07-17-2002, 03:17 PM
Holman Jenkins of the Wall Street Journal is one my favorite columnists in the printed press. Lewis Lapham, editor of Harpers, is the other. Talk about two different ends of the political spectrum. Anyways, here is what Jenkins has to say about some of the events swirling around in Washington.
Lies of the Post-Bubble
When the Senate acts in unanimity you can be sure you're getting a substandard product, as with Monday's 97-to-0 bill on accounting reform. But much worse may be coming. Now is when false dogmas are born, such as the universal belief that the Great Depression was caused by the stock market crash of 1929 rather than gross policy errors originating out of Washington.
Herewith, some of the canards that are likely to harden into myths, though at the moment they merely exist as lies.
Myth: CEO stock options led to telecom overinvestment.
How can this be true when virtually every major company in the country uses stock options, yet we don't have groaning overcapacity in the supermarket business or kitty-food industry? Indeed, the most visible trend in the economy has been toward leaner inventories and more efficient use of resources (aka higher productivity).
What happened in telecom was an aberration but not a novelty -- the same overinvestment and shake-out were seen in the early PC industry, the early auto industry, the early railroad industry, etc.
Myth: Failing to deduct an expense for management stock options "inflated" earnings and therefore stock prices.
Good grief. We've been discussing this rule change for a decade now. It would be the overripe short-selling opportunity of the century if markets were somehow fooled into mispricing stocks simply because we failed to adopt a particular accounting treatment for the noncash value of options.
Of course this is absurd. Coke has now joined Boeing and Winn-Dixie in adopting the proposed treatment, and others may follow. You can be sure they satisfied themselves that the market understands the resulting charge will represent a mere bookkeeping transaction with no economic substance.
Myth: Accounting fraud led to the stock-market bubble.
In fact, share prices were lofted on the Internet enthusiasm of small investors. These folks, to the extent they were concerned with business realities at all, were willing to delay profits indefinitely in pursuit of a glorious expected future. This was true even of Enron, nominally an energy company until Ken Lay announced that it was going into e-business, causing the stock price to jump 26% in a single day.
Enron had been a $20 stock for a decade but soon soared to 90 bucks, unrelated to any reported profits, real or fake. The price collapsed just as quickly as the bubble did, long before any accounting problems were exposed.
Myth: Bernie Ebbers "destroyed thousands of lives."
Whether the WorldCom chief knew of his company's accounting fraud is uncertain. But Mr. Ebbers created thousands of jobs, and whoever cooked the books was trying to keep the company afloat and save those jobs amid a global telecom meltdown. WorldCom's stock price had already fallen to less than a buck before the admitted fraud began.
For that matter, CFO Scott Sullivan, the fraud's alleged author, had already sold much of his stock to finance his dream house. His accounting actions may have been misguided and possibly criminal, but he apparently wasn't out to line his own pockets.
Myth: ImClone's Sam Waksal "put personal profiteering ahead of patients."
Mr. Waksal has been charged with insider trading in advance of an FDA ruling on the company's experimental cancer drug. He may be guilty as charged, but he spent 10 years trying to advance a drug that many experts still believe offers hope to patients.
More interesting than any of this, though, is the apparent need to lie about the origins of the bubble itself. Investors bear primary responsibility for driving up stock prices of speculative businesses and causing billions of dollars to flow into the creation of assets for which there is no demand now. Why not just say so?
The late boom produced a great number of companies that aren't doing well now, and a much smaller number that have resorted to dodgy accounting in an attempt to arrest their fall. Regrettably, such behavior is not all that unusual at this point in an economic cycle. Indeed, we're not even sure the incidence of corporate scandal is any higher than normal -- i.e., that a "crisis of confidence" was ever particularly warranted.
For investors the much more important question is whether the set of optimistic beliefs that sustained a bull market for nearly 20 years is still intact.
Stock prices during that period grew three times faster than corporate earnings. Interpreting stock prices is always a risky endeavor, but this decline in the so-called "risk premium" suggested that investors were confident that companies would find abundant opportunities to keep growing their earnings. After all, shareholders looked out on a world of peace, expanding trade and the triumph of pro-market economic policies.
We wouldn't presume to guess what investors are thinking about all this today, though last week's market reaction to the antibusiness hollering in Washington was heartening in a peculiar way. It showed that the investor class remains a growing ballast in the body politic against destructive policies and class-war rhetoric. Presumably the Senate was listening when it decided on Monday to detour the sticky wicket of stock-option accounting.
Even the televised hearings of nontestifying CEOs were a useful two-fer for parents. Moms and dads could point simultaneously to the disgraced CEOs and bleating, grandstanding members of Congress as two examples of the kind of adult that no child should grow up to be. In a nation where more and more voters measure their well-being in terms of the stock market, Washington is running neck and neck with corporate scofflaws as a target of investor ire.
