The Real Decade of Greed

...Rubin, secretary of the Treasury from 1995 to 1999, is no longer in government...

...Most were hidden in plain sight...

...Many securities companies have merged and organized themselves to gain the profits that can accrue from having sell-side analysts and security underwriting in the same firm...

...How did it all happen...

...The other 97 percent of the capital could come from the parent company...

...WorldCom...

...The donors want to know why they should contribute to the GOP when Rep...

...Many of Enron's shenanigans grew out of an obscure, early-'90s regulatory opinion, EITF 90-15 (EITF being the Emerging Issues Task Force of the Financial Accounting Standards Board—the people who make the accounting rules...

...Sell-side" analysts (those *In an early article for this publication ("Poor Mouthing Uncle Sam," November 27, 1995), I discussed the bizarre and partisan intervention by the Standard & Poor's rating agency in de facto support of the Clinton administration's position in the 1995government shutdown...

...Offenders in the 1980s lurked on corners...

...So the dogs had to be called off...

...In another era, the authorities would have put a stop to abuses...

...As a lender, Citigroup was bound to be injured by a downgrade...

...But over at the White House, the money, to quote Evita, "kept rolling in from every side...

...Untangling this problem without sinking these firms, most of which have thousands of employees, in the middle of a bear market will be very difficult indeed...

...This opinion paved the way for corporations to take entities such as Enron's notorious partnerships off their corporate books if outsiders contributed even 3 percent of the capital to the entity...

...The rating agencies are meant to be neutral arbiters of the financial strength of the entities they rate...

...The regulators came only after and because the party ended...

...Giuliani went at his job with a vengeance, indicting so many Wall Streeters for wrongdoing that he still faced bitterness from the financial community when he first ran for mayor in 1989...

...Billy Tauzin (R-LA) is hauling them before the House Energy and Commerce Committee for public scrutiny of their conduct...

...The Clinton administration had a simple way to resolve this tension: law enforcement had to yield to fund-raising...

...Consider the corruption of the initial public offering (IPO) process—which in theory is about allowing promising young companies with a track record of growth to begin tapping the public stock markets for their capital needs...

...But the 3 percent rule undermined the core principle of American financial reporting: consolidation, the notion that what is basically yours— usually, something you own more than 50 percent of— should appear on your balance sheet...

...who work for brokerage firms, as distinguished from the "buy-side" analysts who work for investment management firms) should never have been compensated on the basis of how well they could promote the interest their employers have in underwriting securities...

...This request was coming from the man who personified the Clinton-era financial establishment...

...The system is in far worse shape when a central and respected figure like Robert Rubin feels free to try and rig the game than when an Ivan Boesky—who even before his arrest was thought by most in the financial market to be a shady character—is trading on inside information...

...Rubin reportedly prefaced his request to Fisher with the phrase, "This may not be the best idea, but . . ." Students of Watergate will recall that Richard Nixon once instructed his subordinates in how to gather hush money for the Watergate burglars, then ended the explanation with the phrase, "But it would be wrong...

...With pending securities law investigations in the background, it would have been impossible...

...George Bush is happy to tell Israel what to do...

...Levitt might as well have been suggesting a program of intergalactic travel...

...Boesky literally repaired to an alley to pass Siegel a briefcase of cash in exchange for inside information...

...Credit Suisse First Boston...

...Indeed, after Alan Greenspan, he is the most respected figure in international financial markets...

...White is the person who should have taken the lead in Wall Street prosecutions...

...The tale of Merrill Lynch and its now-famous security analysts has similar outlines...

...Some relied on changing the rules to make wrong right...

...Tyco...

...Individual acts of wrongdoing stood out on the horizon and were punished...

...The corruptions of the 1980s were chiefly offenses by a few rogues in the system...

...It wasn't until December 2001, nearly two years after the peak in the equity markets and with a new administration in office, that the SEC and the National Association of Securities Dealers (NASD) finally secured a $100 million penalty from Credit Suisse First Boston, whose IPO guru Frank Quattrone was widely believed to be the most flagrant corrupter of the process...

...We kept asking ourselves," they told me, "'Where are the regulators?'" Where, indeed...

...Nixon later pointed to that sentence as evidence of his innocence...

...The corruption was on the periphery...

...Less attention has been paid to the call that Robert Rubin made to Peter Fisher, the Treasury undersecretary who is the administration's point man on financial markets...

...Where to draw the line about what goes on whose balance sheet is a complicated subject, one that accountants have grappled with for years...

...Already the names of the malefactors have mostly faded from public consciousness: Ivan Boesky, Martin Siegel, Dennis Levine, the "Yuppie Five...

...The corruptions of the 1990s were corruptions of the system itself...

...That role is normally assumed by the United States Attorney for the Southern District of New York, in whose jurisdiction most of the securities industry is located...

...Ronald Reagan, whom Clinton accused of "denial" of ethical problems arising from greed, installed in that post Rudolph Giuliani...

...To his immense credit, Levitt saw the outlines of many of the disasters that have since emerged and sought to address them before they got out of hand...

...The now-infamous Jack Grubman earned an eight-figure annual compensation package from Smith Barney for steering his firm's clients into the stock of WorldCom and Global Crossing—and, more important, for getting his firm underwriting fees from WorldCom and Global Crossing...

...Levitt had flagged all of these issues for reform by 1999...

...This was the same Mary Jo White who could not find any senior official to indict when Ron Carey turned the Teamsters' Union Treasury into a mutual money-laundering facility for his reelection campaign and for the Democratic National Committee...

...But the Rubin-Fisher phone call answers the question of whether Rubin would ever attempt to influence the conclusions of independent rating agencies...

...Xerox...

...One hint of what was wrong in the 1990s was the pervasiveness of shady practices and how long they persisted...

