Though PK was my room-mate in college, I don't know him that well anymore and can't read his mind. Somehow the superstars at Princeton and MIT have a different orbit than mine...
JD
-----Original Message-----
From: Ian Murray
To: pen-l
Sent: 8/12/2002 10:27 PM
Subject: [PEN-L:29385] But the work of reconstructing corporate America has barely begun.
[Jim Devine is PK gettin' that old time progessive law and economics
gestalt going, what's with the multiple turns of phrase....? When
will we he go after the tax code as a tool for deconstructing
corporate america?]
August 13, 2002
Clueless in Crawford
By PAUL KRUGMAN
Today, in its Waco economic forum, the Bush administration will try
to convince the country that everything is under control - that the
economy is mending, that "shady" business practices are no longer a
problem. To that end a carefully chosen audience will listen to
speeches by administration officials and selected models of
corporate probity. Among the speakers announced last week was John
T. Chambers, C.E.O. of Cisco Systems.
They really don't get it, do they? One could hardly have picked a
better example of what's wrong with the administration's whole
approach.
Two years ago Cisco was the world's most valuable company, with a
market capitalization of more than $500 billion. Mr. Chambers was
among the world's best-paid executives, receiving $157 million in
2000. Cisco was perceived as a company that combined new-economy
glitz with old-fashioned solidity, that was on the cutting edge but
made real products and earned real profits.
In short, people thought about Cisco the same way they thought about
Enron.
That's not a strained comparison. Even when Cisco was riding high,
an analysis in Barron's dubbed it the "New Economy Creative
Accounting Exemplar." The company's specialty was using its own
overvalued stock as currency - paying its employees with stock
options, acquiring other companies by issuing more stock. Thanks to
loopholes in the accounting rules - loopholes defended with intense
lobbying - these transactions allowed executives to progressively
dilute the stake of their original shareholders, without ever
declaring this dilution as a business cost.
The resulting illusion of profitability sustained the stock price,
making more questionable deals possible. Some analysts flatly called
Cisco a pyramid scheme.
When Enron's financial house of cards collapsed, $80 billion of
market value vanished. Cisco hasn't collapsed, but its market
capitalization has fallen by more than $400 billion. Nobody from
Cisco management - ranked No. 13 in Fortune's "greedy bunch" - has
been arrested. But then neither has anyone from Enron.
Some cynics attribute the continuing absence of Enron indictments to
the Bush family's loyalty code. But the alternative explanation is
both innocent and chilling: Enron executives may have deluded and
defrauded their shareholders without actually breaking the law. What
Cisco did was definitely legal.
Since Enron collapsed, administration officials have insisted that
no new laws are needed to reform corporate America, only enforcement
of existing laws. The administration endorsed a bill imposing modest
reforms in accounting only after doing everything it could to block
it. And as soon as the bill was passed, the administration began
issuing "guidance" to federal prosecutors that will undermine the
law's intent on whistle-blower protection, document shredding and
more. Officials clearly still think the old law was good enough.
But the Cisco story, like the absence of Enron indictments,
demonstrates just how much self-enrichment corporate insiders can
get away with while staying within the letter of the law. The
handful of executives who have been arrested aren't masterminds - on
the contrary, given the legal ways other executives got rich while
their stockholders lost billions, the perp-walkers should be
featured on a special corporate edition of "America's Dumbest
Criminals."
Now the administration is sounding the all clear - we've passed a
bill, we've arrested five people, it's all over. But the work of
reconstructing corporate America has barely begun.
The next step, surely, is dealing with stock options. It's not just
that companies overstate their profits by failing to count options
as an expense. Huge grants of options also give executives an
incentive to do whatever it takes to produce a short-term bump in
the stock price - if one year of illusory success can net you $157
million, who cares what happens later?
Byron Wien of Morgan Stanley recently told a group of security
analysts that "stock options malevolence" is at the root of
corporate scandal, and that "anyone who says that stock options
aren't an expense destroys his credibility on all other issues."
Well, Mr. Chambers's company still refuses to count stock options as
an expense. The administration has said that it opposes rules that
would require Cisco to change its accounting, and the choice of Mr.
Chambers as a speaker seems to be a reaffirmation of that position.
As I said, they just don't get it.
"An indefinite boundary is not really a boundary at all."
(Wittgenstein)
