Federal Mugging of Investors

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Current
federal government actions regarding alleged shady corporate accounting
practices and alleged corporate fraud by CEO's can be characterized
as a mugging of investors. Rather than protecting investors from
greedy and evil chief executive officers (CEO's), the federal government
is inflicting severe financial pain on the average investor by helping
to drive stock prices to new lows.

For
several months, American investors' portfolios have been pummeled
by a Congress bent on conducting "Star Chamber-type" proceedings
in which various corporate no-goodniks are publicly taken
to task for their alleged malfeasance. In the last few weeks, things
have gotten even worse, with the public being treated to televised
hearings in which Congress verbally flogged a number of these alleged
no-goodniks. While providing a sham justification for the
imposition of new laws dictating how corporate executives are to
account for profits, losses, assets, liabilities, and equity, in
fact what they have done is to frighten investors into selling stocks
or redeeming mutual fund shares, which has led institutional investors
to dump stocks in order to pay off their clients. Given all the
bad publicity, why should any investor wait for further bad news
and take an even worse beating in the market?

While
the Senate passed, by a 97-0 vote, a bill which imposes all sorts
of new penalties on CEO's for alleged malfeasance (the House passed
a more lenient version), some in Congress are going further and
are morphing into modern-day Robespierres. Whether it was
Representative Maxine Waters of California subjecting a witness
to a tongue lashing or Montana Senator Conrad Burns calling for
CEO's convicted of fraud to have all their assets forfeited to the
government, the madness has spread in a bipartisan way. And you
wonder why investors are selling, even at tremendous losses? What
will Congressional loonies do next? Import a guillotine from France
and hold mass CEO executions in front of the Capitol?

Not
to be outdone, Harvey Pitt and his Securities and Exchange Commission
(SEC) have also gone on a pogrom. On June 28, the SEC
issued a new ruling
in which it ordered the chief executive
officers and chief financial officers of the 945 largest SEC-registered
publicly traded companies to certify, in writing and under oath,
that their most recent financial statements filed with the SEC are
accurate and complete. And this must be done on or shortly after
August 14, 2002.

As
more investors have become aware of this requirement, their fears
that corporate earnings will be revised downward in a major way
have increased. After all, what CEO or CFO (Chief Financial Officer)
in his right mind would sign a statement giving the feds ammunition
to put him in the slammer for a long time? In fact, who, other than
a CPA, would want to become a CEO or CFO, as that is what it almost
will take in order to feel confident enough to sign such a certification?
In addition, this ruling will force most CEO's and CFO's to err
on the side of caution, that is, to understate earnings. The new
implicit rule will become, when in doubt, make earnings look
worse. That way, a CEO or CFO couldn't be charged with trying
to pump up the price of his firm's stock by overstating earnings.

Unfortunately,
while this would keep CEO's and CFO's out of jail, it will hurt
firms in their ability to attract talented staff and also will hinder
the raising of capital at a reasonable cost. It will thus stifle
investment and hinder long-term economic growth. And contrary to
Congressional and SEC desires to see CEO's and CFO's earn less money
(they claim that executive compensation is exhorbitant), imposing
greater penalties on these folks will only lead them to require
a higher level of salaries and bonuses in order compensate them
for the higher level of risk they are bearing by being in such positions.

Whether
it is Alan Greenspan and the Federal Reserve inflating the currency
and thus fostering the stock market bubble or the SEC and Congress
taking an axe to "the bubble" in the name of protecting
investors, the only thing an investor can be sure of is that the
federal government will find a way to separate him from his hard-earned
wealth. That sure sounds like a pogrom to me!

July
18, 2002

Jim
Grichar (aka Exx-Gman) [send
him mail
] was an economist with the federal government. He writes
to "un-spin" the federal government's attempt to con the
public, whether through its own public relations organs or via the
usual stooges and dupes in the mainstream media.

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