Market Advisory Features

Market Outlook
Greenspan's Soothing Touch 
Fatal Mix: Capitalist Crisis and Corporate Fraud

The Weakness of the Strong Dollar

Argentina and Brazil : Elections and Economics

Watching Out for the Great Bear
Elusive victory
Congress Gets Tough

Corporate Reform



Elusive victory
Jul 22nd 2002
From The Economist Global Agenda

American troops are leaving the Philippines, having spent six months helping Filipino forces battle Abu Sayyaf, a local Islamic terrorist group. But their deployment raised more questions than it answered


ON SUNDAY JULY 21st, the USS Fort McHenry arrived off the southern Philippines, to help ship out the American soldiers who have been conducting anti-terrorist exercises there. The withdrawal marks the closure of the second front in America's war on terror, opened with great fanfare six months ago. It also calls into question the idea of joint exercises, held out at the time as a model for future deployments in the struggle against international terrorism.

General Donald Wurster, the American commander in the Philippines, insists that "Balikatan 02-1", as the exercise was known, was a roaring success. His mission, he says, was to "train, advise, and assist" the Filipino military in its ongoing fight with Abu Sayyaf, a Muslim separatist outfit that relies on kidnapping and terror tactics. During the six months that US special forces spent prepping Filipino troops, the group's fighters were obviously on the run. (American troops did not do any actual fighting themselves, due to restrictions in the Filipino constitution on the activities of foreign soldiers.) Many Abu Sayyaf members deserted, while others were killed or captured. Most of the remainder fled the island of Basilan, an Abu Sayyaf stronghold and the focus of the exercise. Even a bungled attempt to rescue three hostages held by the group, in which two were killed and the other wounded, proved that the Filipino military was getting better at hunting down its foe.

But there is obviously still life in Abu Sayyaf. The day before the Fort McHenry arrived off Basilan, islanders discovered the mutilated body of an informer, presumably murdered by Abu Sayyaf. That same day, on a nearby island, Abu Sayyaf members attacked the motorcade of the provincial governor and police chief. Filipino troops have only managed to kill one of the group's top five leaders—and his body has not been recovered, leading some Filipinos to question even that claim. In the past, the Filipino military has been accused of incompetence and even collusion with Abu Sayyaf. It seems perfectly possible that once the American forces have departed, Abu Sayyaf will begin to regroup, and the Filipinos to lose some of their zeal in pursuit. Gerry Salapuddin, the congressman for Basilan, says he fears just that.

General Wurster argues that America has guarded against a resurgence of Abu Sayyaf by helping to improve the lot of Basilenos. American soldiers have refurbished the road that runs around the island, restored an abandoned airstrip and built a new pier. They have also dug wells, and provided mobile clinics for the local population. Above all, he says, they have undermined the notion that the terrorists can operate with impunity, and helped to restore locals' faith in the government. All this gives them a stake in the exercise, he argues, and will stop them harbouring Abu Sayyaf fighters.

Nonetheless, it might seem prudent for American soldiers to stay on until Abu Sayyaf's demise was guaranteed. But Balikatan was always scheduled to last only six months, and getting it extended would be awkward in a country where the memory of American colonialism still provokes strong feelings. Indeed, both countries seem to be backing away from the example of Balikatan altogether. Angelo Reyes, the Filipino defence minister, says that future exercises should concentrate more on the training element, and less on advice and assistance. An earlier idea, to deploy American troops in similar exercises in the nearby Sulu islands, where Abu Sayyaf also operates, seems to have been scrapped.

It is not hard to see why. America's only direct interest in the campaign against Abu Sayyaf were the hostages, two of whom were American. The group's connections to international terrorism are hazy at best. Although its founder trained with Osama bin Laden, there is no indication of any recent contacts between Abu Sayyaf and al-Qaeda. Rather, Abu Sayyaf, as deplorable as it might be, springs from the local tradition of banditry and piracy.

Furthermore, the Sulu islands, even more than Basilan, boast a huge number of separatist groups and Islamic militants, some of which have negotiated, or are in the process of negotiating, truces with the government. Throwing American troops into this mix, even if they were willing to go, might do more harm than good.

America has said, of course, that it is fighting terrorism in all forms, not just those connected to al-Qaeda. Training national armies to confront terrorist threats certainly makes sense. But the difficulties of Balikatan show how hard it is to win a clear victory against a terrorist group, or even to find a suitable opportunity for military intervention. One Filipino congresswoman points out that America would never send troops to assist Britain in its fight against terrorism in northern Ireland—not because the terrorists are not a worthy target, but because the situation is simply too complicated to allow such a simple solution. The same, she says, is true of the Philippines.



