Investors' Nightmares Made Real

Lying. Cheating. Arrogance. The public's worst fears about the ethics of much of Corporate America are proving to be justified. Yes, despite denials, it turns out that Enron Corp. did rig California's deregulated power market to profit from cheating an entire state. Yes, despite denials, it turns out some Wall Street analysts did have contracts that linked their pay to investment banking deals, profiting enormously by issuing misleading research. Yes, despite denials, many CEOs did misrepresent their companies' financial health.

It now appears that a culture of narcissism and entitlement arose in the mid-'90s, and people began playing by their own rules. It was worse in markets created by deregulation and new technologies, but it spread. Enron officers manipulated newly deregulated markets to their advantage and teamed with Arthur Andersen LLP to play accounting games to fake profits and amass huge personal gains. But even Boeing Co., clearly a member of the business Establishment, fudged its program accounting in 1997 to manage earnings and hide serious problems that threatened a merger with McDonnell Douglas Corp. Boeing still uses this opaque reporting system.

The daily drip of one terrible revelation after another is eroding the public's trust in market capitalism and undermining the conservative political agenda. Debate over the privatization of Social Security or deregulation of markets is impossible while people feel that insiders control markets. That's why President Bush should continue to shame CEOs for their failures to be responsible. That's why Securities & Exchange Commission Chairman Harvey L. Pitt should insist that all who profited from misleading investors--CEOs, Wall Street partners, analysts--be punished with fines that will strip them of their ill-gotten wealth. And that's why the SEC, the New York Stock Exchange, and Nasdaq should insist that analysts be totally independent of investment banking.

It took many decades to persuade Americans to become risk-taking equity holders. These scandals could soon persuade them to stop. Time is short.

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