Serious or systemic fraud is a serious matter for many economic and moral reasons, including the fact that a minimum level of honesty and trust is necessary for a free, thus efficient, society. But the continuous invention of new regulatory frauds undermines the gravity of real fraud. What we have seen since the beginning of the 21st century looks like a repeat of the witch-hunt of the 1980s, but with the reinforcement of the governance craze and ten more years of anti-capitalist business ethics. FULL ARTICLE
Source link: http://archive.mises.org/3962/the-anti-capitalistic-inquisition/
The Anti-Capitalistic Inquisition
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Was this a justification, an apologia for the greatest crimes of the century? I read this in total disbelief! Milken’s junk bond/savings and loan scam wasn’t just a crime it was Treason. It cost the taxpayer a trillion dollars. The 7 trillion dollar Nasdaq collapse cost American investors their life savings and was delicately timed to capture the Boomer inheritances. These guys should be tied to an anthill and drenched with molasses where they can ponder the joys of being eaten alive the way they ate alive middle America.
Q.E.D.
In general I agree with Pierre’s position, the government is on somewhat of a “witch hunt” of CEO’s for purely political reasons. However, I would argue CEO’s that justify their multi-million dollar salaries by claiming special expertise and skills can not then claim they were unaware of what was happening within their companies. They invariably sound like Louie, the Casablaca Prefect of Police, who was “shocked, shocked to find gambling going on” in Ricks Cafe. If they claim the right to earn million dollar salaries then they have to accept the responsibility that comes with it, to do otherwise is to commit fraud.
Liberty will die in a society where no one takes responsibility. Or will assign it. Worldcom and Enron were frauds because they manipulated accounts. You can say the stockholders could bail out anytime, but if they stayed based on intentionally wrong information, they have been defrauded. The boards generally accept what the CEO and other officers do until something goes visibly wrong – and in this case it was too late as it ended up in a death-spiral.
The article says to search for the truth, but in general the whole purpose of having a CEO, CFO, and board are to have people who will be responsible for what happens.
It implies they had no responsibility for the ponzi scheme structures employed to boost their bottom line and stock price. Even if your dog bites someone, you are responsible because you must control your dog.
Who created or knew about the ponzi structures? The people at the top, mainly. Is what they did legal? Maybe in some sense – the FASB rules are strange, but in the Enron case they used a gay cohabitant where if it was a spouse it would have been impermissible.
You can argue about the law’s defects, but then where did the fraud come from? Using loopholes to hide things for as long as they could? They acted morally evil, but technically legal so all the losses for all concerned are an act of evil but no one should be prosecuted?
Enron and Worldcom had either culpable negligence (hiding debt and hoping it wouldn’t matter – you can pretend you don’t know or won’t suffer consequences, but that doesn’t prevent the consequences from occuring as any reasonable person would point out), or worse, they intended to loot the company.
I would not add Martha Stewart to the list as she did nothing I can see wrong – she wasn’t prosecuted for turning MSO into a ponzi scheme, and it isn’t and likely won’t ever be. Just because the government prosecutes someone doesn’t mean they are an angel. “Release Barabbas”?
The article seems to be written as if the entire loss at WCOM and ENE were simply unfortunate accidents where no one could have prevented the collapse. Instead, there were carefully crafted structures to hide debt so as to make the companies appear to be going concerns instead of shells – until the debt came due. This was not and could not be done without the knowledge of people near the top, and even so those at the top had the responsibility to check.
The same as if you pay your mechanic to check your brakes, and he says he checked them and they were fine, but you crash the next day because they had a glaring defect. Or you pay the senior mechanic who tells the junior mechanic to check. Maybe 99.9% of the time the brakes will be fine without checking, but in finance, perverse incentives will cause perversion as profit sharing is greater when you show profits – either fake or real.
The easiest way to demonstrate that any of the people you say were NOT responsible for the collapses is to explain who IS responsible.
Who would you prosecute and with what charge?
“Who created or knew about the ponzi structures? The people at the top, mainly.”
In other words, you’re saying, let’s go after the President and Congress. No argument here.
HI MY NAME IS PONZI AND HAVE I GOT A DEAL FOR YOU
We do well to remember that the corporation is an “artificial person” created by the state and is thus an extension of it. We should not be surprised, then, at the abuses that arise when it grows to excess, for as Bruce Brown writes in The History of the Corporation — http://www.astonisher.com/archives/corporation/corporation_afterword.html — “Greed, cruelty, the will to control and own, these are basic human qualities that take on a much larger role in corporation-dominated cultures, simply because the corporation greatly extends human power to carry them.”
The corporate state is just the state, in other words, and plunder is its middle name.
Hi. My name is Kenny Lay Jr.
I have a wonderful company. You see, we have a certain amount of oil and natural gas on hand. However, I have created shell companies off shore, to double or even treble the on hand stated amount of inventory. Then we are going to hedge the heck out of it.
