One bubble burst, then another and another. Enron, Global Crossing,
WorldCom. The rectitude of auditors--pop. Faith in corporate CEOs and
stock market analysts--pop, pop. The self-righteous prestige of
Citigroup and J.P. Morgan Chase--pop and pop again. The largest bubble
is the stock market's, and it may not yet be fully deflated. These
dizzying events are not an occasion for champagne music because the
bursting bubbles have cast millions of Americans into deep personal
losses, destroyed trillions of dollars in capital, especially retirement
savings, and littered the economic landscape with corporate wreckage.
Ex-drinker George W. Bush explained that a "binge" is always followed by
the inevitable "hangover." What he did not say is that the "binge" that
has just ended with so much pain for the country was the conservative
Economic liberalism prevailed from the New Deal forward but broke down
in the late 1960s when it was unable to resolve doctrinal failures
including an inability to confront persistent inflation. Now market
orthodoxy is coming apart as a result of its own distinctive failures.
It can neither explain the economic disorders before us nor remedy them
because, in fact, its doctrine of reckless laissez-faire produced them.
The bursting bubbles are not accidents or the work of a few
larceny-prone executives. They are the consequence of everything the
conservative ascendancy sought to achieve--the savagery and injustice of
unregulated markets, the blind willfulness of unaccountable
We will be a long time getting over the conservative "hangover." It may
even take some years before politicians and policy thinkers grasp that
the old order is fallen. But this season marks a dramatic starting point
for thinking anew. Left-liberal progressives have been pinned down in
rearguard defensive actions for nearly thirty years, but now they have
to learn how to play offense again. Though still marginalized and
ignored, progressives will determine how fast the governing ethos can be
changed, because the pace will be set largely by the strength of their
ideas, their strategic shrewdness and, above all, the depth of their
convictions. That may sound fanciful to perennial pessimists, but if you
look back at the rise of the conservative orthodoxy, it was not driven
by mainstream conservatives or the Republican Party but by those
dedicated right-wingers who knew what they believed and believed, most
improbably, that their ideas would prevail.
The new agenda falls roughly into three parts, and the first might be
described as "restoring the New Deal." That is, the first round of
necessary reforms, like the Sarbanes bill already enacted, must
basically restore principles and economic assurances that Americans used
to enjoy--the protections inherited from the liberal era that were
destroyed or severely damaged by right-wing deregulation and corporate
corruption of government. Pension funds, for instance, lost horrendously
in the stock market collapse and face a potentially explosive crisis
because corporate managers gamed the pension savings to inflate company
profits. Employees of all kinds deserve a supervisory voice in managing
this wealth, but Congress should also ask why corporations are allowed
such privileged control over other people's money. Broader reform will
confront the disgraceful fact that only half the work force has any
pension at all beyond Social Security and set out to create tax
incentives and penalties to change this.
Another major reconstruction is needed in antitrust law, to restore and
modernize the legal doctrine systematically gutted by the Reagan era
(and only marginally repaired under Clinton). The financial debacle
includes scores of companies concocted by endless mergers that pumped up
the stock price but added no real economic value. Others sought to build
the dominance of oligopoly and have succeeded across many sectors.
Spectacular failures include AOL Time Warner and the airline industry.
Skepticism of unlimited bigness needs to be renewed and should start
with the banking industry--reining in those conflicted conglomerates,
like Citigroup and J.P. Morgan Chase, created with repeal of the New
Deal's wise separation of commercial and investment banking.
New Dealers got a lot of things right, but the second dimension of new
progressive thinking requires a recognition that returning to the New
Deal framework is essentially a retrograde option (and not only because
the country is a different place now). Liberals ought to ask why so many
New Deal reforms proved to be quite perishable or why some of its
greatest triumphs, like the law establishing the rights of working
people to organize, have been perverted into obstacles for the very
people supposedly protected. In short, this new era requires
self-scrutiny and the willingness to ask big, radical, seemingly
impossible questions about how to confront enduring social discontents
and economic injustice.
