr. Castellani, who is an employee of the Roundtable, said it selects new members in part on the basis of where their corporations are, what they do, whether a prospective company seems to view participation in the public-policy process as important and whether the candidate "is an individual chief executive whose voice is important in the public-policy process."
From the beginning, the idea was to draw strength not from numbers but from exclusivity
The idea: to cut out the middleman and create a forum where the nation's top corporate chieftains could lobby government decision makers directly.
The Roundtable creates task forces to carry out its agenda, each led by a chief executive who typically taps his own corporate staff for task-force work. Is True Reform Possible Here? The New York Times July 14, 2002
The nexus between business, politics and market ideology is alluded to at multiple points on these web pages as it plays such an important part not only for Wall Street financiers but in health care - an area where legislation also has a profound impact on profits. Lobbying and political donations are particularly intense when citizen's put pressure on regulators to control health care corporations and protect citizens from being misused. Managed care's successful battle to castrate effective patients rights legislation is a good example.
The giant financial groups have successfully positioned themselves to control and profit from every facet of market activity. Without their approval and support success in the marketplace is nearly impossible. Their central position as both advisers to, financial agents for, and analysts of all aspects of business activity gives them control of the marketplace. From guiding companies through their first IPO, to subsequent floats, through takeovers and mergers, to structured finance to beautify balance sheets and avoid tax, through fraud, and finally through bankruptcy they facilitate, guide, lend and profit handsomely. They make vast sums from this cycle of activity.
Lately, the rain has become a downpour. "This is boom time," said Henry S. Miller, a leading restructuring guru, unabashed by the paradox that his good fortune happens because of the misfortune of others. "It's just the way it is. This is our time."
Mr. Newman, whose restructuring staff numbers about 40, is now working on two of the largest reorganizations in history: those of Enron and Global Crossing, as well as that of the Williams Communications Group.
A handful of other boutique investment banks are also busy trying to mend tattered companies and advise upset creditors.
There is no question that the business of corporate restructuring, once a backwater, has grown into a big business in recent years.
All told, industry analysts estimate that cleaning up corporate messes will net more than $5 billion in fees this year for the firms like those of Mr. Newman and Mr. Miller Bankruptcy Doctors Are Most Definitely In The New York Times July 14, 2002
The one thing the bankers don't want is a stable marketplace where instead of doing deals the companies concentrate on the business of serving the community and making a profit from doing that. Without deals there are few profits for the financiers and greater benefits for the community. With an excess of deals service to the community is compromised and in their role of investors they are at extreme risk. Multiple competitors are steadily replaced with industry giants who control and exert far too much influence. Democracy becomes the victim of a blind faith in efficiency and productivity as ultimate goals.
It is perhaps no coincidence that the financiers have driven the market ideology and directed competition away from services to takeovers and mergers. They have created a situation where a company's survival depends on competing successfully in the merger marketplace.
By creating a series of bubbles and collapses they ensure their own profitability. When one bubble collapses they go looking for another activity where the process can be repeated. In this climate a few make vast riches at the expense of the majority of the population. It is tempting to label this as deliberate manipulation by greedy entrepreneurs but it is more likely that it is simply the consequence of the ideology and the unrestrained market forces to which people are responding.
The noble American ideals of democracy, opportunity, reward for work, and a level playing field full of opportunity have been corrupted and are now an illusion. Politicians and market bigots maintain and sell this illusion. The public still buys it. At some stage the myth must dissolve and if capitalism is to survive then the underlying problems inherent in an ideology which legitimises this excessively competitive market system need to be addressed.
After examining the Wall Street scandals and the extent of the unethical and immoral practices one can only conclude that the market in its present form is a powerful and pervasive force for corruption in our society. Fixing it is not going to be easy but the longer we ignore it the more difficult it gets. It is not a few errant criminals. It lies at the heart of the marrketplace and the way we think about it. We need to start thinking about what is really important for us and what we believe in. Then start restructuring and repositioning the market in fundamental ways.