The
rabble rouser makes some good summaries for the average reader, asks a lot of
questions, points fingers and makes another case for further reforms to
campaign finances laws. But he
doesn’t ask the question: Why isn’t Cheney being investigated for Halliburton?
I’ve got a déjà vu Spiro Agnew feeling. Could Cheney will have health problems
before 2003?
Bush’s
sudden interest in promoting business ethics (so funny considering his Hardin
Oil - SEC troubles) is shallow and
Rovesque.
Is
it time for a revival of classical economics? Or just a good born-again
moment?
Karen
Watters Cole
Flavors
of Fraud
By PAUL
KRUGMAN
(NYT)
June
28, 2002
o you're the manager of an ice cream parlor. It's not
very profitable, so how can you get rich? Each of the big business scandals
uncovered so far suggests a different strategy for executive self-dealing.
First
there's the
Enron
strategy.
You sign contracts to provide customers with an ice cream cone a day for the
next 30 years. You deliberately underestimate the cost of providing each cone;
then you book all the projected profits on those future ice cream sales as
part of this year's bottom line. Suddenly you appear
to have a highly profitable business, and you can sell shares in your store at
inflated prices.
Then
there's the
Dynegy strategy.
Ice cream sales aren't profitable, but you convince investors that they will
be profitable in the future. Then you enter into a quiet agreement with
another ice cream parlor down the street: each of you will buy hundreds of
cones from the other every day. Or rather, pretend to buy — no need to go to
the trouble of actually moving all those cones back and forth. The result is
that you appear
to be a big player in a coming business, and can sell shares at inflated
prices.
Or
there's the
Adelphia strategy.
You sign contracts with customers, and get investors to focus on the volume of
contracts rather than their profitability. This time you don't engage in
imaginary
trades,
you simply invent
lots of imaginary
customers.
With your subscriber base growing so rapidly, analysts give you high marks,
and you can sell shares at inflated prices.
Finally,
there's the
WorldCom
strategy.
Here you don't create imaginary sales; you make real costs disappear, by
pretending
that operating expenses — cream, sugar, chocolate syrup — are part of the
purchase price of a new refrigerator. So your unprofitable business seems,
on
paper,
to be a highly profitable business that borrows money only to finance its
purchases of new equipment. And you can sell shares at inflated
prices.
Oh,
I almost forgot: How do you enrich yourself personally? The easiest way is to
give yourself lots of stock options, so that you benefit from those inflated
prices. But you can also use Enron-style special-purpose entities,
Adelphia-style personal loans and so on to add to the windfall. It's good to
be C.E.O.
There
are a couple of ominous things about this menu
of mischief.
First is that each of the major business scandals to emerge so far involved a
different scam. So there's no comfort in saying that few other companies could
have employed the same tricks used by Enron or WorldCom — surely other
companies found other tricks. Second, the scams shouldn't have been all that
hard to spot. For example, WorldCom now says that 40 percent of its investment
last year was bogus, that it was really operating expenses. How could the
people who should have been alert to the possibility of corporate fraud —
auditors,
banks and government regulators
— miss something that big? The answer, of course, is that they
either didn't want to see it or were prevented from doing something about
it.
I'm
not saying that all U.S. corporations are corrupt. But it's clear that
executives who want to be corrupt have faced few obstacles.
Auditors weren't interested in giving a hard time to companies that gave them
lots of consulting income; bank executives weren't interested in giving a hard
time to companies that, as we've learned in the Enron case, let them in on
some of those lucrative side deals. And elected
officials, kept compliant by campaign contributions and other
inducements,
kept the regulators from doing their job — starving
their agencies for funds, creating regulatory
"black holes" in which shady practices could flourish.
(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.)
Meanwhile
the revelations keep coming. Six months ago, in a widely denounced column, I
suggested that in the end the Enron scandal would mark a bigger turning point
for America's perception of itself than Sept. 11 did. Does that sound so
implausible today?
