Regulation now - Comment

Progressive, The, Sept, 2002

Hearing George W. Bush boast about passing what he called "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt" certainly gave us pause.

To throw up.

The idea that George W. Bush can now claim to be in the tradition of FDR is enough to make even those with the sturdiest stomachs lose it. Here's a guy who came to power proclaiming the need for less regulation, not more. And here's a guy who is up to his smirk in the very-shenanigans he now condemns.

What's more, Bush opposed this new law in its early stages and came around to it only after one financial scandal after another sent the stock market plunging--and the public into uproar.

No champion he.

The new law does do several good things, however. It ups the penalties for corporate fraud, and creates a new felony for securities fraud that is punishable by a twenty-year prison sentence.

It bans companies from making personal loans to top executives (which Bush enjoyed while he was at Harken, incidentally).

It prohibits corporate executives from selling stock when their employees are not allowed to do so. (This should be called the "Ken Lay Provision," since he was cashing in his stock while Enron employees were forced to hold on to theirs, even as it plummeted.)

It requires CEOs to certify the financial books of their companies.

It establishes an oversight board to regulate auditors.

It limits some of the consulting that auditors can perform for their clients.

It adds protection for corporate whistleblowers.

And it boosts funding for the Securities and Exchange Commission by 44 percent.

But it doesn't go far enough.

As the watchdog group Citizen Works noted, the standard for finding a CEO guilty was raised, in conference, from "reckless" behavior to "knowing" behavior. This "will make it harder for prosecutors to prove cases," the group notes. And the new law "does not extend responsibility for corporate fraud to accountants, lawyers, and banks, all of whom make fraud possible," it adds.

The law also does nothing about the scandal of corporations granting stock options to executives and not counting those stock options as expenses. These stock options gave executives a huge personal incentive to pump up the value of their companies' stock. Senate Majority Leader Tom Daschle was as much at fault as anyone on this one, since he refused to go along with draft legislation that would have forced companies to list stock options as expenses.

Nor does the bill do anything about the flagrant use of offshore tax havens to shelter income and disguise losses.

And despite Bush's tough-guy rhetoric the day he signed the bill ("No more easy money for corporate criminals, just hard time"), he immediately set out to weaken the whistleblower provision. The Administration said it would "provide federal job protection to employees who cooperate with an investigation authorized by the House or the Senate, but made no mention of protection for employees who might speak more informally to a single member of the House or Senate," The New York Times reported on August 1. The two Senators who wrote the provision, Patrick Leahy, Democrat of Vermont, and Charles Grassley, Republican of Iowa, sent Bush a letter, calling this move "at odds with the plain language of the statute" and said it "risks chilling corporate whistleblowers."

Such whistleblowers just aren't of the Bush-Cheney stripe.

Much of the discussion of this new law in the media was fatuous. First of all, there is a huge myth built right into the foundation of Wall Street, as Adolph Reed notes this month. And this myth is that every investor in this country is privy to the same amount of information and has access to the same level of expertise in assessing a company's worth as anyone else. We are meant to believe that all of us are on an even plane with Warren Buffett, and that just isn't so. And can't be so. Corporate managers have superior knowledge of their own companies' strengths and weaknesses. And full-time market analysts know more than those of us who work forty-hour weeks. What's more, wealthy individuals and vast institutional investors can make decisions that will swamp the portfolios of the unsuspecting individual investor. Equality on Wall Street is a myth.

Another unstated assumption is that if only the corporate books were made square, all would be right with capitalism once more, and Americans could go back to reaping the blessings of Wall Street. But the problems go well beyond cooked books and stock options. At the very heart is the imperative to make a profit at all costs. That imperative persists, whether a CEO has stock options or not. A CEO's position, salary, and stature depend on the ability to deliver quick profits. Thus, corporate executives have a tremendous incentive to cut health care coverage, renege on pensions, bust unions, and pick up stakes and move to any country that offers the lowest wages and the least regulation. If maximizing profits means flouting the law, many corporations are willing to take that risk.