Who really owns the corporation (clearly it's not the shareholders), and
how might corporations be reorganized to reduce the social injuries? Is
the government itself implicated in fostering, through subsidy and
tax-code favoritism, the very corporate antisocial behavior its
regulations are supposed to prevent? Congress, aroused by scandal, is
considering penalizing those companies that moved to Caribbean tax
havens yet still enjoy US privileges and protection. That's a good
starting point for rethinking the nature of government's corporatized
indulgences (old habits first formed in the New Deal) and perhaps
turning them into leverage for public objectives. To explore this new
terrain, we need lots of earnest inquiry, noisy debate and re-education
by a reinvigorated labor movement, environmental and social reformers
and ordinary citizens who yearn for serious politics, significant
A third dimension for new thinking is the economic order itself. During
the past two decades, a profound inversion has occurred in the governing
values of US economic life and, in turn, captured politics and elite
discourse--the triumph of finance over the real economy. In the natural
order of capitalism, the financial system is supposed to serve the
economy of production--goods and services, jobs and incomes--but the
narrow values of Wall Street have become the master. The Federal Reserve
and other governing institutions are implicated, but so are the media
and other institutions of society.
The political system is, of course, not ready to consider any of these
or other big matters. One of the first chores is to bang on the
Democratic Party, which, despite some advances, has expressed its fealty
to corporate money by clearing the fast-track trade bill and bankers'
bankruptcy bill for passage. This amounts to selling out principle and
loyal constituencies before the election, instead of afterward. Of
course the politicians are hostile--what else is new?--but now it's the
left that can say, They just don't get it.
Reversing the nation's deformed priorities will be a hard struggle but
has renewed promise now that the stock market bubble and other New
Economy delusions have been demolished. People do not live and work in
order to buy stocks. People exist in complex webs of relationships with
family, work, community and many other rewarding adventures and
obligations. The larger purpose of the economic order, including Wall
Street, is to support the material conditions for human existence, not
to undermine and destabilize them. If that observation sounds quaint,
it's what most Americans, regardless of ideology, happen to believe. If
our progressive objectives are deeply aligned with what people truly
seek and need in their lives, the ideas will prevail.
"Creative accounting" is something we hate.
From now on your numbers will have to be straight.
No taking of options for stock you contrive
To dump when insiders can tell it will dive.
And loans? If you want one, then go to the bank.
These sweetheart loans stink! They're disgusting! They're rank!
This type of behavior we strictly forbid.
Just do as we say now, and not as we did.
When did the great executive stock option hog wallow really start? You
can go back to the deregulatory push under Carter in the late 1970s,
then move into the Reagan '80s, when corporate purchases of shares
really took off with the leveraged buyouts and mergermania, assisted by
tax laws that favored capital gains over stockholder dividends and
allowed corporations to write off interest payments entirely.
Between 1983 and 1990, 72.5 percent of net US equity purchases were
bought by nonfinancial corporations. At the end of this spree the
debt-laden corporations withdrew to their tents for three years of
necessary restraint and repose, until in 1994 they roared into action
once more, plunging themselves into debt to finance their share
purchases. This was the start of the options game.
Between 1994 and 1998 nonfinancial companies began to load themselves up
with yet more debt. The annual value of the repurchases quadrupled,
testimony to the most hectic sustained orgy of self-aggrandizement by an
executive class in the history of capitalism.
For these and ensuing reflections and specific figures, I'm mostly
indebted to Robert Brenner's prescient The Boom and the Bubble,
published this spring with impeccable timing by Verso; also Robin
Blackburn's long-awaited book (now being released by Verso) on the past
and future of pensions, Banking on Death.
Why did these chief executive officers, chief financial officers and
boards of directors choose to burden their companies with debt? Since
stock prices were going up, companies needing money could have raised
funds by issuing shares rather than borrowing money to buy shares back.
Top corporate officers stood to make vast killings on their options, and
by the unstinting efforts of legislators such as Senator Joe Lieberman,
they were spared the inconvenience of having to report to stockholders
the cost of these same options. Enlightened legislators had also been
thoughtful enough to rewrite the tax laws in such a manner that the cost
of issuing stock options could be deducted from company income.
It's fun these days to read all the jubilant punditeers who favor the
Democrats now lashing Bush and Cheney for the way they made their
fortunes while repining the glories of the Clinton boom, when the dollar
was mighty and the middle classes gazed into their 401(k) nest eggs with
the devotion of Volpone eyeing his trove. "Good morning to the day; and,
next, my gold:/Open the shrine, that I may see my saint."
