AY goodbye to the victimless economy.Posted on 05/12/2002 12:40:46 AM PDT by JohnHuang2
AY goodbye to the victimless economy.
As the 1990's boom stretched on and on, many otherwise sober market watchers decided that the United States had repealed the laws of economics. Not only could the expansion go on forever, but this time, nobody's prosperity need come at the expense of others.
The symbols of the boom were not the ruthless robber barons of the Gilded Age, or the corporate raiders of the 1980's, but young new economy entrepreneurs, who started Internet companies and made millionaires not only of themselves but, legend had it, also of their stock-holding receptionists.
Even when the stock market began falling two years ago and a recession ended the longest economic expansion on record a year ago, the primary culprit seemed to be the country's irrational but well-intended exuberance.
Recently, however, the victimless economy seems as remote as a $200 share of Amazon.com stock.
Last week, federal regulators released documents showing that Enron, and perhaps other energy companies, helped cause California's recent power crisis by artificially driving up prices.
Other regulators, from the Democratic attorney general of New York to the Republican chairman of the Securities and Exchange Commission, are investigating conflicts of interest on Wall Street. And jury selection began in the government's prosecution of Arthur Andersen, the accounting firm the Justice Department has charged with obstructing justice during the Enron inquiry.
The details of the cases vary widely, but they collectively reveal that the 90's boom really did claim millions of economic victims.
Virtually every resident of California and every business with an office there seems to have suffered from price gouging after the state's energy deregulation.
"About $30 billion was extorted from this state," Gray Davis, California's governor, said last week.
Many investors, thinking that the earnings statements approved by Andersen and other major accounting firms were truthful, lost money buying stocks. Others bought stocks on the bullish advice of Wall Street analysts, whose research reports may have been written more to win the investment-banking business of the corporations being analyzed than to make an objective assessment of the future prospects of its stock.
In February 2000, analysts made 85 "buy" recommendations for every "sell" recommendation, according to Zacks Investment Research in Chicago. Since then, the stock market has fallen about 25 percent, and many of the technology stocks analysts were hyping as a bargain at $100, including DoubleClick and JDS Uniphase, now trade for less than $10.
WHEN the collapse of Enron cost employees and investors billions of dollars, corporate executives like Jeffrey R. Immelt, the new head of General Electric, rushed to criticize Enron, suggesting it was an exception. Such an easy explanation is harder to accept today.
"It has been said that the four most dangerous words in business are `This time it's different,' " said Richard S. Tedlow, a historian at Harvard Business School. "And people really thought it was."
No longer. Investors have punished the stock prices of G.E., Tyco International and other companies, fearing that they used accounting legerdemain to spiff up their earnings. The S.E.C. is investigating whether analysts deceived investors by publishing falsely optimistic research reports to please the corporate clients of their investment firms. Eliot L. Spitzer, New York's attorney general, is considering whether to bring criminal charges against employees of Merrill Lynch and Salomon Smith Barney for similar reasons.
In one internal e-mail, a Merrill analyst called InfoSpace — a technology company whose stock now trades at 79 cents, down from a high of $130 — "a piece of junk" even as the firm's official position on it was favorable.
The seven stocks Mr. Spitzer is investigating at Merrill have lost $118 billion of their worth, from peak to trough, according to Brad Hintz of the investment firm Sanford C. Bernstein. Merrill's customers may have lost $4 billion of this total, Mr. Hintz said.
Mr. Spitzer has suggested that Merrill establish a restitution fund for investors, and is negotiating with executives over the eventual penalties. The firm has denied some of the allegations, but its chief executive, David H. Komansky, has publicly apologized. "We have failed to live up to the high standards that are our tradition," Mr. Komansky said.
Other regulators are investigating whether investment banks, including Goldman, Sachs and J.P. Morgan Chase, and a small group of chosen investors unfairly profited from initial public offerings of stock during the dot-com craze. Individual investors absorbed many of the losses, regulators said.
The New York Stock Exchange has been looking into Salomon Smith Barney for its role in persuading employees of Worldcom, the telecommunications company, not to sell some of their shares in the company a few years ago. By holding the stock, the employees helped lift Salomon's profits, but the decision ended up costing some people virtually their entire savings, as Worldcom's stock has fallen to $2 from a peak of $60 in 1999.
