Federal Mugging of Investors

by Jim Grichar (aka Exx-Gman)

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.

Copyright © 2002 by LewRockwell.com