Market Outlook
July 22, 2001


Largely precipitated by accounting scandals at Worldcom and Enron, the public flogging of corporate CEOs, both from Congress and the President, may be backfiring. Instead of giving reassurance that the mess will be cleaned up, it has actually convinced many people that most of corporate America is dishonest.

These high profile scandals guarantee that more government regulation is forthcoming. The new proposals sound great at first blush. After all, who would oppose sending corporate executives to jail when they knowingly release misleading financial information? However, no amount of regulation will make equity investing a risk-free endeavor.  And bad regulation could make the problem worse.

Ultimately, though, stock prices are about corporate earnings and their prospects for future growth, and as I see it, the earnings outlook is improving.

·        > Earnings are rising

According to Thomson Financial/First Call, of the 221 S&P 500 companies that have reported their results for the second quarter, 59.7 percent beat Wall Street’s earnings expectations, 28.1 percent matched projections and only 12.2 percent fell short of consensus targets. Many companies are reporting upside surprises in the second quarter, but have given cautious guidance for the rest of the year.  In our view, the third quarter is showing signs of significant improvement, but CEO’s don’t want to stick their necks out.  I suspect this is because many executives are unwilling to expose themselves to the risk of being prosecuted for honest mistakes.

·        > P/Es look reasonable

Despite rising earnings and falling stock prices, many believe that the market is still expensive because the S&P 500’s current price-to-earnings ratio is still above historic averages. However, I believe that Greenspan’s model is a better gauge of the market’s value because it takes interest rates into consideration.  According to Barron’s, the Fed Model, as it is known, now suggests that the S&P 500 is 30% undervalued. This model, which compares the yield on the 10-year Treasury with the so-called earnings yield on the S&P 500, suggests fair value for the S&P 500 of about 1200.  Barron’s also notes that other, more sophisticated models indicate the S&P 500 is undervalued to an even greater extent.

·        >  Earnings doubts?

Leading up to the August 14 deadline for CEOs to personally sign-off on their financial statements, the risk of more scandals raises doubt about earnings estimates. But consider this—the S&P 500’s total projected earnings for the year ending next March is $495 billion.  According to Barron’s estimates using the Fed model, earnings could decline by 30 percent—or $148 billion --  and the market would still be fairly valued. Getting to this level would require the unlikely revelation of 39 additional Worldcom size restatements of $3.8 billion.

Offsetting further restatements is the possibility that earnings growth is stronger than anyone currently expects. I take solace in Greenspan’s recent testimony to Congress:

“We do have a set of profits data which, for all practical purposes, are free of spin. ... [The national income and product accounts numbers] are improving fairly dramatically, as indeed they must because the necessary implications of productivity growth at a 7 percent annual rate in the average of the fourth and first quarters is very difficult to engender without a very major increase in operating earnings. And, indeed, that’s exactly what is happening.”

Translation: Behind all the spin, profits are improving dramatically.

·        >  Summary

It is impossible to pick a bottom in the market. History teaches that if you are prepared to ride out the short-term then the long-term is safe. Some of the best investors I know are buying equities now because they don’t expect stocks to fall much further given forecasts for an economic recovery.

The potential for new revelations of corporate fraud makes the market look and feel grim right now. But I don’t think fraud is so widespread as to justify the significant plunge in all major indices.  I believe that the sensational headlines about today’s wrongdoers represent a tiny fraction of the publicly traded companies. The overwhelming majority of managements are honest and trustworthy even when “nobody is looking.” We should invest accordingly.

Ken Kam
President and CEO
Marketocracy, Inc.
July 22, 2002


Congress Gets Tough
Jul 18th 2002
The Economist Global Agenda

A series of stern measures to prevent companies from cooking the books for the benefit of executives has been unanimously agreed on by the American Senate. With the public outraged and elections looming, the bill could survive almost intact and be signed into law next month by President George Bush

A TOUGH set of proposals to clean up corporate America could be completed next month. America's Senate unanimously passed a raft of measures on July 15th, which includes making schemes that defraud shareholders a crime and prison terms for wrong-doers of up to ten years. A new public supervisory board would also be established to monitor the accounting profession. Chief executives and chief financial officers of public companies would have to swear that their company's financial statements are accurate, or risk losing profits and bonuses if they have to be restated.