IT'S all a far cry from the 90's, when Time magazine named as its Man of the Year three businessmen — Ted Turner of CNN, Andrew Grove of Intel and Jeff Bezos of Amazon.com — having named only two in the previous 60 years. Wired, Fast Company and a handful of other magazines sprang up during the decade to chronicle and promote what they called companies' revolutionary role in society.
"Business in the 90's became not a fallback for people who weren't creative enough for other pursuits, but a force for innovation and creativity," said William Taylor, a founding editor of Fast Company. "Clearly, the attitude toward business has changed dramatically."
Indeed, the current investigations take aim at many of the "victimless" economy's most important pillars. The long bull market? Yes, it fattened the retirement accounts of millions of people, but it also seems to have allowed a small group of investors and bankers to profit off of the ignorance and trust of others.
The great surge in corporate profits? Some of it now appears to be fiction, with Arthur Anderson and its peers playing the role of ghost writer. Those beloved technology entrepreneurs? Knowingly or not, they created companies that became the prime vehicles for the questionable stock-market profits. Many of those executives now appear in magazine not as heroes but as symbols of hubris, like Bernard Ebbers of Worldcom, or of greed, like Gary Winnick of Global Crossing.
In addition to the thousands of people suffering the financial consequences of one bubble or another, the American economy is also a victim. Investors poured money and employees poured themselves into companies that were far less prosperous than they appeared. The unwinding of this excess is one reason that the economy seems to be recovering slowly from recession and that the unemployment rate actually rose sharply last month, to 6 percent.
"There was a massive redeployment of capital and people," said Adrian J. Slywotzky, a partner at Mercer Management Consulting, a consulting firm, "from fundamentally productive activities to fundamentally unproductive activities."
Beyond the investigations and prosecutions, policy makers have also called for change. Congress is considering whether to prevent accountants from selling other services, like business consulting, to their clients. On Wednesday, Mr. Pitt, the S.E.C. chairman, proposed new rules to limit conflicts of interest among stock analysts. Wall Street firms praised the plan, but some Democrats and investors called it too tame.
Some business leaders, as well as Mr. Pitt, are concerned that a wave of new laws could hamstring businesses and hurt the economy far more than any of the current scandals have. To others, the conflicts of interest that have now been exposed cry out for new rules.
Otherwise, Mr. Slywotzky said, "the next bubble won't be victimless, just as the last one wasn't."
It will keep everyone fooled right to the bitter end.
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I had to repeat that. The Red Chinese are making Everything. Heck, I just saw a six dollar electric razor from there. And not just low tech. IBM is moving chips there. The stores are cluttered with stuff from Red Chinese slave labor, and it's only increasing. Pretty soon we will all be, as the saying goes, doing each other's laundry. Seriously though, people don't realize how much of American productive capacity is being exported. Which is a real danger. The reason we won the Second World War was we were able to make more stuff than anyone else.
Of course we still have the movie business, and we can blow things up, so there will always be something for us to do.
25% my foot! The DOW, maybe, but not the NASDAQ. which is down close to 70%...
many of the technology stocks analysts were hyping as a bargain at $100, including DoubleClick and JDS Uniphase, now trade for less than $10.
JDSU (which has taken a bigger beating than the NASDAQ)...
Of course, not all stocks are hitting the tank. Some selected gold stocks hit bottom earlier and are now on the way up...
The equity bubble has burst, and now the finger-pointing has begun in earnest. Expect the politicians to come out on top. After all, they are the ones running the investigations. However, don't ask them how much they have grown - and continue to grow - the wildest growth sector in the world,... the United States Government (and most state govenments)!
Anybody seeing any shrinkages on those horizons, much less any investigations into rampant unchecked spending and incomprehensible waste, fraud, abuse and outright criminality?
Yeah all the profitable activities are now in Mexico and China, welcome to the new economy.(suckers)
We probaly will not read any stories in the paper about that. Any business that did not make money and invest in something safe would go under. But not the gov.org. They will just steal more wages from the backs of the workers till the parasites outnumber the workers, then we will have chaos and from the ruins will emerge some accountability in gov.org but not untill.
Another elite limo liberal is outted.
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