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Friday, May 26, 2006

Jump on In

Is it safe to go back in the water? Daniel Gross points to a few shark fins in the surf:

Lay and Skilling Aren't the Only Guilty Ones, by Daniel Gross, Slate.com: Just minutes before the verdict in the Ken Lay/Jeffrey Skilling trial was announced, CNBC anchor Bill Griffeth asked former SEC Commissioner Laura Unger whether it would, once and for all, bring down the curtain on the corporate scandals of the 1990s. A dutiful guest, Unger replied: "I think this is the final page of the chapter."

The exchange neatly set up what is likely to be the business world's reaction to the trial's resolution. ... The upshot: Nothing to worry about anymore, it's safe to buy stocks. And you can bet that CEOs and the Wall Street Journal editorial page will soon be telling us that, now that the evildoers have been rooted from the system, it's time to scrap Sarbanes-Oxley and other post-scandal regulation.

It would be nice if this vision of a sparkling clean corporate America were true. It would also be nice if everyone could have a pony. Alas, the accounting games and executive-compensation excess that began in the 1990s are still very much with us. Some of the most obvious offenders have been caught, but huge amounts of corporate corruption remain.

Consider what's been making the headlines in the business press. On Monday, the Securities and Exchange Commission levied a whopping $400 million penalty on Fannie Mae to settle charges that the mortgage giant fudged earnings ... so that executives ... could receive larger bonuses. The accounting problems persisted well into the Sarbanes-Oxley era...

The biggest business news story of recent weeks is the Wall Street Journal series of reports on options backdating. ... [L]ead reporter James Bandler, working with number-crunching academics, unearthed several instances in which companies, including blue-chip firms..., repeatedly granted options to top executives on days when stocks were at or near their low points for a quarter or year. ... The odds of such a propitious set of options grants were calculated at one in 300 billion. The article helped set off a series of federal investigations and has already caused the resignation of two CEOs. Yet until enterprising journalists and a few academics pointed out the problem, Wall Street's highly paid analysts and the beefed-up Securities and Exchange Commission enforcement division hadn't noticed anything amiss. Clearly, the bugs in the system remain...

Finally, as we labor to congratulate the efficient marketplace on rooting out bad actors, we should bear in mind that Michael Kinsley's law applies as much on Wall Street as it does in Washington: "The scandal isn't what's illegal; the scandal is what's legal." And the prevalence of perfectly legal shenanigans should be sufficient to make us realize that a few years of Sarbanes-Oxley and these Enron verdicts haven't served to clean up the governance of publicly held companies...

    Posted by on Friday, May 26, 2006 at 12:33 AM in Economics, Policy | Permalink  TrackBack (0)  Comments (4)

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