“It would be unthinkable to deprive people of my expertise.”-Harvey Pitt, chairman of the Securities and Exchange Commission, on the S.E.C.’s handling of his former clients’ cases.
In the old days, the maxim used to be that when the shoeshine boys and manicurists started passing out stock tips, it was time to sell out and head for the hurricane cellar. If the doodleheads who didn’t know their arse from a hole in the ground were bidding up the price of securities and running around in hysterical glee telling each other how rich they were getting, it was a sure sign of an impending stock-market crash.
What we’re passing through now is different. Over the last 20 years, Presidents, the Congress and the business world have forced through a basic change in the way people save. Except for government workers and politicians, pensions are a thing of the past, and investing in the stock market has become the means by which millions-who’ve been told there’s no other practical way to save for their retirement-insure their futures.
Now hundreds of billions in savings have been washed away. The last time something of this sort occurred was in 1933, when the nation’s banks collapsed, taking with them the life savings of perhaps half the country’s families. As a result, the federal government enacted bank-deposit insurance, but-wouldn’t you know it?-this time the money wasn’t in the banks; it was unprotected again in the stock market. So what to do?
Rumors on the Internet have it that the Federal Reserve Board is going into the stock market and will keep buying shares until the prices are back where they ought to be, wherever that is. Only with special application could anybody come up with a worse idea for dealing with the problem of how to provide a modicum of retirement protection to a nation that has most of its money in the market. The corruption and idiocy that would follow the government’s buying stocks would dwarf all previous scandals.
In the 1930’s, the government went further than simply insuring bank deposits. It brought forth the Securities and Exchange Commission, to which it gave the task of making rules against cheating and enforcing them. The arrangement has worked reasonably well over the years. It helps when luck and good politics give us an S.E.C. chairman of the stature of Arthur Levitt Jr., but he went out of office with Bill Clinton, to be replaced by Harvey (the Ho) Pitt, yet another of George W. Bush’s appointees who entered this important job pre-slimed-o’er with the frog spittle of conflicted interest. (Also dripping with the exudate of reptilian glands is Larry Thompson, the Bush appointee who is to bring sticky-fingered C.E.O.’s to justice. Mr. Thompson comes fresh from a company, Providian, which has had to pay more than $400 million to settle charges of consumer and securities fraud, but hey, good buddy-it takes one to catch one.)
Punishment in these matters is less important than deterrence, and thus it was that Franklin Roosevelt’s New Deal-moving to prevent another bank collapse-included laws that prohibited banks from entering into non-banking businesses that could entice them into disaster. The 1980’s and the implosion of the savings-and-loan industry demonstrated that banking institutions, even when confined to the purposes spelled out in their charters, were able to bring off a horrendous financial shipwreck.
Now, in hopes of no more Enrons, it is proposed that accounting firms be legally prohibited from doing consulting work. The idea behind the proposal is valid: It’s inherently dangerous to have what is advertised as an outside auditor helping to run the company it’s auditing. In other words, by prohibiting an auditor from selling the two services to the same company, the temptation to wink at wicky-wacky bookkeeping is eliminated. Nevertheless, trying to prevent crime by making crime hard to commit may work with individuals (i.e., safes, TV cameras, electric fences and so forth), but not with institutions. If you want the auditor to connive in cooking your books, a rule barring him from acting as your business consultant isn’t going to stop you.
What will stop you is the threat of exposure. What’s needed is a federal agency with the I.R.S.-like power to examine the books of any publicly owned corporation. Call it the Board of Audit, and staff it with enough people that it can do a certain number of random audits every year, plus extras determined on the basis of tips, suspicions and whistler-blower information. Armed with subpoena powers, the Board of Audit would quietly go in and check things out and quietly leave if nothing were amiss-but if there was something wrong, it would have the power to issue a simple statement saying that the financial statements of the company in question do not reflect its actual condition. You may be sure that the next day, the stuffings will have been knocked out of that company’s stock. As a further deterrent, if there is subsequent litigation, the Board of Audit’s report could be made public and used as evidence in court. The Board of Audit would not have rule-making powers or the power to punish, other than through publicity.
Had the published financials of every corporation in the country been reasonably honest and approximately accurate, a lot of people would not have been cheated, but the market probably would have gone down anyway. As far as we know, only a few-albeit large-corporations engaged in dishonest manipulations. The worst losses inflicted on so many families’ savings are not attributable to crookedness, but to a market that acts like a casino instead of a sober mechanism for the placement of investment capital.
Everybody’s buying and selling stocks in hope or fear of their going up or down in price. That’s an indefensible basis for a whole nation’s personal-savings program. Investments bought for retirement, for education, for prospective medical bills shouldn’t vanish simply because Wall Street rolls snake eyes. Nor would people’s savings disappear as they do now if stocks paid dividends. How different our situation today would be if most of those stocks whose value has gone down by 10 to 40 percent were paying 5 percent dividends. Imagine what that would mean to retirees who are contemplating going back to work or forgoing their prescriptions.
Companies can’t be forced to pay dividends, nor should they be-but they can be pressured into it by the investing public. All that’s needed is a slight change in the income-tax law, a change long wished for by business organizations-eliminate the tax on dividends to people with gross incomes of, say, $300,000 or less. The big rich would still have to pay an income tax on their dividends. For decades, conservatives have complained that dividends are double-taxed, once as a corporate-profits tax and then as an individual income tax. The loss of revenue might be made up by raising the capital-gains tax a point or two.
For good reasons, some companies don’t want to pay dividends. Andrew Carnegie never did, nor did I.B.M. during the decades of its greatest power and dominance, nor does Microsoft, and that’s O.K. But if the tax on dividends is lifted, C.E.O.’s who want their companies’ share prices to go up will pay dividends. It’s not for every company, but enough companies would begin to pay so that people looking for solid, retirement-type investments would have a place to go.
These suggestions are offered with the rock-hard conviction that the power of lobbyists being what it is, they don’t stand a chance of being considered.