Lies of the Post-Bubble
When the Senate acts in unanimity you can be sure you're getting a substandard product, as with Monday's 97-to-0 bill on accounting reform. But much worse may be coming. Now is when false dogmas are born, such as the universal belief that the Great Depression was caused by the stock market crash of 1929 rather than gross policy errors originating out of Washington.
Herewith, some of the canards that are likely to harden into myths, though at the moment they merely exist as lies.
Myth: CEO stock options led to telecom overinvestment.
How can this be true when virtually every major company in the country uses stock options, yet we don't have groaning overcapacity in the supermarket business or kitty-food industry? Indeed, the most visible trend in the economy has been toward leaner inventories and more efficient use of resources (aka higher productivity).
What happened in telecom was an aberration but not a novelty -- the same overinvestment and shake-out were seen in the early PC industry, the early auto industry, the early railroad industry, etc.
Myth: Failing to deduct an expense for management stock options "inflated" earnings and therefore stock prices.
Good grief. We've been discussing this rule change for a decade now. It would be the overripe short-selling opportunity of the century if markets were somehow fooled into mispricing stocks simply because we failed to adopt a particular accounting treatment for the noncash value of options.
Of course this is absurd. Coke has now joined Boeing and Winn-Dixie in adopting the proposed treatment, and others may follow. You can be sure they satisfied themselves that the market understands the resulting charge will represent a mere bookkeeping transaction with no economic substance.
Myth: Accounting fraud led to the stock-market bubble.
In fact, share prices were lofted on the Internet enthusiasm of small investors. These folks, to the extent they were concerned with business realities at all, were willing to delay profits indefinitely in pursuit of a glorious expected future. This was true even of Enron, nominally an energy company until Ken Lay announced that it was going into e-business, causing the stock price to jump 26% in a single day.
Enron had been a $20 stock for a decade but soon soared to 90 bucks, unrelated to any reported profits, real or fake. The price collapsed just as quickly as the bubble did, long before any accounting problems were exposed.
Myth: Bernie Ebbers "destroyed thousands of lives."
Whether the WorldCom chief knew of his company's accounting fraud is uncertain. But Mr. Ebbers created thousands of jobs, and whoever cooked the books was trying to keep the company afloat and save those jobs amid a global telecom meltdown. WorldCom's stock price had already fallen to less than a buck before the admitted fraud began.
For that matter, CFO Scott Sullivan, the fraud's alleged author, had already sold much of his stock to finance his dream house. His accounting actions may have been misguided and possibly criminal, but he apparently wasn't out to line his own pockets.
Myth: ImClone's Sam Waksal "put personal profiteering ahead of patients."
Mr. Waksal has been charged with insider trading in advance of an FDA ruling on the company's experimental cancer drug. He may be guilty as charged, but he spent 10 years trying to advance a drug that many experts still believe offers hope to patients.
More interesting than any of this, though, is the apparent need to lie about the origins of the bubble itself. Investors bear primary responsibility for driving up stock prices of speculative businesses and causing billions of dollars to flow into the creation of assets for which there is no demand now. Why not just say so?
The late boom produced a great number of companies that aren't doing well now, and a much smaller number that have resorted to dodgy accounting in an attempt to arrest their fall. Regrettably, such behavior is not all that unusual at this point in an economic cycle. Indeed, we're not even sure the incidence of corporate scandal is any higher than normal -- i.e., that a "crisis of confidence" was ever particularly warranted.
For investors the much more important question is whether the set of optimistic beliefs that sustained a bull market for nearly 20 years is still intact.
Stock prices during that period grew three times faster than corporate earnings. Interpreting stock prices is always a risky endeavor, but this decline in the so-called "risk premium" suggested that investors were confident that companies would find abundant opportunities to keep growing their earnings. After all, shareholders looked out on a world of peace, expanding trade and the triumph of pro-market economic policies.
We wouldn't presume to guess what investors are thinking about all this today, though last week's market reaction to the antibusiness hollering in Washington was heartening in a peculiar way. It showed that the investor class remains a growing ballast in the body politic against destructive policies and class-war rhetoric. Presumably the Senate was listening when it decided on Monday to detour the sticky wicket of stock-option accounting.
Even the televised hearings of nontestifying CEOs were a useful two-fer for parents. Moms and dads could point simultaneously to the disgraced CEOs and bleating, grandstanding members of Congress as two examples of the kind of adult that no child should grow up to be. In a nation where more and more voters measure their well-being in terms of the stock market, Washington is running neck and neck with corporate scofflaws as a target of investor ire.