Heck, we are even going to sell it back and forth to our own selevs. Yep!! That’s right.
Clever, Ehhh? Why the President of these United States calls me “Kenny Boy!’ And right to my facde no less.
WHOA!! Wait a minute. I’m just the CEO. I don’t know nuttin’ about that nothing!. And if you say I did, I’ll call you a liar to your face.
Its all those accounting people and Vice Presidents all a running around and all. ME? I ain’t responsible for taking your , I mean THE money. The money I honestly own from my paycheck. After all, I’m the Ceo, remember?
Some accountants in my company are during this on their OWN initiative. I’m just racking in the bucks.
So if you want to invest, please send US$ 1,000.00 to the following address:
Kenny Boy’s Oil and Natural Gas Co.
666 Easy Street
Houston, Texas 01922
And please make it cash, and please, small bills only.
Postal Script:
Any time you want to, you can sell your stock. But YOU are responsible for knowing what the heck is going on in my company. NOT me! Get it?
Quod Erat Demonstratum Part II
Respects,
Joseph Zack
Post Postal Script:
Pssssst!!!! You can send ME your money too. I’ll invest it real good for me, I mean YOU!!.
HaHaHaHa
Dear Professor
I hope you are not teaching your concept to your students. Your make light of Security Fraud and compare it to the witch hunts of the old days. The scams of these people cost the public millions of dollars.
How much of a kick back, or public relation fee did you receive for writing the article?
Bill
We seem to forget that the reason to purchase stock in a company is to become an owner of that company — American’s treat the stock market like online gambling. It is not designed to get rich quick, the stock markets are designed to transfer ownership. Investors should only be pruchasing stock in companies they wish to own and watch over. Vigilant shareholders will ensure that a company does NOT commit fraud or at least minimize fraud.
The answer is not more regualtion or finger pointing or absolution of irresponsible guardians of shareholder’s money. The answer is vigilant, involved, educated shareholders; little or no government regulation and full-disclosure. As long as a shareholder has access to all financial documents of a corporation (not the public at large or by proxy through their elected reps, just shareholders)then fraud is difficult for managers to engage in.
People need to quit chasing sexy returns, which encourage managers to skew the numbers. Buy stock in a company you want to own becuase the corporation’s operations, the sale of goods and/or services is profitable, not becuase of an increasing stock price. As an owner of a company you want net profit, which is a dividend — you know real money. Moreover, the government’s intervention and stock-options for execs invite fraud.
Let the market work, well, like a market — hands off for the state — hands on for the owners.
The issue with securities fraud is, as always, that the government “protection” of investors created the false sense of security – so they neglected to do any due diligence of their own.
Without government “guarantees” of quality of information the investors would have to defend their interests by actually participating in the company management, or by hiring fund managers who actually manage.
In any case, a fool which gives his money to strangers on the word of other strangers that this is a safe bet – fully deserves to lose.
Interesting how many statists post on the Mises Economics Blog. Seems like the anti-statist message must be getting through, and the statists are beginning their death throes. (No tribute to war criminal Cheney intended.)
Much of the difficulty in the issues here stems from statism having conditioned people over many generations to be unwilling to take responsibility for their actions, and how democracy plays off the envy of the masses toward the most financially successful.
Traditionally, investors have understood that they must view their investments skeptically, staying on the lookout for shenanigans and other risks. Now if they’re lied to or mislead, however ambiguously, Big Brother — spearheaded by prosecutors and politicians seeking career advancement — is eager to hang somebody up to dry as a trophy, by hook or crook.
There are two general policy objections I can see to this kind of thing. (The dubious constitutionality of the federal regime microregulating businesses and investors who are merely exercising property rights is a legal objection, to be discussed another day.)
The first is that such regulations provide perverse incentives to investors to invest poorly. Many investors now figure that Big Brother looks out for them, ensuring shareholder corporations stand behind their hype and operate in good faith. Rather than rigorously investigating their prospective stock purchases and demanding reliable accounting procedures, people are encouraged to believe government will make their investments safe. These are foolish and irresponsible habits for investors, and place great power in the hands of the eminently corruptible, inefficient, and despotic State.
The second policy objection is that, to get a handle on all its prosecution and persecution of real or imagined wrongdoers, Big Brother increasingly imposes rigid, inefficient, and arbitrary rules that constrain the operations of business. Rather than allow executives and board members the flexibility and experimentation to optimize their operations, businesses are now crippled by sclerotic constraints as a preventative in case somebody tries to do something shady.
It’s as if the government was concerned that private citizens might engage in acts of, say, burglary, or “terrorism,” and decided to require everybody to establish a tight daily schedule, submitted to the government for approval and enforcement. Of course, the “cure” would be far worse than the sum total of such crimes. (And in the end would probably do little to prevent such crimes anyway.)