Although the plans go well beyond the measures proposed by President George Bush last week, they do not include everything that both Republican and Democratic politicians have been threatening to impose since a wave of scandals crashed over corporate America, undermining the confidence of investors, employees and the general public, and causing turmoil in the financial markets. In particular, moves to have stock options counted as a business expense were blocked. Nevertheless, some senators vowed to press on for this change as well.

Coca-Cola and several other large American companies have announced that they will voluntarily do this, whatever Congress decides. Most firms report stock options granted to top executives as mere footnotes to their accounts, and these do not alter their bottom line. But the allegation that managers have manipulated profit figures to boost share prices, and so the value of their stock options, has been behind many of the recent corporate scandals in America. Nevertheless businesses have been lobbying hard against the change. Opponents claim that if companies are forced to treat stock options as an expense, it could damage their ability to entice and keep talented employees. Proponents of the change say it would make no difference, other than to make the true financial state of a company more visible.

<Exactly how the new reforms work out remains to be seen. The Senate bill has to be reconciled with much weaker measures passed by the House of Representatives in April. That was after the collapse of Enron, but before the latest scandals were revealed, such as a massive fraud by WorldCom. With corporate malfeasance likely to be the biggest issue in this autumn’s mid-term Congressional elections, both Democrats and Republicans are now speaking out in support of harsh action against errant executives and companies. In this climate, the Senate's proposals have a good chance of surviving undiluted. Mr Bush has urged the House and Senate to sort out their differences and to finalise a bill which he could sign into law by the summer recess next month.

In his regular weekend radio address, Mr Bush said he supported the creation of a strong, independent board to act as a watchdog over the accounting profession. The Senate bill would establish the Public Company Accounting Oversight Board to conduct regular inspections of public accounting firms. It would have the power to investigate and punish any violations. Accountants would be restricted in the provision of other services, such as consultancy, to firms for which they are acting as auditors. Companies would also be forced to rotate their accounting partners every five years.

This would be on top of Mr Bush’s plans to create a new financial crimes “SWAT team” and to boost the penalties for people convicted of the existing offences covered by company fraud legislation. But many of his measures were seen as being too weak, or relying too much on the self-policing of companies and stockmarkets. The demand for more to be done has grown as the affairs of more companies have been subjected to official investigation. Soon after Qwest Communications, the biggest local-telephone company in 14 states, joined the list of firms under investigation, it was revealed that the Securities and Exchange Commission (SEC) is looking into the sales practices of Bristol-Myers Squibb, a big drug company. Even though some of the cases now being investigated may not involve any law-breaking, the growing list of companies whose accounts are being scrutinised is making bosses and investors increasingly nervous.

Democrats are hoping to exploit this by claiming that Mr Bush’s administration, with its close links to big corporations, is soft on financial misbehaviour. Both Mr Bush and his vice-president, Dick Cheney, are having to defend themselves against allegations of dodgy dealings during their own time as businessmen. Some in Congress have also called on Harvey Pitt, the chairman of the SEC, to resign, arguing that his background as a securities lawyer and lobbyist for the big accounting firms is a conflict of interest that limits his ability to take the right action.

There is no doubt that the corporate scandals have started to harm Mr Bush’s administration and Republicans at large, especially with the mid-term elections looming. Two thirds of those polled in a New York Times/CBS survey think the Bush administration is too heavily influenced by big business. Almost half of those polled also believe that Mr Bush and Mr Cheney had not been sufficiently forthcoming about their past business dealings.

All this has made corporate scandals a campaign issue. While the Democrats see the subject as a way of diminishing Mr Bush’s popularity, the Republicans, who control the House of Representatives, worry that their party may not look tough enough. A clean-up of corporate America is needed. But one done in haste, and mainly to help win an election, could yet do more harm than good.



Corporate Reform

Clambering back up
Jul 18th 2002
The Economist

Can Americans trust their business leaders to do the right thing?

AFTER the race to the bottom, a race back up to the top. Claiming a desire to “help restore confidence in corporate America”, on July 14th Coca-Cola announced that it would begin recording employee stock options as an expense on its income statement. A day later, the Washington Post Company said that it too would make the change. AMB Property, a hitherto obscure real-estate investment firm, said that it had been expensing options for a whole week already, throwing doubt on Coca-Cola's stated willingness to “take the lead on this issue”. More firms might follow these pioneers, including Heinz, a food group, and Delta Air Lines.

