Something is rotten behind economic scene

0 Comments | Insight on the News, Dec 31, 2001 | by Jamie Dettmer

During the first week of December, Bush officials started briefing journalists to the effect that the White House was aware that it needed to focus more attention on America's blighted economy.

The underlying thrust of what they were saying was that this president wouldn't get caught out like his daddy did in 1992 and appear aloof from the everyday concerns of Americans struggling with harsh economic times. In short, there will be no embarrassing photo opportunities at supermarkets featuring a president apparently bewildered by checkout scanning technology. But the timing of the economy briefing from Bush aides was interesting, coming as it did on the back of the abrupt collapse of Enron Corp., the energy trader with close ties to Bush and whose executives were singled out to assist in developing the president's energy policy.

Of course, it doesn't take a political genius to see that the White House hardly can ignore the bleak economy. For all the debate about whether this is a Clinton recession or a Bush one, come 2004, if the good times aren't rolling, the buck is going to stop with the guy sitting in the Oval Office.

That isn't the only reason the Bush White House is feeling nervous about possible political fallout from the economy. There are signs ordinary Americans are beginning to get mad. Not so much because of the recession but because of the disturbing things the recession is throwing up about Wall Street, investment banks, the big auditing firms and the politicians they are close to, at least in terms of chucking campaign dollars at them and securing favorable legislation.

The evidence that a head of steam is building is coming in many forms. For one, the National Association of Securities Dealers is on track to receive a record number of formal complaints filed by investors against brokers and analysts: By the end of the year the total likely will exceed by a thousand the record of 6,058 set in 1995.

The current onslaught of complaints has Wall Street worried. And as more details emerge of dubious practices, ranging from conflicts of interests to bad investment advice, from lack of due diligence by brokerages and securities firms to churning by brokers determined to build up fees, Wall Street has cause for anxiety.

In 1998 Americans were taken aback at the revelations of crony capitalism in the Tiger economies of Asia: the kickbacks, nepotism, corruption and lack of transparency in banking and dealing. Now it's "physician cure thyself" as the recession is highlighting serious crony capitalism here.

The Enron bankruptcy is one example of the existence of something rotten. Why didn't auditors and investment banks raise an early alarm about the massive off-the-books debt of Enron? Where was the Securities and Exchange Commission?

The second example is the dot-com mania of the late 1990s and the cronyism and lack of due diligence that now is beginning to emerge in the allocation of shares in initial public offerings (IPOs). When the dot-com bubble burst investors faced huge portfolio losses. And up to a point they had only themselves to blame for taking risks and boosting the notion that the market would go up forever.

But did the securities firms and brokerages and underwriters talk up the market in 1998 and 1999 when they knew problems were looming? Did they in fact do even worse?

On Dec. 4, dozens of high-powered lawyers gathered on the 48th floor of One Penn Plaza in New York City to discuss how to deal with nearly 1,000 class-action lawsuits filed against the underwriters of IPOs. Virtually all the major securities firms are defendants in these suits: Morgan Stanley, Citibank, Merrill Lynch, Goldman Sachs, Credit Suisse First Boston, etc. Chairing the meeting was Mel Weiss, the New York attorney Wall Street fears the most. His New York law firm helped recover $800 million for investors in the investigation of junk-bond king Michael Milken.

Known for his tenacity and bare-knuckled approach, Weiss says the NASDAQ boom wasn't just the result of "irrational exuberance" but a glaring case of market manipulation and fraud by the underwriters, who used kickback schemes, secret profit-sharing agreements with selected clients and price-fixing to inflate the value of IPOs.

Weiss argues that the underwriters required select clients who wanted IPO share-allocations to buy a certain number of shares after launch at predetermined prices, "not for investment purposes but to generate momentum." That process is known as "laddering." The smell of gold was intense. "Greed has always been a growth industry, but it became a supergrowth industry," Weiss says.

He adds: "Investors were blinded by an illusion that was very carefully orchestrated by the investment banks. Our investigations are revealing that the securities firms knew there was a problem. People from the investment banks are telling us that they would sit around the table and ask, `Why the hell are we bringing this or that company public? This looks like it is a dead-bang nothing.' And then they would walk into the next room to the analysts and they would give a glowing report."