Once again, handcuffed men in suits are being paraded as common criminals in the streets of Manhattan. Deja vu. We are once again reminded of who is in charge, and this, not law enforcement, is the real point. Fifteen years ago, Murray Rothbard described the situation as follows:
There is a veritable Reign of Terror rampant in the United States — and everyone’s cheering. “They should lock those guys up and throw away the key. Nothing is bad enough for them,” says the man-in-the-street. Distinguished men are literally being dragged from their plush offices in manacles. Indictments are being handed down en masse, and punishments, including jail terms, are severe.
He wrote this in the Spring of 1987 (published June 1987 in The Free Market, republished in Making Economic Sense), when government prosecutor Rudolph Giuliani was rounding up respectable traders and brokers for the non-crime of “insider trading.”
Rothbard asked: “what kind of a world-view dubs it ‘unfair’ for some men to know more than others?” His answer is one in which the government is given a hunting license to go after any person or firm who may be out of power in the financial-political struggles among the power elite.
Notable too are the method of arrest and the lack of compassion for the perpetrator:
Armed robbers are usually coddled by our judicial system. Columnists and social workers worry about their deprived backgrounds as youths, the friction between their parents, their lack of supervised playgrounds as children, and all the rest. And they are let off with a few months’ probation to rob or mug again. But no one worries about the broken homes that may have spawned investment bankers and inside traders, and no social workers are there to hold their hands. They receive the full might of the law, and are sent straight to jail without stopping at “Go.”
Fifteen years later, the Reign of Terror is back, once again egged on by a Republican president, cheered on by a complicit media printing government press releases, and celebrated by the left as a praiseworthy crackdown on “white collar” crime.
Ignorant pensioners are urged to scream at these men, as they are being dragged away, “that’s what you get for shrinking my 401k!”
The role of Giuliani is being played by John Ashcroft, who says: “Corrupt corporate executives are no better than common thieves when they betray their employees and steal from their investors. Corporate executives who cheat investors, steal savings and squander pensions will meet the judgment they fear and punishment they deserve.”
(Of course, this is slightly incorrect, since common thieves are pretty much allowed to practice their craft without police intervention in New York and Washington.)
The alleged crime this time is “accounting fraud” — even though it is not at all clear that what WorldCom, Enron, Computer Associates, Global Crossing, or Qwest did, often with the blessing of respected auditors, amounts to that at all. In each case, the accusation is similar: their books counted spending as profitable investment before the revenue was in the bag, and when the economic tables turned, their optimistic projections proved unsound and even, in retrospect, absurd.
WorldCom is the worst case of the batch, which is why the government has made such a big deal out of the arrest of two former executives, Scott Sullivan and David Myers. Their spectacular shifting of a total of $3.8 billion from expenses to capital began small, in mid 2000 as the bust was hitting and their accounts were starting to appear unimpressive.
No one disputes the facts. WorldCom’s expenses for last-mile leases on other companies’ communications networks were rising very quickly, and Sullivan and Myers wanted to move these expenses out of their operating account (filed quarterly and watched carefully) into the capital account — which is something akin to treating the electric bill like the mortgage.
Now, understand that there was no lying going on, and no graft or theft or anything else of that nature. What we have here is an imprudent reclassification designed to impress investors who, at the height of the bubble, demanded nothing less. Unless you are an accounting whiz, there is no way to say that this is a priori evil. In any case, it didn’t fool everyone. Many skeptics drew attention to the crazy finance of WorldCom’s books. But in the boom times, most people didn’t care.
Most of the other cases of corporate fraud now under the microscope are far less serious than the WorldCom cases, and none are obvious cases of theft or fraud. Mostly it was just bad forecasting reflected in optimistic accounting methods. If the stock prices of each of the companies had continued to soar with a rising market, nobody would be accusing anyone of anything.
The supposed damage caused by their behavior was that their pretty books kept their stock price rising even as the financial condition of the company deteriorated. That’s probably true, but it is also a short description of what it means to be in a bubble economy. If this is fraud, the entire economic boom is fraud.
What is clear, however, is that the new Reign of Terror isn’t really about accounting and the definition of fraud. In the criminal trials, the prosecution will have to prove intent, and no jury in the world could possibly follow all the ins and outs of corporate accounting to say with certainty whether these guys should go to jail. John Ashcroft sure as heck can’t say.
Ultimately, of course, it is all about politics, and on two levels. First, notice that the companies under fire are upstarts and the CFOs and CEOs being arrested are political outsiders. When all the dust settles, it wouldn’t be surprising to find the hand of vindictive old-line companies inside the Justice Department glove.
Second, arresting corporate executives, dragging them in and out of FBI headquarters in Manhattan, having the US Attorney General threaten them with 65 years in prison is, as the New York Times says: “the vital center of the administration’s strategy for reducing the political vulnerability for the White House.”
In other words, the Republicans are up to their old trick of behaving even worse than the Democrats in order to keep the Democrats from coming to power and imposing bad policy. In other words, we get the worst of both worlds, and no way out. If you disagree with this approach, you must be some sort of libertarian utopian who doesn’t understand the need for compromise.
As for the dizzying amounts involved in the WorldCom cases, we gasp at a number like $3.8 billion. But consider that the Senate just passed a $355.4 billion military budget that is $34.4 billion larger this year than last. Newspapers ran the story because they have column inches dedicated to the DC budget.
If we really did care, we can generally discover what it’s for and how it will be spent, given or take a few billion here and there, but no one really pays close attention. With the military budget, there are no investors, forecasts, profits, or customers to worry about such things. There are only the looted classes of taxpayers, powerless to stop and therefore passive and uninterested, and those who get the loot. Oh, yes, there is one other affective class, which is not investors with reduced retirements but the thousands dead in far-flung countries.
This kind of spectacular reclassification, shifting budget items from graft to defense, is beyond anything anyone in corporate America could conjure up, and it is justified under a handful of slogans, like “national security," for which the bull market never ends.
That’s the way government does business. It’s worse than the perpetrator of accounting fraud. It’s worse than the common thief. But it is in charge, and it never lets us forget it.