Give Coca-Cola its due: its timing is spot on. Twice in two weeks, President George Bush has demanded that corporate America put its house in order. On July 16th Alan Greenspan took his turn to wag his finger at America's bosses. Too many of them, said Mr Greenspan, had sought ways to “harvest” the booming stockmarket of the late 1990s. The investments of ordinary Americans, meanwhile, keep wilting. Since the start of the year, the S&P 500 index has fallen by over 20%.

Coca-Cola's choice of reform is also clever. Although other initiatives are beginning to take shape in Congress, efforts to make it compulsory to charge the cost of stock options as an expense have fallen foul of the high-tech business lobby. That has turned options-expensing into a pressing issue among those Americans who feel their government is doing too little.

The willingness of companies to embrace this accounting change voluntarily, meanwhile, cheers free marketeers. They urge caution in new rule-making and claim that the system can, by and large, be relied upon to fix itself.

Dice men

On the evidence so far, who is right? One place to look for the answer is bosses' pay. The theory is that the huge amounts of stock options dished out to executives in the 1990s encouraged them to behave badly. Unlike stock itself, a stock option has no downside: the owner might gain a lot of money if his company's share price rises, but he loses only the cost of the option if the share price falls (and nothing at all if the option is given to him). That might have encouraged excessive risk-taking at the top—a willingness, as Ira Kay of Watson Wyatt, a pay consultancy, puts it, to “roll the dice”.

Combined with the freedom to sell the company's stock once the option is exercised, stock options might also have encouraged short-term business strategies, or even fraud. By fiddling with their accounts, company bosses could hope to drive up the share price, cash in their options, and set sail in their yachts.

Stock options are indeed becoming less popular in the boardroom. Mr Kay sees a gradual switch from options to outright share-ownership plans. So does Peter Chingos of William Mercer, another consultancy. Mr Chingos says that efforts to make bosses hold on to their companies' shares are also gaining ground. New share-ownership plans, for instance, might typically prevent the boss from selling his shares for five years. Sanford Weill, the boss of Citigroup, boasts of the “blood oath” that he and the company's other executives must take. As long as they run the company, Citi's top dogs must keep three-quarters of any shares or options that they receive. Between them, Citigroup's board of directors and senior managers own 85m shares, worth a staggering $3.2 billion.

There is a happy coincidence at work here. Because of the slumping stockmarket, options were in any case becoming less popular. Chief executives already have their drawers full of worthless options. Increasingly, they prefer straight shares, says Mr Chingos, because even if the market falls, shares are still worth something.

Stock-holding restrictions, meanwhile, typically lack bite. Few companies can match Mr Weill's blood oath. Much more typical are rules requiring chief executives to own company shares worth, say, six times their annual salary.

Another test of reform is the way companies choose to present their accounts. Here, shareholders are demanding more “honest” numbers, designed to illuminate, rather than disguise, the profitability of businesses. The decision by Coca-Cola, AMB and others to expense stock options is the first big sign that companies are beginning to take these calls seriously.

Employee stock options are not a huge cost at Coca-Cola, however. By the company's own calculation, expensing them would have knocked just $200m off its profits in 2001. West-coast technology companies, such as Microsoft and Cisco, will find it harder to follow suit. Cisco, for instance, calculates that the options it dished out to its employees last year had a value of $1.7 billion. The Business Roundtable, a trade organisation for chief executives, remains opposed to options-expensing, on the dubious argument that there are so many ways to calculate their cost. Elsewhere, “pro forma” accounting—the selective (and usually flattering) removal of certain costs in calculating “core” profits—remains far too common

Ban the boss

A final test of reform is change in the boardroom. One effort has been to strengthen outside directors as a counterweight to over-mighty bosses. As part of the proposed changes to its listing requirements, the New York Stock Exchange (NYSE) wants to make boardroom “executive sessions” without the chief executive compulsory, a change that corporate-governance activists think might help to restore some balance to the board.

It was thought that these executive sessions would arouse controversy. As it turns out, chief executives have put up little resistance, says Leon Panetta, a former White House chief of staff who sits on the NYSE's board. Given the news, he chuckles, bosses are not in much of a position to complain. David Nygren of Mercer Delta, a consultancy, thinks this change could help to entrench the role of a “lead” independent director, America's answer to the separation of the role of chairman and chief executive that has already happened in many British companies.

