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While stock frauds look bad these days, it is a pittance compared to what Franklin D. Roosevelt faced during his presidency. Besides the worst depression in American history – 33 percent unemployment at its peak – was the widespread belief that all the misery was due to the stock market excesses of the previous decade.
During the Roaring 20s, completely unregulated security markets made today’s situation look tame. Bear raids, phony utility trusts and broker manipulations were so bad that the managements of Enron, WorldCom and Global Crossing look like saints by comparison. It all blew up in October 1929 and scarred a generation of investors. In fact, it took the benchmark Dow Jones Industrial Average another 25 years before it reached the same high as in the ’20s.
So what did FDR do? In 1934, after Congress created the Securities and Exchange Commission, he appointed Joseph P. Kennedy, father of one future president and two future senators, as the SEC’s first chairman.
If the public markets were the chicken coop, then Joseph P. Kennedy was the ultimate fox. Before his various kids made good, Kennedy had a deserved reputation as one of the most egregious – and successful – stock market speculators of the 1920’s stock bubble.
But Roosevelt was a sly fox too. One cabinet officer remembered that when Kennedy’s name was proposed, FDR considered his reputation as “a former stock-market plunger” a plus. The mission of clearing out the crooks from the Exchanges could only be managed by somebody who knew all of the tricks, as Kennedy surely did. Over the objections of many supporters, Roosevelt went through with the appointment. The result? As historian Arthur M. Schlesinger Jr. noted, Kennedy “did a first-class job in establishing a vigilant and effective regulatory agency.”
Which brings me to Harvey Pitt. What really ails the securities market today isn’t insider trading or broker touts. That’s just the public face of greed-generated fraud. What has the serious money – mutual funds, pension funds and other large investors – scared stiff about today’s market is that the life-blood of market capitalism – accounting standards – are no longer standard and no longer account. In other words, the system that Congress established in the 1930s to keep the markets honest – full disclosure of all facts that an investor needs to make an investment – no longer works. Behind Enron, WorldCom and Global Crossing were accommodating bean counters who, for a fee, allowed crooked managements to conceal losses, inflate profits and reward themselves with what looked like cost-free stock options.
Believe me when I tell you that there probably aren’t 10 senators or 20 congresspersons who really understand the bean counters’ hanky-panky that led to the current mess. Asking any of them to fix this problem would have been like asking them to fix the problems when Apollo XIII got stuck between here and the moon.
And there’s another reason to distrust some of the pols’ claims to virginity in this crisis. If anyone wants to point fingers, here’s a few names: Although I believe Republican John McCain has the best of motives on this issue, he was one of the largest recipients of WorldCom money. Democrat Chris Dodd took his accounting-firm contributors off the hook when he pushed through legislation in the mid-1990s to protect them from liability in shareholder lawsuits. And there’s New Jersey Sen. John Corzine posturing left, right and center about the Republicans.
What a hoot! Between 1994 and 1999, he was the chairman of Goldman Sachs, a Wall Street firm that some claim was a major perpetrator in some of the last decade’s stock scams. According to USA Today, five members of the House Energy and Commerce Committee, which is leading the investigation into WorldCom, owned stock in the company as recently as Dec. 31.
In short, not only is the accounting system busted, but so is campaign-finance “reform” – which, in spite of recent legislation, is being covertly gutted before the Federal Election Commission.
Harvey Pitt, lawyer for the accounting interests until his appointment as SEC chairman, is probably one of the few guys who understands exactly what Enron did – and why – and also how to fix it. His reputation is thoroughly honest. After all, he was confirmed as SEC chairman by a voice vote of the Senate.
Making Pitt the issue is a dodge. It distracts attention from the real issues – Generally Accepted Accounting Principles that are not general, are accepted by no one (outside of the slammer), account for nothing and are no more principled than the principle of honor among thieves. It also distracts the public from a scam at least as bad as any Enron partnership – the hoax of campaign-finance reform.
It’s the pits, but it’s not Harvey!