Bush and Cheney deserve the punishment. But when it comes to political
parties, the seaminess is seamless. The Clinton boom was lofted in large
part by the helium of bubble accountancy.
By the end of 1999 average annual pay of CEOs at 362 of America's
largest corporations had swollen to $12.4 million, six times more than
what it was in 1990. The top option payout was to Charles Wang, boss of
Computer Associates International, who got $650 million in restricted
shares, towering far above Ken Lay's scrawny salary of $5.4 million and
shares worth $49 million. As the 1990s blew themselves out, the
corporate culture, applauded on a weekly basis by such bullfrogs of the
bubble as Thomas Friedman, saw average CEO pay at those same 362
corporations rise to a level 475 times larger than that of the average
The executive suites of America's largest companies became a vast hog
wallow. CEOs and finance officers would borrow millions from some
complicit bank, using the money to drive up company stock prices,
thereby inflating the value of their options. Brenner offers us the
memorable figure of $1.22 trillion as the total of borrowing by
nonfinancial corporations between 1994 and 1999, inclusive. Of that sum,
corporations used just 15.3 percent for capital expenditures. They used
57 percent of it, or $697.4 billion, to buy back stock and thus enrich
themselves. Surely the wildest smash and grab in the annals of corporate
When the bubble burst, the parachutes opened, golden in a darkening sky.
Blackburn cites the packages of two departing Lucent executives, Richard
McGinn and Deborah Hopkins, a CFO. Whereas the laying off of 10,500
employees was dealt with in less than a page of Lucent's quarterly
report in August 2001, it took a fifteen-page attachment to outline the
treasures allotted to McGinn (just under $13 million, after running
Lucent for barely three years) and to Hopkins (at Lucent for less than a
year, departing with almost $5 million).
Makes your blood boil, doesn't it? Isn't it time we had a "New Covenant
for economic change that empowers people"? Aye to that! "Never again
should Washington reward those who speculate in paper, instead of those
who put people first." Hurrah! Whistle the tune and memorize the words
(Bill Clinton's in 1992).
There are villains in this story, an entire piranha-elite. And there are
victims, the people whose pension funds were pumped dry to flood the hog
wallow with loot. Here in the United States privatization of Social
Security has been staved off only because Clinton couldn't keep his hand
from his zipper, and now again because Bush's credentials as a voucher
for the ethics of private enterprise have taken a fierce beating.
But the wolves will be back, and popgun populism (a brawnier SEC, etc.,
etc.) won't hold them off. The Democrats will no more defend the people
from the predations of capital than they will protect the Bill of Rights
(in the most recent snoop bill pushed through the House, only three
voted against a measure that allows life sentences for "malicious
hacking": Dennis Kucinich and two Republicans, Jeff Miller of Florida
and the great Texas libertarian, Ron Paul). It was the Senate Democrats
in early July who rallied in defense of accounting "principles" that
permitted the present deceptive treatment of stock options. Not just Joe
Lieberman, the whore of Connecticut, but Tom Daschle of the Northern
Popgun populism is not enough. Socialize accumulation! Details soon.
Events in Washington are potentially momentous, but hold the applause.
In late May, the Dow was at 10,300, but by mid-July it had dropped
almost 2,000 points. The Nasdaq and S&P indexes are at zero gain for
the past five years, as if the bubble never occurred. This slow-motion
crash induced even the most obedient right-wing lapdogs to scurry aboard
the Sarbanes reform bill, and the Senate passed it, 97-0. The President
made two malaprop-laced pep talks to recast himself as Mr. Reformer Guy
(and knocked another 500 points off the Dow). But W. is a lagging
political indicator these days. Even Federal Reserve Chairman Alan
Greenspan has lost his touch. For years he celebrated the new economy
and refused to take any action that might have worked to curb its
excesses; a bit late he tells us "irrational exuberance" was actually
"infectious greed." Now, with fear overtaking that greed in the markets
and thus in Washington, the ingredients are present for an ideological
sea change in American politics. But not yet.