Supporters of greater government intervention might argue that these achievements are slender. But several points are worth bearing in mind. It is still too early to tell how far companies are willing to go. Cynics will say they are playing the same waiting game as the politicians. The economy could recover, the markets might bounce back and America might invade Iraq. All three events would lessen the impetus for reform. But America's capricious shareholders, whom bosses serve, might also change their minds, and once again stop caring about greedy bosses. After all, a couple of years ago, none of this mattered to them. “We have sought leadership in corporate governance for years,” says Hamid Moghadam, the boss of AMB. “Nobody noticed until a month or two ago. All of a sudden, everybody cares.”



Greenspan's Soothing Touch 

Jul 19th 2002
The Economist Global Agenda

Modestly encouraging labour market and inflation data supported the cautious optimism about America's economic prospects from Federal Reserve chairman, Alan Greenspan, this week. But neither Mr Greenspan nor the economic figures have yet eased volatility in world stockmarkets

CALL it a happy coincidence. Alan Greenspan's appearance before Congress this week had been long planned. The powerful chairman of the Federal Reserve, America’s central bank, presents his monetary-policy report to both houses of Congress twice a year. On July 16th, he testified before the Senate Banking Committee; on July 17th, it was the turn of the House committee. With stockmarkets in a panic—“skittish" was how Mr Greenspan described them—the Fed chairman's appearance was fortuitously timed. It gave him the chance to try to soothe the markets without having to make an unplanned statement, a gesture which could easily have been interpreted as panicky rather than reassuring. 

His remarks did little to calm extremely volatile markets. They remain sensitive to every new economic statistic and every new corporate earnings report, and their underlying trend continues to be downward. More good news on inflation on Friday July 19th had no immediate market impact, whereas a worsening of America's trade deficit in May, revealed on the same day, initially depressed them further. What they will do next is anyone's guess.

The markets have been jittery, and depressed, for months. Since the peak in January 2000, for instance, the Dow Jones Industrial Average has fallen by close to 30%; the FTSE 100 index is down by nearly 40%. On most days in recent weeks, trading screens have glowed red as billions were wiped off share prices. 

Yet Mr Greenspan did have encouraging news to impart. He continues to think the economic recovery is on track, a view supported by encouraging labour market data on July 18th, showing a further fall in initial claims. The upturn is modest, but Mr Greenspan has consistently said that it would be, in part because the recession last year was the mildest on record. Consumers, he again pointed out, shopped through the downturn, so there is little pent-up consumer demand to generate a sudden surge in economic activity. 

All the same, American household spending has held up well in spite of the fall in equity prices because mortgage rates are low, the housing market has stayed buoyant, and incomes have also been rising. The drop in housing starts in June, revealed in new data published on July 17th and marginally bigger than expected, should not be enough to dent confidence in household spending, at least for now. Business investment remains weak, but productivity has stayed unexpectedly strong, and as inventories have been run down, some restocking is likely to take place in the coming months.  

As if on cue, new figures for industrial production were released shortly before Mr Greenspan's first appearance on Capitol Hill. These showed an unexpectedly large rise in June, up 0.8% compared with May; and the May figures had themselves been revised upwards. Mr Greenspan is well known for his obsessive scrutiny of economic data, and his analysis is clear: the underlying economic trend is for modest but healthy growth this year. He revealed that the Fed has revised its own forecast for economic growth in 2002 to between 3.5% and 3.75%—that is slightly higher than when Mr Greenspan presented his last report, in February. 

Fond as he is of numbers, though, Mr Greenspan knows that other factors can be equally important in times of stockmarket upheaval. Chief among these is confidence—in the economy, in companies and, on this occasion, in America’s capitalist system itself. The Fed chairman was frank about the shortcomings of some companies, and the extent to which recent corporate scandals have alarmed investors. He did not mention any of the culprits by name, but it is clear he was talking about Enron, WorldCom, Andersen and others. Shareholders are concerned now because, as Mr Greenspan pointed out, they had not been given access to accurate information about the companies they had invested in.  

The problem was, said Mr Greenspan, that "lawyers, internal and external auditors, corporate boards, Wall Street security analysts, rating agencies, and large institutional holders of stock all failed for one reason or another to detect and blow the whistle on those who breached the level of trust essential to well-functioning markets." According to the Fed chairman, the root cause of this breakdown was the stockmarket boom of the late 1990s: this "arguably engendered an outsized increase in opportunities for avarice". In other words, corporate bosses got greedy. They tried to cream off too much of the stockmarket gains for themselves. 