...Their 1990s James Higgins is a New York based partner in a private equity firm and an adjunct fellow at the Claremont Institute for the Study of Statesmanship and Political Philosophy...

...Why won't he tell Wall Street what to do...

...Notwithstanding many Democratic insinuations that the Bush White House was a wholly owned subsidiary of "Kenny Boy" Lay's Enron, the Bush administration turned Enron down flat...

...In 1994, a private pilot crashed his small plane onto the White House grounds...

...Some of them relied on the non-existence of white collar law enforcement...

...What Rubin asked for, by all accounts, was for Fisher to call the debt rating agencies and ask them to find an "alternative" to a downgrade of Enron's securities...

...Clinton's chairman of the Securities and Exchange Commission (SEC) was Arthur Levitt Jr., former head of the American Stock Exchange and son of a leg-endarily upstanding New York State comptroller...

...But not in the 1990s...

...Rubin is the ne plus ultra of eminent Clintonians...

...With Levitt's proposals lacking the promise of fund-raising, improved poll numbers, or the Nobel Peace Prize, Clinton had no interest in them...

...The joke could have been about Arthur Levitt and the SEC...

...ImClone...

...He is a director of the Citigroup financial conglomerate...

...Enron...

...Dennis Prager, the radio commentator and Torah scholar, has long emphasized the difference between a society with some people in it who behave immorally and a society in which the immoral change the rules to make their behavior acceptable...

...While the call was not a crime or even a civil offense, it was in an important way the most telling event in all the recent financial fiascoes...

...The latter situation, Prager tells us, is far worse...

...Not so, it is now apparent, of the more recent class of malefactors...

...Plus ga change.* Republican campaign committees are already encountering a predictable challenge with potential corporate donors...

...In the same job, Bill Clinton gave us Mary Jo White...

...This was an astounding request...

...But that crisis grew out of boneheaded public policy: extreme liberalization of deposit insurance and instant, massive changes in the depreciation rules...

...Washingtoni-ans joked (such things were funny back then) that the pilot was James Woolsey, the CIA director, seeking a meeting with a president who had no interest in Woolsey's agency...

...At the time I raised the question of whether Treasury Secretary Robert Rubin, a former trader of broad acquaintance in the markets, might have encouraged Standard & Poor's to enter the political fray...

...In the hands of Andrew Fastow and Jeffrey Skilling, EITF 90-15 and subsequent regulations were a license to create imaginary profits and hide genuine losses...

...The conflict of interest was obvious all along...

...The New York attorney general is not the natural or primary enforcement agent against serious wrongdoing...

...The casual reader of the business press might assume that Rubin, whose firm is a major lender to Enron, asked Fisher for the same thing that Kenneth Lay asked Treasury Secretary Paul O'Neill for: a bailout, some form of government financing...

...It must have been difficult enough to persuade a CEO to come to the White House for coffee at $50,000 a cup...

...In the avalanche of news following the Enron collapse, the repeated calls that Enron made to the White House and Treasury Department pleading for a bailout were widely reported...

...The principals in a very reputable investment management firm told me of their dismay and disgust as they found their IPO allocations reduced and then eliminated altogether when they balked at ever more explicit demands for kickbacks in the form of excessive commissions on other trades...

...The request Rubin made of Fisher was akin to the owner of a team faced with playoff elimination calling the league commissioner and asking him to see if he can get the referees to call the next game so that the owner's team doesn't lose...

...And almost no attention has been given to the content of that call...

...Arthur Andersen...

...Merrill Lynch...

...That analysis contains a measure of truth, but it misses the larger forces that permitted undesirable trends to go unchecked until they burst...

...This game went on far longer and got much further out of hand than one would expect in an allegedly regulated market...

...In Tauzin's case, the hearings have gone on as scheduled...

...Now that regulators and law enforcement officials are finally dealing with this problem, they have a real mess to contend with...

...As the problem grew to elephantine proportions during the Clinton era, regulators did . .. nothing...

...Today's news is different from the financial scandals of the 1980s not just in magnitude but in kind...

...This tension is a natural outgrowth of a system in which elected officials both oversee industries and raise funds...

...counterparts operated in the proverbial corner offices rather than on street corners...

...For any who had doubted the importance of this distinction, the news of the last six months has been an awakening...

...Surely, the EITF didn't intend the result it got...

...One of the anomalous and confusing aspects of the Merrill Lynch investigation, which lately led the firm to agree to a $100 million penalty over analyst conflicts of interest, is that the investigation was initiated by New York Attorney General Eliot Spitzer...

...True, there were scandals in the 1980s involving large institutions and large sums, notably the savings and loan crisis...

...In the 1990s, this became a get-rich-quick scheme for investment banks—who marketed wildly overpriced shares of infant companies that were barely more than concepts—the venture capitalists who owned these companies, and the insiders and their friends who were allocated shares at artificially low prices before trading opened...

...No evidence that I am aware of has emerged to answer that specific question...

...White's boss, of course, was Janet Reno, whose name has become a synonym for a certain approach to law enforcement...

...The Wall Street Journal news pages intone that "a stock market bubble magnified changes in business mores and brought trends that had been building for years to a climax...

...Not so—the request was both more subtle and potentially more damaging to the good health of America's markets...

...Bill Clinton, September 22, 1991 Not even Bill Clinton's harshest critics could have foreseen what the headlines would look like a decade after he campaigned on that statement and after eight years of his leadership in the White House...

...Problems have appeared in audit committee structure and authority, in security analyst conflicts of interest, and in the conflict of interest posed when accounting firms audit the books of and earn consulting fees from the same client...

...It is consolidation that gives you confidence that when you look at a company's financial reports you are getting a real snapshot of the company's financial condition...