<nettime> NYT: The Long Boom Shows Its Ugly Side

["nettime's_roving_reporter" <nettime@bbs.thing.net>]

     [via <tbyfield@panix.com>. a curious idea: 'the american economy 
      is also a victim.' still, it's interesting to see this kind of 
      negativism coincide with endless assurances that the economy is
      springing back -- for example, the nasdaq jumping almost 8% in a
      day on the basis of the report of a single company, cisco, which 
      even during the boom was known for dodgy accounting. it's easy
      to underestimate the sheer force of the optimism placed in very
      particular economic indicators, and it'll take more -- much more
      -- than wobbling markets for that faith to dissipate. and let us
      not forget that we really don't understand the dynamics of the 
      infrastructure of institutions, safeguards, automation that was
      built up before and during this boom -- so if, as this article
      says, the four most dangerous words are 'this time it's differ-
      ent,' dangerous words 5 through 8 are 'this time it's the same.'
      but note: the 'it' has changed. cheers, t]

<http://www.nytimes.com/2002/05/12/weekinreview/12LEON.html>

The Long Boom Shows Its Ugly Side
By DAVID LEONHARDT

SAY goodbye to the victimless economy.

As the 1990's boom stretched on and on, many otherwise sober market
watchers decided that the United States had repealed the laws of
economics. Not only could the expansion go on forever, but this time,
nobody's prosperity need come at the expense of others.

The symbols of the boom were not the ruthless robber barons of the
Gilded Age, or the corporate raiders of the 1980's, but young new
economy entrepreneurs, who started Internet companies and made
millionaires not only of themselves but, legend had it, also of their
stock-holding receptionists.

Even when the stock market began falling two years ago and a recession
ended the longest economic expansion on record a year ago, the primary
culprit seemed to be the country's irrational but well-intended
exuberance.

Recently, however, the victimless economy seems as remote as a $200
share of Amazon.com stock.

Last week, federal regulators released documents showing that Enron, and
perhaps other energy companies, helped cause California's recent power
crisis by artificially driving up prices.

Other regulators, from the Democratic attorney general of New York to
the Republican chairman of the Securities and Exchange Commission, are
investigating conflicts of interest on Wall Street. And jury selection
began in the government's prosecution of Arthur Andersen, the accounting
firm the Justice Department has charged with obstructing justice during
the Enron inquiry.

The details of the cases vary widely, but they collectively reveal that
the 90's boom really did claim millions of economic victims.

Virtually every resident of California and every business with an office
there seems to have suffered from price gouging after the state's energy
deregulation.

"About $30 billion was extorted from this state," Gray Davis,
California's governor, said last week.

Many investors, thinking that the earnings statements approved by
Andersen and other major accounting firms were truthful, lost money
buying stocks. Others bought stocks on the bullish advice of Wall Street
analysts, whose research reports may have been written more to win the
investment-banking business of the corporations being analyzed than to
make an objective assessment of the future prospects of its stock.

In February 2000, analysts made 85 "buy" recommendations for every
"sell" recommendation, according to Zacks Investment Research in
Chicago. Since then, the stock market has fallen about 25 percent, and
many of the technology stocks analysts were hyping as a bargain at $100,
including DoubleClick and JDS Uniphase, now trade for less than $10.

WHEN the collapse of Enron cost employees and investors billions of
dollars, corporate executives like Jeffrey R. Immelt, the new head of
General Electric, rushed to criticize Enron, suggesting it was an
exception. Such an easy explanation is harder to accept today.

"It has been said that the four most dangerous words in business are
`This time it's different,' " said Richard S. Tedlow, a historian at
Harvard Business School. "And people really thought it was."

No longer. Investors have punished the stock prices of G.E., Tyco
International and other companies, fearing that they used accounting
legerdemain to spiff up their earnings. The S.E.C. is investigating
whether analysts deceived investors by publishing falsely optimistic
research reports to please the corporate clients of their investment
firms. Eliot L. Spitzer, New York's attorney general, is considering
whether to bring criminal charges against employees of Merrill Lynch and
Salomon Smith Barney for similar reasons.