This could all, in Mr Greenspan's view, be the result of a "once-in-a-generation frenzy" that might already be over. But that does not reduce the need for corporate-governance reform, apart from anything else because people have short memories. There has to be a better balance between shareholders and corporate officers. And Mr Greenspan ultimately laid the blame for any imbalance in the relationship firmly at the door of what he called "failed CEOs". A chief executive who wants objective accounts gets them, said Mr Greenspan.  

This was tough talking from the mild-mannered Fed chairman. But he seems genuinely worried that a fundamentally healthy recovery could yet be undermined by the backlash against recent corporate failures. He pointed out that, ironically, one of the elements of executive remuneration that has recently caused trouble, share options, could have helped create a misleading impression of profits growth in the past couple of years. This is because share options were not counted as an expense for companies, enabling them to show higher profits. As share options lost their value because of declining share prices, they were replaced by other forms of pay which did hit the bottom line, and so reported profits suddenly appeared lower. More consistent government measures of profits, claimed Mr Greenspan, show a much sharper upturn since the third quarter of last year. 

If markets did not find that reassuring, they should derive some consolation from Mr Greenspan’s indication that interest rates will not rise any time soon. Using the familiar coded language with which he discusses such sensitive issues, the Fed chairman gave a pretty clear signal that interest rates will not rise until he is more certain that the recovery will not be dented by unexpected shocks or, though he did not say this explicitly, by further panic in the markets. It was the best he could offer. Given how little room the Fed has for manoeuvre—interest rates are already at their lowest for 40 years—a further cut is not much of an option.



MANILA, PHILIPPINES | Thursday, July 18, 2002

Fatal Mix: Capitalist Crisis and Corporate Fraud


(Mr. Bello is the executive director of Focus on the Global South, a research, analysis, and advocacy program of the Chulalongkorn University Research Institute.) 

The unraveling of the reputations of firms that were once the toast of Wall Street continues and the end is not in sight. 

But one thing is certain: already fragile prior to Enron, the legitimacy of global capitalism as the dominant system of production, distribution, and exchange will be eroded even further, even in the heartland of the system. 

During the halcyon days of the so-called "New Economy" in 2000, a Business Week survey found that 72% of Americans felt that corporations had too much power over their lives. That figure is likely to be much higher now. 

Like the massive overvaluation of stocks that led to the dot-com collapse on Wall Street in 2000-2001, corporate fraud was an essential feature of the "New Economy." To understand this, one must begin with two developments that were central to the dynamics of global capitalism in the 1980's and 1990's: finance capital's becoming the driving force of the global economy, and the crisis of overcapacity or overproduction in the real economy. 

The last two decades saw the deregulation of financial markets, with barriers to the movement of capital across borders and across sectors -- e.g., the US Glass-Steagall Act banning financial institutions from engaging in both investment banking and commercial banking -- being progressively eliminated. The result was a tremendous burst of speculative activity that made finance the most profitable sector of the global economy. 

So profitable was speculation that in addition to traditional activities like lending and dealing in equities and bonds, the eighties and nineties witnessed the development of ever more sophisticated financial instruments such as futures, swaps, options -- the so-called trade in derivatives, where profits came not from trading assets but from speculation on the expectations of the risk of underlying assets. 

The attractiveness of finance relative to other sectors of the economy, like trade and industry, was underlined by the fact that in the late 1990's, the volume of transactions per day in foreign exchange markets came to over $1.2 trillion, which was equal to the value of trade in goods and services in an entire quarter. 

With the speculative sector awash in cash, much of it from outside the US, industrial firms became more and more dependent on massive credit and the sale of shares for financing instead of on retained earnings. 

This dependence became even more marked in the late 1990's, as the boom of the Clinton years began to taper off. This boom had resulted in a burst of global investment activity that led to tremendous overcapacity all around. 

By the late 1990's, the indicators were stark. The US computer industry's capacity was rising at 40% annually, far above projected increases in demand. The world auto industry was selling just 74% of the 70.1 million cars it built each year. 

So much investment took place in global telecommunications infrastructure that traffic carried over fiber-optic networks was reported to be only 2.5% of capacity. Retailers suffered as well, with giants like K-Mart and Wal-Mart hit with a tremendous surfeit of floor capacity. There was, as economist Gary Shilling put it, an "oversupply of nearly everything." 


