Viewpoint: Enron only a symptom
By Joe Baker
Enron only a symptom
By Joe Baker
Major media are focused on the Enron debacle, but Enron is just a symptom of a much larger and much more serious situation. The bigger story has been termed by some as a multi-trillion dollar scandal.
In a nutshell, corporate America has been lying to us. You wont hear anything about it from Rather, Brokaw or Jennings because the parent companies of their networksViacom, General Electric and Disneyare as guilty as many other corporations.
Last year, in February, Enron stock was trading at more than $80 a share. Today it isnt traded at all, yet the company never reported a bad earnings quarter.
The disease that brought all this about is two-headed: deregulation and a questionable accounting method. This method, called pro forma accounting, has been protected by many conservative politicians on behalf of their campaign benefactors.
It used to be that most companies used GAAPgenerally accepted accounting principlesin keeping their books. This method deducts nearly all expenses from income, even if the expenses stem from unusual events, such as a tornado or a fire.
The next most conservative reporting method is called reported earnings. It allows some non-recurring expenses to be added to income. This method is used by Standard & Poors to figure their indexes overall earnings.
Another, more liberal method, is operating earnings. This method adds a number of expenses back into income, inflating the figures. These expenses are said to be non-recurring, but analysts say they are simply the continuing costs of doing business.
Then comes pro forma. This system adds all sorts of expenses into income, claiming to give an accurate, true picture of earnings. Most often, companies that are actually losing money use this method to show a profit.
Enron used it. So does Microsoft, IBM, Intel, Motorola and a host of others. This is being done with the approval of accountants and federal oversight agencies. The result is a giant con game that lures more investors to the markets. Its estimated that Standard & Poors 500 corporations have earned about $410 billion last year, using the pro forma method. If the GAAP system is used, however, collective earnings are about $240 billion.
While Enron overestimated its earnings by 100 percent, the average large U.S. corporation is overestimating its earnings by 42 percent, according to market analysts. This kind of accounting sleight-of-hand has built many corporate empires, including the mainstream media.
A national association of accounting firms has asked the Securities and Exchange Commission to mandate that all publicly held corporations must report real earnings according to the GAAP method of accounting.
If stock prices were to drop in a major way, trillions of dollars of investors wealth would vanish. The average Americans finances would be devastated.
Back in 1995, Senate Republicans and about half the Democrats in that chamber joined to override President Clintons veto of legislation to give corporations protection against stockholder lawsuits. The effort to cut liability for companies who report phony earnings was spearheaded by Wall Street lobbyist Harvey Pitt.
Pitt made a career of defending dubious deals by shady market opportunists like Ivan Boesky. President Bush is anxious to keep all of this under the rug until after the 2004 elections. He is looking for help from the chairman of the Securities and Exchange Commission. That man is Harvey Pitt.
And, of course, there is the attitude and performance of Arthur Andersen accountants. Alan Newman, editor of Crosscurrents, a newsletter published by HD Brous & Co., stated: Trust on many levels has been irreparably shattered and will remain an elusive target for years to come. A mania cannot end unless trust is ruined and a secular bear market cannot commence unless investors are left with no reasons to invest in stocks. Wall Streets promise of guardianship of the small investor was a lie. The implications are enormous. We expect them to reverberate for years to come.
That assessment was echoed to some extent by Comstock Partners, Inc., an investment management company. Comstock wrote: The deterioration of the accounting process is not an isolated incident, but is directly related to the previous financial and economic boom. In this, as in so many other ways, the debacle is comparable to the degradation of the financial situation in the years leading up to 1929. Overly aggressive accounting is one of the hallmarks of an unsustainable boom, and the cleanup that typically takes place when the party is over is under way now.
At the same time, the Securities and Exchange Commission reached a settlement with Bank Credit Suisse First Boston. According to Gregg Wirth, writing for Tom Paine.com, an Internet news site, the bank was assessed a $100 million fine.
The action is part of an investigation by the SEC and the National Association of Securities Dealers into the way Wall Street sold new stocks to investors, particularly high-tech and dot.com stocks.
SEC investigators allege Wall Street banks conspired with favored investors to rocket the price of new stocks after they began trading with banks which sometimes got illegal kickbacks from these same customers.
Investigators say it was a plan to inflate the Internet stocks to near bursting in order to lure small investors who were quickly fleeced, while the banks pocketed mammoth profits.
It was really a bubble created by Wall Street for the enrichment of Wall Street, said Jacob Zamansky, a New York lawyer. Last year he forced Merrill Lynch to make a financial settlement over the behavior of a stock analyst.
Besides First Boston, investigators are looking at firms such as Goldman Sachs, Morgan Stanley and several others.
It looks as though the financial cable car is headed downhill, and the brakes may not hold.