Democrats, newly awakened to the potency of Enron-like financial
scandals, are throwing smart punches at the business-friendly White
House, but they are six months late to the cause (and still sound less
convinced than Republican maverick John McCain). The passage of Senator
Sarbanes's legislation is meaningful, but Democratic leaders choked on
the hard part--reforming stock options and giving workers a voice in
managing their own pension savings. Why mess up fundraising with those
high-tech companies dumping "New Dem" millions on the party of working
people? Majority leader Tom Daschle, who lamely promised a vote
(someday) on the stock-option issue, will be revealed as another limp
corporate shmoozer if he fails to deliver. So far, the Coca-Cola
directors have more courage than he. Likewise, Senator Joseph Lieberman
can doubtless raise millions from Silicon Valley for his presidential
ambitions by defending the corporate hogs but, if so, he should rethink
which party will have him.
The Republicans are in a deeper hole, of course. If Bush wants to bring
his much-touted "moral clarity" to the reform cause, he'll have to drop
the weepy speeches and dump Harvey Pitt as SEC chairman and Tom White,
the Enronized Army Secretary. Then Bush should take his own medicine and
come clean, open the secret SEC records of his insider cashout as a
director of Harken, and do the same for the SEC investigation of Vice
President Cheney's stewardship as CEO of Halliburton. Republican zealots
and their attack-dog newspaper, the Wall Street Journal,
exhausted the nation with their pursuit of the Clintons on Whitewater.
Stonewalling by the Bush White House promises to make these far more
serious financial matters a permanent theme of the Bush presidency.
The reforms currently in motion are a good start, but no more, as
William Greider notes on page 11. We know what to expect from the
Republicans--stubborn maneuvering and guile designed to stall real
change until (they hope) the stock market turns around and public anger
subsides. But Democrats have a historic opening far greater than this
fall's elections--the opportunity to revive their role as trustworthy
defenders of the folks who have always been the bone and sinew of the
party, the people who do not get stock options and who deserve a much
larger voice in Washington. If Democrats take a pass on the facts before
them, they deserve our scorn. If they find the courage to break out of
the corporate-money straitjacket and once again speak for the public,
this could be the beginning of something big.
William Lerach's legal crusade against Enron and infectious greed.
The Ten Habits Of Highly Defective Corporations
POP-ing the Bankers
With the Bush Administration too often feeling the pain of its corporate
sponsors, and with the Enron scandal (so far) producing little political
fallout or legislative change on Capitol Hill, advocates of corporate
accountability have cause for frustration. (Martha Stewart is not much
consolation.) But in one area corporate critics can feel encouraged. For
several years, a small group of lawyers and labor advocates has been
trying to hold transnational companies responsible for their actions by
suing them in the United States for abetting and/or benefiting from
human rights abuses overseas. Finally, these corporation-chasers are
beginning to see signs of possible success.
In about a dozen cases, attorneys in the United States, on behalf of
villagers, indigenous people and labor leaders overseas, have filed
legal action against large corporations under the Alien Tort Claims Act
(ATCA), a law passed in 1789 that allowed foreigners to sue one another
in US courts. The law was not much used until 1979, when the family of a
17-year-old boy tortured and killed by a Paraguayan policeman
successfully employed it to sue the officer. Afterward, human rights
lawyers turned to the act as a way to address human rights violations
conducted or enabled by multinational firms.
In 1996, for instance, the Washington-based International Labor Rights
Fund (ILRF) filed an ATCA suit against Unocal, an oil and gas firm,
charging that it knowingly used slave labor to build a pipeline in
Burma. The plaintiffs included villagers who said they were forced at
gunpoint to work on the project. A federal judge dismissed the ATCA
lawsuit, arguing that Unocal did not have direct control over the
Burmese military regime, a partner in the pipeline project. That
decision is under appeal, but, in a legal first, in June a California
state judge ordered Unocal to stand trial. In that trial, in September,
the plaintiffs will argue under state law that partners in a joint
venture can be held responsible for each other's actions. That would be
a blow to Unocal. Evidence in the federal case showed it was well aware
that human rights abuses were committed by the military regime in
relation to the pipeline.
