The Four Hundred

The deregulation chickens are coming home to roost. The sky is darkening with them, blotting out what just a few months ago was a bright economic sun shining across a limitless horizon. They have grand, exotic names like Tyco and Enron, Kmart and Global Crossing, Qwest and Dynergy, and Xerox and WorldCom. As they fall from the heady heights of America's economic firmament, their impact reverberates around the globe, creating shock waves that threaten the economic stability of the entire planet.

WorldCom and the venerable Xerox are the latest to admit to what is euphemistically referred to as "accounting irregularities." In this context, however, the term "irregularity" is as misleading as the practices it describes. Xerox, for example, systematically inflated its revenues by $1.9 billion over a five-year period, while WorldCom booked $3.6 billion of expenses as capital expenditures. These are actions that clearly reflect policy, not random irregularity. Nor are these actions unique. WorldCom and Xerox are only the frayed ends of a long string of nearly 1,000 companies that have been compelled to restate earnings since 1977.

And what a novel and civilized notion, this "restating earnings." What exactly is that, a fiscal mulligan for CEOs who are bad at math? More likely a get-out-of-jail-free card to be used as the option of last resort when fraud grows to a scale where it can no longer be contained.

As a consequence of the spreading ethical meltdown, American and foreign investors are learning a lesson that has ominous implications for our economy and, by extension, the global economy: It's not that the system is corrupt, but that corruption is the system. This, as we have seen, is especially true at the summits of economic power where top managers feel empowered to invent their own ethics, much as mountains create their own weather.

Investors, however, are weary of waiting for somnambulant corporate audit committees to "discover" the next billion-dollar irregularity and are looking to invest elsewhere. As a result, the stock market is tanking and the dollar is losing its value. For unemployed Americans and workers struggling to make ends meet, the impact of corruption on the economy is a painful reminder of the truth of John Kenneth Galbraith's wry axiom that "Recessions catch what the auditors miss."

Foreign investment, which could hasten the recovery and comprises over 10 percent of the market's total value, is also down. The view of nervous Europeans was summarized by Wolfram Gerdes, chief investment officer for global equities at Dresdner Investment Trust in Frankfurt. "There is unanimous agreement that the U.S. is not the best place to invest anymore." On its face, the comment might be dismissed as a wild generalization. But Gerdes' distrust of American markets is reflected in a recent Gallup poll that found only 32 percent of European investors rank the United States as the most attractive market in the world.

For a nation accustomed and largely reliant on cheap foreign goods, the loss of confidence in U.S. markets is problematic. Edmund Andrews, writing in The New York Times, explains that to cover its huge trade deficit, "America must attract a net inflow of $1.3 billion in foreign money every day. Even a modest decline in the flow can weaken the dollar and drive up the prices of imported goods." Thus inflation is another consequence of corrupt corporate governance.

While government officials now make grand pronouncements about ethical obligations and swift punishment for "wrongdoers," it is unlikely that Congress will reverse twenty years of anti-regulatory frenzy. Reluctance to regulate notwithstanding, the need to reform and rehabilitate government oversight has a clear mandate in recent economic history. From the junk bond fiasco and the savings and loan collapse (which alone cost taxpayers half a trillion dollars) to the major bank bailouts of the 1980s, right through to the current bloom of accounting irregularities, failures of deregulation litter the fiscal landscape.

Regardless, the majority of government officials from both parties will proceed cautiously and cosmetically, because they profit from the same interlocking system that allows players to move freely from politics to business to lobbying to serving on the government regulatory agency, which just happens to oversee their former business. Harvey Pitt, the current Security and Exchange Commission chairman, is a case in point. Pitt was a businessman turned lobbyist for stock brokers and accounting firms who opposed SEC regulation, and he is now being asked to investigate the very abuses his policies permitted.

The irony is that Pitt may be unable to discharge his duties even if he were so inclined. A judge recently dismissed an SEC action against the accounting firm of Ernst & Young because the SEC could not assemble a quorum of commissioners who had not previously worked for the firm. Any possibility of reform will have to include the removal of the deregulation foxes from the regulatory henhouse.

Although deregulation is usually depicted as a "market" issue, the creation of free markets is not its primary purpose. The objective is to deregulate--and therefore decriminalize--behavior. Thus a wide range of quasi-ethical behaviors are protected by the simple lack of common-sense restraints.

Of course, it is impossible to prove intent after the fact, but whether it's Hillary Clinton miraculously reaping $100,000 on a $1,000 investment or the President profiting from sweetheart loans, then dumping $848,560 of his Harken stock weeks before the company announced a $23 million loss, or the Vice President enriching himself through his former company's shady dealings with Iraq, it's clear that the powerful hold themselves exempt from the laws and conventions that govern lesser beings. Why, even Martha Stewart, the hallmark of consumptive propriety, has been unmasked as someone who would rather wear the right thing than do the right thing.

Not surprisingly, this lack of scruples at the top is showing up in the workforce. Having watched the big boys manipulate the system, the little guys apparently want to get in on the action. According to research conducted by KPMG, between 1994 and 2000 employee theft in the public, private, and nonprofit sectors more than doubled and now accounts for five times the losses attributed to shoplifting.

Most insiders agree that we have not seen the end of the scandals. Columnist Bill Berkowitz suggested--perhaps only half in jest--that the President might reconsider and invade Wall Street instead of Iraq. In the end, however, change will not require the force of arms, but force of character. Seventeenth century English dramatist Thomas Otway noted, "Honest men are the soft easy cushions on which knaves repose and fatten." Perhaps it is time for the majority of honest and ethical men and women to roughly fluff the cushions.