Washingtonians have been diverted of late by a dumpy, bearded, middle-aged man running around on Pennsylvania Avenue wearing only white patent-leather, calf-length boots, a blue wig, a thong and two tassels attached to the silver rings in his nipples. The man’s name is Harvey Pitt, the chairman of the Securities and Exchange Commission, but you must not conclude on the basis of his apparent numerous conflicts of interest and his ex parte meetings with the securities industry that he is a ho. Take his word for it: He’s no ho, merely an eccentric dresser.
While Harvey the ho is running the streets looking for johns, the commission he heads is doing as little as it can to restore a degree of trustworthiness to the stock-and-bond business. The looting, the false books, the misleading information has, by most estimates, scared a significant number of investors, American and foreign, out of the market. If Wall Street is going to emulate Buenos Aires or Moscow, a certain number of investors are going to yank Harvey the ho’s rings, snap his thong and hie themselves and their money elsewhere.
It’s hard enough to pick winners even when accurate information on their financial condition and business operations are available. So many forms of deception, misdirection, sly confusion, mystification, collusion and trompe d’oeil bookkeeping are being practiced by major corporations that buying common stock is buying a pig in a poke. From Enron to Microsoft, every manner of company is being accused of indulging in practices meant to give would-be buyers a false impression of the firm’s condition. It just never stops. Halliburton is accused of accounting flimflammery while Dick Cheney was running it, thus adding to the administration’s growing reputation for probity.
With lobbyists and campaign contributors from the accounting, legal and securities industries tucking wads of green into the thong strings of Pennsylvania Avenue’s hos, the chances of the immediate and dramatic rectification the situation calls for actually happening are somewhere between dim and nonexistent. Much has been made of New York Attorney General Eliot Spitzer’s extracting a $100 million fine from Merrill Lynch for touting stocks that it knew were dogs to its customers. The firm’s dishonesty would have made its founder, Charlie Merrill (1885-1956), vomit.
Given who and what Charlie Merrill was, that the firm he started and which carries his name would cheat its customers this way is especially galling. More than any other single person, Merrill, who vowed to “bring Wall Street to Main Street,” got the American middle class to buy securities. Under Merrill, salesmen were paid straight salaries so they had no incentive to lie to their customers; he ended all those tricky, secret service charges; and his was the first firm to print annual reports that explained what the firm was doing, what it owned and what its partners owned, so that any possible conflicts of interest were on the table for all to study. He put out a magazine, he staged a “How to Invest” show, and he made a point of seeing that the firm spoke in layman’s English. As a broker, he did what a broker should do: Instead of playing sneaky, lucrative games, he channeled capital into new industries like the movies and chain stores, which needed start-up money. He had no peer as an honest straight-shooter. As for today’s Merrill Lynch, let it be judged by its record.
Attorney General Spitzer is accepting compliments for the $100 million fine, but that’s peanuts, and a small bag of peanuts, when we recollect that the hundred mil will be classified as a tax deduction. (In the tax collector’s eyes, expenses associated with bilking one’s customers is an ordinary cost of business.) The settlement by which Merrill Lynch admitted no wrongdoing doesn’t bode well for future innocents who walk into the company’s offices. The few changes agreed to fall far short of making sure the next wave of suckers gets an even break.
Merrill Lynch didn’t flinch at the $100 million; that’s what some C.E.O.’s make in a year. One of the parts of our business system that is badly out-of-whack is the compensation going to banks, brokerage houses, lawyers and accountants. It is insanely out of proportion to the services rendered, but an idea for fixing it is hard to come by, though there are steps which can be taken that will help raise the general level of transparency (the word that the big shots use when they mean “honesty” but just can’t get it out of their mouths).
Standard & Poor’s, one of the nation’s important suppliers of financial info about companies, says that it’s going to change its presentations so that the costs of these humongous stock options granted to executives will be taken out of the footnotes and put where investors can see them. The New York Stock Exchange is thinking about insisting that the boards of the companies listed on the exchange must be comprised of a majority of independent members-that is, people who don’t work for the company and aren’t financially connected with it.
That’s a start, but more’s needed. Some thought might be given to the creation of a corps of professional board members, who go to school to learn the work. One of these board pros would be placed on the boards of companies over a certain size. Since they will not have been chosen by the stockholders, they would have no power to vote, but they would have the power to speak at board meetings and serve on board committees. Whenever a significant decision is made by the board, the non-voting pros would be required to write a report or memo to the other members of the board, giving their opinions. A copy would also be filed with the S.E.C. and kept secret, but available as evidence in the event of a government investigation or a stockholder suit.
This person would not be sitting on the board to represent the “public.” The public doesn’t own these companies; the stockholders do, and it would be they whom the non-voting member would represent. Time was when company stock was in the hands of a few hundred people or less, and they tended to be geographically close to the company’s headquarters. If they weren’t active owners, they were cognizant owners-but that was a century ago. Today, owners-who number in the thousands, live around the globe and cannot be effectively organized-have no control over the executives who are robbing them blind by taking inordinate compensation, watering the stock to give themselves indefensibly large options, and jeopardizing the company’s long-run strength in favor of short-term pro-management looting.
The list of corrective steps the government might take is long, but there’s a limit to that kind of action. One thing the government can’t do-but the securities industry can-is educate investors to look for stocks that pay dividends. We have a generation of investors brought up to believe that you buy stocks with “growth potential.” Growth potential isn’t the same as actual growth. Dividends can be iffy, too. The Pennsylvania Railroad eventually went belly up, but before it did, it paid a dividend every quarter for more than 100 years.
In flat market periods, stocks that pay dividends but don’t appreciate are better than stocks that lie flat and pay nothing. For the millions who buy stocks for their retirement, having a portfolio that pays something four times a year is more appealing than one that keeps its owners on their knees praying the Market God has been kind to them.
Managements under pressure to produce regular dividends will not be able to play some of the games they’ve been playing these days. You can’t announce phony profits when you’re obliged to use some of them to pay the dividend. The burden of making real money for the owners will impose a significant degree of discipline on wild-ass managers.
These past weeks, the business press has been full of sensible proposals, new laws and measures the S.E.C. might undertake, but Harvey the ho is not at his desk. Harvey the ho is in mid-frolic; Harvey the ho is on Pennsylvania Avenue, bending over and wiggling his dasypygal and hirsute derriere-and boy, can that man stop traffic.
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