ATCA-wielding lawyers and activists have been going after corporate
malfeasance around the globe. Earlier this year, a case filed against
Shell by EarthRights International and the Center for Constitutional
Rights got a major boost. This lawsuit claims the oil company is liable
for human rights abuses committed by the Nigerian military against the
Ogoni people, who opposed a Shell pipeline. Shell repeatedly filed
motions to dismiss the case, but in February a federal judge denied
these motions and permitted the case to move into the discovery phase.
Now the plaintiffs can take depositions of Shell officials and review
Texaco was sued in New York by indigenous people of Ecuador, who charged
it with destroying their local environment by dumping a million gallons
of toxic waste into the ecosystem for two decades. The company's
actions, they claim, devastated rainforest areas, caused an increase in
cancer and other diseases and brought several tribes to the brink of
extinction. In March the two sides argued about whether the case should
be dismissed on jurisdictional grounds. The court has not yet ruled. Two
years ago, residents of Bougainville Island in Papua New Guinea filed a
lawsuit in San Francisco against the London-based Rio Tinto mining firm.
The plaintiffs maintained that the corporation, which took over a
company that developed a mine on the island, was in cahoots with a
government that engaged in human rights abuses and destroyed entire
villages in wiping out local resistance to the project. In March a
federal judge dismissed the lawsuit after the State Department argued
that the case could interfere with an ongoing peace process in Papua New
Guinea. But the judge said the Papua New Guinea government would have to
agree to permit the plaintiffs to file a case there.
In addition to the Unocal case, the ILRF is handling ATCA lawsuits
against Coca-Cola (for allegedly using paramilitary forces to
suppress--violently--union activity in Colombia), Del Monte (for
allegedly employing thugs who tortured union leaders in Guatemala),
DynCorp (for allegedly spraying Ecuadorean farmers and villagers with
toxic chemicals that were supposed to be dumped on coca plants in
Colombia) and the Drummond Company, a mining firm (for allegedly hiring
gunmen to torture, kidnap and murder labor leaders in Colombia). In a
case against ExxonMobil, ILRF contends that Mobil, which formed a
joint-venture natural gas project with the Indonesian government, paid
the Indonesian military for security and that these troops committed
human rights atrocities--including murder and torture--against villagers
in the Aceh province.
As these ATCA lawsuits creep forward, corporations here and abroad have
to take notice. A plaintiff's win would compel transnationals to
consider bringing their activities overseas into sync with international
human rights standards. As the Wall Street Journal noted, a
ruling against Unocal--if upheld--"could subject a long list of US
companies to lawsuits in American courts as human rights groups seek to
expand the reach of American tort law to foreign soil." Already the
Street is paying attention. "I've started getting calls from mutual fund
managers," says Terry Collingsworth, ILRF's executive director. "They
tell me that they cannot base stock recommendations on moral
considerations. But if there is a chance a company could be damaged by a
big award in a trial, its business practices overseas become quite
relevant." That is, "the markets" are watching and waiting--to see if
Third World locals screwed by transnationals can find justice in courts
far from their villages.
Would it be too early to sense a sudden, uncovenanted shift against the corporate ethic, if ethic is the word? I can barely turn the page of a newspaper or magazine without striking across either some damaging admission, or at least some damage-control statement, from the boardroom classes.
"How many times can you say 'unbelievable'?" my wife asked the other
morning, as I was rattling the newspaper and again exclaiming over the
latest outrageous news from American capitalism. Maybe it was the story
about the CEO of Tyco International, a very wealthy and much admired
titan, being indicted for evading the New York State sales tax on his
art purchases. Perhaps it was the disclosure that the soaring market in
energy trading, a jewel of the new economy, was largely a fabrication
built on phony round-trip trades. Or the accusation that Perot Systems,
after designing California's deregulated energy-trading system, turned
around and showed the energy companies how to blow holes in it (and
generate those soaring electric bills for Californians).