Profits apparently stopped growing in the US corporate sector after 1997, leading firms to a wave of mergers, some motivated by the elimination of competition, others by the hope to extract renewed profitability from some mystical process called "synergy." 

The most prominent of these were the Daimler Benz-Chrysler-Mitsubishi union, the Renault takeover of Nissan, the Mobil-Exxon merger, the BP-Amoco-Arco deal, the blockbuster "Star Alliance" in the airline industry, the AOL Time Warner deal, WorldCom's takeover of long distance carrier MCI. 

In fact, many mergers ended up consolidating costs without adding to profitability, as was the case, for instance, with the much-ballyhooed AOL Time Warner deal. 

Where mergers could not be effected, cutthroat competition ruled, resulting in bankruptcies such as that of giant retailer K-Mart. 

With profit margins slim or nonexistent, survival increasingly meant greater and greater dependence on Wall Street financing, which increasingly came under the sway of hybrid investment-commercial bankers like JP Morgan Chase, Salomon Smith Barney, and Merrill Lynch, which aggressively competed to put together deals. 

With little to show in terms of an attractive bottom line, some firms took the route of trading future promise for hard cash in the present, something that creative investment managers were especially good at in the high technology sector. 

It was this seemingly innovative technique of trading on illusion that resulted in the stratospheric rise of share values in the high technology sector, where they lost all relation to the real state of companies. 

Amazon.Com, for instance, saw a constant rise in its share values even as it had yet to turn a profit. Other start-ups lost all connection to production and served mainly as mechanisms to inflate share prices to enable venture capitalists and managers with stock options to make a killing from an early sale, after which the firm was left to languish and eventually collapse. 

But in the end, trading on illusion could only get you so far. Reality intervened in 2000, resulting in the wiping out of $4.6 trillion in investor wealth in Wall Street, a sum that, as Business Week pointed out, was half of the US Gross Domestic Product and four times the wealth wiped out in the 1987 crash. Its boom extended artificially for three or four years by the dot-com craze, the US economy entered into recession in 2001. 

And precisely because reality was masked so long by the illusion of prosperity, the longer it would take to rectify the massive structural imbalances that had built up, if at all. 


In the end, there was no getting around the fact that your balance sheet had to show an excess of revenue over costs to continue to attract investors. 

This was the simple but harsh reality that led to the proliferation of fancy accounting techniques such as that of Enron finance officer Andrew Fastow's "partnerships," which were mechanisms to keep major costs and liabilities off the balance sheet, as well as cruder methods like WorldCom's masking of current costs as capital expenditures. 

In the context of deregulation and the benign approach to the private sector that accompanied the reigning neoliberal, "hands-off-business" outlook, it was easy for such pressures to erode the so-called "firewalls" -- between management and board, stock analyst and stockbroker, auditor and audited. 

Faced with the common specter of an economy on the downspin and slimmer pickings for all, the watchdogs and the watched threw off the pretense of being governed by a system of checks and balances and united to promote the illusion of prosperity -- and thus maintain the financial lifeline to unsuspecting investors -- as long as possible. 

This united front could not be maintained for long, however, since it was very tempting for those who knew the real score to sell before the mass of investors got wise to what was happening. In the end, business acumen was reduced to figuring out when to sell, take the money, and run...and avoid prosecution. 

Enron CEO Jeffrey Skilling read the handwriting on the wall, resigned, and made off with $112 million in the sale of his stock options a few months before the fall. Not so lucky was Tyco's Dennis Kozlowski, who was not content with raking off $240 million and was still trying to milk his cash cow when his company went under; he is currently under prosecution for tax evasion. 

More culprits will be unmasked no doubt, and who knows, the cast of odious characters may ultimately even include George W. Bush and Dick Cheney. 

But it is worthwhile to remember that while there are villains aplenty, it is the dynamics of the system of deregulated, finance-driven global capitalism that is the central problem, and this is not something that can be banished by Georgian pieties like "There is no capitalism without conscience," or addressed with quaint solutions like "good corporate governance." 

In the meantime, foreign investors are fleeing the US, the dollar is on a downspin, and the overhang of overcapacity is greater than ever, globally. The mixture of this deepening structural crisis of the economy with the crisis of legitimacy of neoliberal capitalism promises a volatile future indeed.