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Corruption, Crime, Chicanery: Business Through the Ages December 16, 2002 By CHARLES P. KINDLEBERGER THE accounting scandals involving Enron, Arthur Andersen, WorldCom, Qwest Communications, Tyco and other once highly regarded companies have caused a crisis of confidence among many Americans. Some ask whether the problems are so severe as to represent an irreparable fault in the economic system. >From a historical perspective, the answer is that economies are capable of recovering and making progress, even after near devastation - not only from war, as in the case of Germany and Japan after World War II, but also from economic chicanery, which is scarcely new. After bubbles collapse and interfere with economic growth, the resulting loss of income stimulates efforts to maintain and increase income, both honestly and in corrupt ways. Starting in 1600 with the establishment of the British East India Company, followed by its Dutch counterpart two years later, Europeans learned how to extract great wealth from the Far East. Warren Hastings, the first governor-general of India, and Robert Clive, a civil servant with the East India Company who became known as "the conqueror of India," were perhaps the earliest private malefactors of great wealth. Hastings accumulated �200,000 in India and transferred it to England in the 18th century; in the same period Clive transferred �280,000. Edmund Burke, the 18th-century statesman, argued that Clive ought to be removed. At the same time Lord North, who served as Britain's prime minister from 1770 to 1782, contended that Hastings's �200,000 was not excessive. A few hundred lesser employees of the company also did well. On nominal salaries, clerks (known then as writers), cadets, assistant surgeons, ship captains and ship husbands, who handled charters, all found opportunities to acquire wealth. Human nature has not changed. Andrew S. Fastow - who, while serving as Enron's chief financial officer, was also running partnerships, particularly LJM2, set up by Enron to keep debt off the books - has been indicted on 78 counts of fraud, money laundering, conspiracy and obstruction of justice. The East India employees smuggled goods to Europe and dealt in opium with China. The role of ship commander was bought and sold, typically for �2,000 to �5,000, but sometimes for up to �10,000 and once for double that. So egregious were their activities that British historians were not the only ones to single out Hastings and Clive. A German economic historian, Jacob van Klaveren, writing in the 1950's on the origins of corruption between the state and private business, asserted that corruption in business had begun with the East India Companies. By the 19th century, business corruption was so much a fact of life that it became a prominent theme for European novelists. Among them were Honor� de Balzac in "The Human Comedy"; Charles Dickens, "Little Dorrit"; William Makepeace Thackeray, "The Newcomes"; Anthony Trollope, "The Way We Live Now"; Gustav Freytag, "Soll und Haben"; Alexandre Dumas, "Black Tulip"; and Emile Zola, "L'Argent." And like many European fashions, swindling found its place in America by the 19th century, where Mark Twain and Theodore Dreiser included it in the plots of their books, while Boston produced Charles Ponzi, a swindler so prominent that his name became synonymous with one type of chicanery. He borrowed money for 45 days at 50 percent interest and paid early investors with cash from later suckers whose money he kept. The writers had abundant examples to inspire them, including Eugene Bontoux, founder and director of Union G�n�rale, a French bank that collapsed in 1882, and in the United States, Daniel Drew, James Fisk Jr. and Jay Gould, who manipulated the stock of the Erie Railroad. Financial scandals abounded on both sides of the Atlantic in the 20th century, as well. Among the perpetrators were the cabinet members involved in the Teapot Dome scandal during the administration of President Warren G. Harding; Ivar Kreuger, the Swedish Match King, who put together an empire of companies and became a private lender to governments before the empire collapsed, fraudulent accounting was exposed and he committed suicide in Paris in 1932; Robert L. Vesco, who looted Investors Overseas Services, the Swiss-based mutual fund empire founded by Bernard Cornfeld; Michele Sindona, the financier behind the Franklin National Bank in New York and Banca Ambrosia in Milan; and Nicholas Leeson, the rogue trader who brought down Barings Bank. Two famous 18th-century swindlers - Sir John Blunt, chairman of the South Sea Trading Company, and John Law, a Scot, who persuaded the French government in 1716 to let him open a bank that could issue paper currency in Louisiana, which France owned - might be said to have a modern counterpart. Sir John's stock manipulation led to what became known as the South Sea bubble and produced the crash of the London stock exchange. Law's issuance of paper money, which was used to drive up shares that then plunged, became known as the Mississippi bubble. Before the bubbles burst, each took vast earnings and invested in real estate. Sir John had six contracts to buy estates when the South Sea bubble burst in 1720; Law owned one-sixth of the Place Vend�me in Paris, plus a dozen estates in the French countryside, when the Banque Royale and the Compagnie d'Occident failed that same year. Some figures in current scandals have also shown an eye for real estate. One of them is Kenneth L. Lay, the former chief executive of Enron. He acquired a multimillion-dollar penthouse in Houston, his home city, plus three large houses in Aspen, Colo., worth more than $5 million each, along with a building site valued at more than $1 million. Investors have good reason to worry that next year may produce new disclosures of illegal insider trading, overstated profits and other dubious accounting practices. But the year could also bring new rules for corporate accounting, as the Securities and Exchange Commission, the new Public Accounting Oversight Board, federal and state governments, the courts and securities exchanges take up the issues raised by the scandals. Although it is too early to say whether they will succeed in overhauling the rules and restoring public confidence, it is fair to say that after disclosure of history's past swindles, public outrage led eventually to reform. http://www.nytimes.com/2002/12/16/business/businessspecial/16SCAN.html?ex=1041083190&ei=1&en=03a1563003ac16ed HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact [EMAIL PROTECTED] or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to [EMAIL PROTECTED] Copyright 2002 The New York Times Company <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance�not soap-boxing�please! 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