Corporate Dishonesty

Youroldunderwear.com and Other Bubble Delusions
Commentary about business and finance.
July 1 2002 3:34 PM

Corporate Dishonesty

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I always thought I'd make a good psychoanalyst. My standard reply to any patient would be "Oh, come off it!"

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That's my first impulse after reading your post, Nell. Voice in the wilderness? Cassandra? Gimme a break.

There can't have been a more widely predicted stock-market crash in the history of mankind than the correction that began in April 2000. Everybody knew they were participating in a bubble, and those of us on the sidelines knew we were watching one. Everybody knew!

Alan Greenspan coined the term "irrational exuberance" in 1996. What year of the 1990s passed without a business magazine cover on Outrageous CEO Pay? Who could forget the stirring "valuations" debate, in which various jokesters tried to come up with far-out explanations of Amazon's or Cisco's or Priceline's market cap? Great fortunes were being created out of the air. How could that fail to be interesting? So, CNBC covered the hell out of it, and CNBC itself became yet more fuel on the bonfire.

You're right, though. This all happened before—the combination of popular enthusiasm for stocks and corporate fraud. You'd think we'd try to understand the circular nature of the causation better.

The media are weird, though. You know a story has achieved the status of monument when reporters prefer to mythologize it rather than say what actually happened. I guess reality is just too interesting to do justice to. Instead they resort to off-the-shelf narrative devices and standard clichés of the "evil businessmen did this to us" variety. Come to think of it, there's gotta be a psychoanalytic issue here—explaining both the New York Times coverage of the bubble aftermath and the Pulitzer Prize it won, though maybe I should save it until I'm retired on a fortified island.

Oh, well. The story has its true elements, too. A great deal of paper wealth was created in the bubble, and a much smaller proportion became cash and changed pockets. The hunt now is to make villains out of those who benefited because they managed to extract cash out of the bubble. So, the targets include Wall Street bankers who minted IPOs and company executives who sold at the top. Sooner or later, I suppose, the mob will catch up with the venture capital industry, which slapped a logo on any idea that came through the door and offered it to the public as youroldunderwear.com.

Of course, we're not criminalizing any office clerks or junior vice presidents and ordinary shareholders who also sold at the top, though thousands did. For that matter, those cast in the unfortunate role of "greater fool" are also to be found on both sides of the social divide. George Soros was a latecomer to Internet investing and got killed, as did any number of less well-known fund managers. But we're not shedding tears for them.

Anyway, now the lesser-greater fool (who also happens to be voter) has found his champs in Eliot Spitzer and Rep. Greenwood and assorted ambulance chasers. I have zero sympathy—the bubble was a bit of nudge-and-wink between the Internet entrepreneurs and their serendipitous co-conspirators in the day-trading community. These people invented this game, and some may have been lucky enough to cash out before the whistle blew. But whether they did or not is their problem and not a public policy issue.

Those words, by the way, are a paraphrase of something I wrote in the middle of the bubble, with only the tenses changed. To say as much now is an official gaffe—as in Mayor Mike Bloomberg's comment last week: ''People who were buying stocks in the stock market at multiples that never made any sense should look at themselves in the mirror."

He's right even though he's been pilloried. Everybody I know who participated in the bubble was openly and unembarassedly speculating on the behavior of other players to send prices higher. They didn't pretend to know or care about the cash flows of the underlying businesses. Much of what has us rending our garments now—Enron, WorldCom, Global Crossing—is a direct consequence.

When companies no longer see their share prices as a rational measure of market confidence but as a high-wire act to be maintained, they make the wrong decisions for the wrong reasons—which readily elides into fraud. It's unfortunate but not unexpected, too, that the market singled out real opportunities—the Internet, telecom, industrial deconstruction—to become the focus of such distorted incentives.

My favorite example is Al Dunlap, the notorious "Chainsaw" whose parachuting into Sunbeam caused its share price to rise beyond any reasonable valuation. Al was supposed to spruce up the company and sell it. But no buyer wanted it now at the suddenly rich price, and Poor Al was stuck actually running the company—leading to a famous pre-Enron accounting scandal when he tried to keep the game going by channel-stuffing barbecue grills.

Anyway, wasn't our subject supposed to be "business ethics?" I don't believe ethics exist as an independent quantity from individuals. What fluctuates are opportunity and incentive. When both are plentiful (as they were in the bubble), there will always be opportunists who will seek to take advantage even as higher-minded, self-denying types step to the sidelines. No "reform" or any preachments about ethics can change this.

We'd have fewer occasions for hand-wringing, though, if we had "good" stock prices—i.e., prices that reflect fundamentals rather than attempts to profit from market psychology. CEOs find it a lot easier to lie in an environment where nobody is interested in the truth.

That's why I love the advent of single-stock futures in the Chicago trading pits. These were outlawed for decades but have come along in the past year or so and should make it easier and cheaper for the average investor to short the next bubble stock. Bubbles will be less likely to occur in the first place—with less temptation for businesses to do dumb or sleazy things.