Lieberman's Slippery Slope
Senator Joe Lieberman, as chairman of the Governmental Affairs Committee, presides over hearings into what-went-wrong with the air of sorrowful piety that is his specialty. "Gatekeepers weren't keeping the gate, watchdogs weren't watching," he lamented. He neglects to mention that he is one of the faulty watchdogs and also a leading gatekeeper who blocked the timely reform of corporate finance. The Senator has a hypocrisy problem. He frequently sermonizes on the moral failings of others, including other public figures. Meanwhile, he has shilled vigorously, sometimes venomously, for the very players who are new icons of corruption--major auditing firms, corporate executives who cashed stock options early while investors took a bath and, especially, those self-inflating high-tech companies in Silicon Valley that drove the stock-market bubble. As a New Democrat, Lieberman held the door for their escapades.
His most important crusade was protecting the loopy accounting for corporate stock options. Nervous regulators recognized early on that the profusion of stock options had the potential to deceive investors while cheating the tax system--illusions that could drive company stock prices to impossible heights. Tech startup firms, as well as established names like Microsoft, were issuing a growing volume of stock options as a substitute for wage compensation, especially for top executives. These companies did not have to report the billions in new options as an operating cost, thus making their earnings seem much greater than they were. Yet when employees eventually cashed in the options, the companies claimed them as tax deductions. This two-way mirror is symptomatic of the deceptive bookkeeping that permeated corporate affairs during the boom and the bubble.
Back in 1993, when the Financial Accounting Standards Board proposed to stop it, Lieberman went to war. "I believe that the global pre-eminence of America's vital technological industries could be damaged by the proposal," he warned. The FASB, he insinuated, was politically motivated or simply didn't grasp the bright promise of the New Economy. Lieberman organized a series of letters warning the accountants' board to stop its meddling. In the Senate, he mobilized a resolution urging the Securities and Exchange Commission to squelch the reform. It passed 88 to 9. The regulators backed off--and stock prices soared on the inflated earnings reports. Whenever FASB tried to reopen the issue, Lieberman jumped them again. He was well rewarded by Silicon Valley and auditing firms. He is the New Democrats' favorite candidate for 2004.
Lieberman's victory was extraordinarily costly for the economy, not to mention duped investors, unhinging valuations and fostering the overinvestments that now hang over the tech industry. Accounting professor Itzhak Sharav of the Columbia University Business School describes Lieberman's intervention as the first step on "the slippery slope that got us mired in the Enron swamp." Once auditors and corporate managers saw regulators defanged on stock options, Sharav explained, they were emboldened to explore further in the realm of gimmicky profit reports. "How much is two plus two? How much do you want it to be?" Sharav said. "Once you start playing games with the numbers, there's no limit to what you might do." Senators Carl Levin and John McCain have proposed a nifty solution--companies can no longer have it both ways. If they don't account for their stock options as a cost in earnings reports, then they cannot claim them later as tax deductions. Lieberman is opposed--still on the slippery slope.
During the 2000 election, other New Dems organized a direct assault on SEC chairman Arthur Levitt, who was challenging the big five auditing firms on their conflicted interests--consulting with companies on business strategy, then auditing the books with supposed independence. Dozens of politicians piled on Democrats Torricelli, Schumer and Bayh in the Senate; and Jim Moran, Cal Dooley, Ellen Tauscher and other New Dem regulars in the House. The New Democrat Network harvested more than $1 million that year for deserving politicians. Some have now recanted. "We were wrong, you were right," Torricelli told Levitt, though he neglected to mention the money. The luster of Silicon Valley fundraising has not been dimmed by the scandals and bankruptcies. The "economic stimulus" bill passed in March was described as a Democratic victory because it includes a minor dollop for the unemployed. But most of the $43 billion went to business--including a gorgeous tax bonus sought by the needy entrepreneurs of Silicon Valley.