About some of the post above:
“Tim Elrod” blames the S&L collapse on Milken: Why, that rascal cost us $7 trillion. Makes Bush 2′s imperial wars on Iraq and Afghanistan sound like a bargain, doesn’t it?
Somehow the chartering policies, microregulation, and taxpayer-backed compulsory insurance all imposed by Big Brother get a free ride on this one. Why, it must be some rich scoundrel who didn’t follow Big Brother’s rules to a “T,” preferring to facilitate the exercise of property rights by private individuals in what we’re constantly told is a free market, who’s at fault for that round of the business cycle.
Finally we have “Bill,” who, with infinite subtlety and presenting no evidence but his own bigoted cerebrations, accuses Lemieux of taking “a kick back [sic], or public relation [sic] fee” for offering his carefully argued (if too Chicagoan and insufficiently Austrian) commentary on one of the latest advances of statism in America.
There’s no doubt that some CEO’s, CFO’s, appropriated money that belonged to the owner’s, i.e. stockholders of the company. The property rights of the owner’s where violated, thus they committed fraud, or theft however you want to call it. Some appropriated funds by misrepresenting the financial statements to attract more loans or keep the stock price up.
In the cases where this was genuinely so the audit firm had a major part in it. It even went so far as Arthur Anderson helping Enron to set up Special Purpose Entities(SPE’s, like “the raptors”) to get billions of debt of the financial statements. The consequences of these actions are well known, from companies being forever scared to companies being completely wiped out. These people were guilty, but the current witch-hunt, convincingly described in the article, is the government trying to convince the public that all companies are managed by greedy criminals. With the new laws of Sarbanes-Oxley the CEO of a company can’t even sneeze his nose without being found guilty of some kind of fraud.
Who can still live in a fantasy that government doesn’t interfere with business, with US GAAP now running over 110.000 pages. What would happen if another company falls, would the government just stop bothering with new laws and just take over all companies, in the public’s interest? Sadly it looks like where heading more and more that way.
In the same vein as my above post, it’s worth noting that shareholders in public corporations do not actually own a piece of the company or have title to any of its property. On the contrary, as Adolph Berle and Gardiner Means write in their classic 1932 work “The Modern Corporation and Private Property”:
“Private property in the share of stock still continues, since the owner possesses the share and has power to dispose of it, but his share of stock is only a token representing a bundle of ill-defined rights and expectations. It is the possession of this token which can be transferred, a transfer which has little if any influence on the instruments of production.”
While some may argue that corporate governance has improved substantially since the creation of the SEC, in reality nothing has changed at all beyond the fact that the marriage between Big Government and Big Business is stronger than ever. One need only look at the recent passage of CAFTA to know that this is true.
I second Averros’ opinion: the government securities fraud “protection” induces lax owner oversight. Shareholders, thinking they are safely protected from fraud, have become lazy and irresponsible owners.
Tim Elrod
“Milken’s junk bond/savings and loan scam wasn’t just a crime it was Treason. It cost the taxpayer a trillion dollars.”
How so? The estimated cost of the S&L Bailout was only $200 billion. The actual cost was considerably less – by the time the RTC got around to liquidating some of the seized S&L’s the market had turned around and they were no longer insolvent. The aggregate S&L Junk Bond portfolio was $12 billion, not all of them put together by Milken. Most of the losses were not caused by defaults in the bond portfolios – The FIREA legislation forced the S&L’s to liquidate all Junk Bond Portfolios. The loss of liquidity, and the resulting fire sale and cherry picking that ensued, generated nearly all of the Junk Bond losses. After Milken pleaded guilty, Judge Kimba Wood found that the alleged losses resulting from fraud and other illegal transactions only amounted to $600,000. If $600,000 or even $12 billion is equal to $1 trillion, I guess I should have stayed in Astrophysics!
tz
I agree that there was a massive amount of fraud at Enron, (and all the other companies who colluded), and this should not in any way be condoned. However, the business failure preceded the fraud. Business failure is part and parcel of a healthy free-market economy – it is nature’s way of weeding out badly run or mal-invested companies. The fraud was committed in trying to conceal the true financial state of the company in the hope that the market would turn around and generate a windfall to bail them out. Whether Ken Lay was a willing participant in this fraud, I do not know. If he had known, his best choice would have been to retire, and cash out as many of his shares as possible. As it was, he got left holding the “Old Maid” card to the tune of $100 million.
My comments on this topic were too long to post here. I’ve posted them seperately on my own site instead. You can find them here.
I question how Worldcom can be considered a “fraud” for going bankrupt, but AT&T is fraud free while losing 95% of their market value. Sprint, clean as a whistle, losing 97% of its market value etc.
This reminds me more of the French Revolution than a witch hunt. If you fail, you must have committed a crime.
Wouldn’t someone committing a crime be more likely to increase the market value of their business than to wipe it out?
JBP
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