In one internal e-mail, a Merrill analyst called InfoSpace -- a
technology company whose stock now trades at 79 cents, down from a high
of $130 -- "a piece of junk" even as the firm's official position on it
was favorable.

The seven stocks Mr. Spitzer is investigating at Merrill have lost $118
billion of their worth, from peak to trough, according to Brad Hintz of
the investment firm Sanford C. Bernstein. Merrill's customers may have
lost $4 billion of this total, Mr. Hintz said.

Mr. Spitzer has suggested that Merrill establish a restitution fund for
investors, and is negotiating with executives over the eventual
penalties. The firm has denied some of the allegations, but its chief
executive, David H. Komansky, has publicly apologized. "We have failed
to live up to the high standards that are our tradition," Mr. Komansky
said.

Other regulators are investigating whether investment banks, including
Goldman, Sachs and J.P. Morgan Chase, and a small group of chosen
investors unfairly profited from initial public offerings of stock
during the dot-com craze. Individual investors absorbed many of the
losses, regulators said.

The New York Stock Exchange has been looking into Salomon Smith Barney
for its role in persuading employees of Worldcom, the telecommunications
company, not to sell some of their shares in the company a few years
ago. By holding the stock, the employees helped lift Salomon's profits,
but the decision ended up costing some people virtually their entire
savings, as Worldcom's stock has fallen to $2 from a peak of $60 in
1999.

IT'S all a far cry from the 90's, when Time magazine named as its Man of
the Year three businessmen -- Ted Turner of CNN, Andrew Grove of Intel
and Jeff Bezos of Amazon.com -- having named only two in the previous 60
years. Wired, Fast Company and a handful of other magazines sprang up
during the decade to chronicle and promote what they called companies'
revolutionary role in society.

"Business in the 90's became not a fallback for people who weren't
creative enough for other pursuits, but a force for innovation and
creativity," said William Taylor, a founding editor of Fast Company.
"Clearly, the attitude toward business has changed dramatically."

Indeed, the current investigations take aim at many of the "victimless"
economy's most important pillars. The long bull market? Yes, it fattened
the retirement accounts of millions of people, but it also seems to have
allowed a small group of investors and bankers to profit off of the
ignorance and trust of others.

The great surge in corporate profits? Some of it now appears to be
fiction, with Arthur Anderson and its peers playing the role of ghost
writer. Those beloved technology entrepreneurs? Knowingly or not, they
created companies that became the prime vehicles for the questionable
stock-market profits. Many of those executives now appear in magazine
not as heroes but as symbols of hubris, like Bernard Ebbers of Worldcom,
or of greed, like Gary Winnick of Global Crossing.

In addition to the thousands of people suffering the financial
consequences of one bubble or another, the American economy is also a
victim. Investors poured money and employees poured themselves into
companies that were far less prosperous than they appeared. The
unwinding of this excess is one reason that the economy seems to be
recovering slowly from recession and that the unemployment rate actually
rose sharply last month, to 6 percent.

"There was a massive redeployment of capital and people," said Adrian J.
Slywotzky, a partner at Mercer Management Consulting, a consulting firm,
"from fundamentally productive activities to fundamentally unproductive
activities."

Beyond the investigations and prosecutions, policy makers have also
called for change. Congress is considering whether to prevent
accountants from selling other services, like business consulting, to
their clients. On Wednesday, Mr. Pitt, the S.E.C. chairman, proposed new
rules to limit conflicts of interest among stock analysts. Wall Street
firms praised the plan, but some Democrats and investors called it too
tame.

Some business leaders, as well as Mr. Pitt, are concerned that a wave of
new laws could hamstring businesses and hurt the economy far more than
any of the current scandals have. To others, the conflicts of interest
that have now been exposed cry out for new rules.

Otherwise, Mr. Slywotzky said, "the next bubble won't be victimless,
just as the last one wasn't."

#  distributed via <nettime>: no commercial use without permission
#  <nettime> is a moderated mailing list for net criticism,
#  collaborative text filtering and cultural politics of the nets
#  more info: majordomo@bbs.thing.net and "info nettime-l" in the msg body
#  archive: http://www.nettime.org contact: nettime@bbs.thing.net