It is unbelievable--what we've learned in the past six or eight
months about the financial system and corporate management. The
systematic deceit and imaginative greed--the sheer chintziness of
personal finagling for more loot--go well beyond the darkest hunches
harbored by resident skeptics like myself. Indeed, the Wall Street
system is now being flayed in the media almost daily by its own leading
tribunes. Listen to this summary of the scandals: "The failures of Wall
Street's compliance efforts are coming under intense scrutiny--part of a
growing awareness of how deeply flawed the US financial markets really
are. The watchdogs charged with keeping the financial world honest have
all lost credibility themselves: outside auditors who bend the rules to
please corporate clients, analysts who shape stock recommendations to
woo investment-banking customers and government regulators too timid or
overwhelmed to keep track of the frenzy." You might have read those
points in The Nation, but these words appeared on the front page
of the Wall Street Journal. A week later, another page-one
Journal story crisply explained the implications for global
investors: "Boasts about world-class corporate disclosure, bookkeeping
and regulation of American financial markets have become laughable in
the wake of Enron and Arthur Andersen scandals."
When radical critique becomes mainstream observation, change may be in
the air. In my view, this is a rare historical moment--conditions are
ripe for reforming and reordering the system, an opportunity unmatched
since World War II. How things really work is on the table, visible to
all in shocking detail, authoritatively documented by the torrent of
disclosures, with more to come. The libertarian ideology that colonized
economic affairs and politics during the past two decades (markets know
best, government is an obstacle, greed is good) has been pulled up
short. The conservative orthodoxy is vulnerable--actually breaking
down--because it has no good explanations for what we now understand to
be routine malpractice in business and finance. Political tinder is
spread all around the landscape, but who will strike the match?
The potential downside of this moment is also palpable and quite
ominous: Nothing will happen, nothing will change--nobody goes to jail,
no significant reforms are enacted. If so, the main result will be
confirmation of an already endemic public cynicism and the further
poisoning of American values. The revelations, instead of provoking a
sea change in political thinking, may be smothered by the alignments of
corporate-financial power, diverted into false reforms and complexified
to the point that media attention and public anger are exhausted. In
that event, the consequences for the country will be less obvious but
profoundly corrosive. The system would go forward in roughly the same
fashion (perhaps tarted up with public-relations rouge), and everyone
would understand that corruption is the system. In markets and in
the popular culture, the message would be: Forget that crap about
ethics--might as well take the low road, since that's how the big boys
The stakes are enormous, and it's much too early to predict the outcome.
But there's already abundant evidence that the business establishment
expects to ride out this storm and is working the usual political levers
to insure it. The politics resemble the S&L debacle in the late
1980s, when Congressional Republocrats put out lots of noise and smoke
but left the high-priced suits unruffled and stuck the public with the
bill. Our current galaxy of scandals is far more grave because it is
systemic. Anyone with courage among the Democratic presidential hopefuls
could seize this moment and reorder the agenda for 2004, but no one so
far has found the guts to break ranks with corporate power. Smoldering
public anger, however, may yet find a way to express itself, perhaps in
the fall elections, and rouse the reluctant politicians.
For now, the best hope seems to be that the bankers and business guys
will react to the fact that financial markets have been severely damaged
by the scandalous revelations, as have the high-flying moguls of
corporate America. Who can trust them? Who wants to pour more good money
after bad? In other words, this scandal stuff is bad for business,
especially bad for the faltering stock market. Henry Paulson Jr., chair
of Goldman Sachs, delivered that message recently in a sober speech
before the National Press Club and endorsed a number of useful reforms.
His remedies are insufficient (even the Journal editorial page
was happy to bless them) but are a fair start. A chorus of high-minded
anguish from elite circles might persuade Washington that this problem
does need fixing.
The scandals of Enron et al., unfortunately, must compete with another
story--the war on terrorism--that's more exciting, and threatening, than
dirty bookkeeping or the looted billions. The two crises are intertwined
in perverse ways. The smug triumphalism of Bush's unilateralist war
policy could be abruptly deflated by economic events--which probably
would be a good thing for world affairs, since Washington couldn't run
roughshod over others, but terrible for US prosperity. The financial
scandals have provided yet another chilling reason to be wary of the US
stock market, and if overseas investors decide to take their money home
in volume, the already declining dollar will fall sharply. Credit would
thus become suddenly scarce, since our debtor-nation economy relies
heavily on capital borrowed from abroad, and such a convergence would
trigger an ugly downdraft in the US economy. In that event, the
fashionable boastfulness about America, the only superpower, would
implode as swiftly as Enron's stock price.