Some Financial Villains-to-Be When
the Blame Game Starts
IHT Opinion Page November
By Philip Bowring
Hong Kong: The Nasdaq index
has hit another record. Alana Greenspan is in low-inflation, high-productivity
heaven. The 70th anniversary of the 1929 crash has passed peacefully.
And that Depression-era relic, the Glass-Steagall Act, is finally dead,
opening the way for ever bigger financial combines.
So it is time to ask not
when Wall Street latest house of cards comes tumebling down but who
is going to get the blame when it does.
That a huge issue is looming,
there is no doubt. The politically important, long-spoiled baby boomer
generation will be faced with unpleasant alternatives. If there is a
crash, much of their (never large) personal savings will be wiped out.
If there is not a crash many with defined-contribution pension plans
will find that though they may feel rich the income a million dollars
in S&P 500 stocks is a mere $13,000 a year.
Yields on mutual funds are
negligible after expenses. The assumption that capital values will continue
to grow is just the trap the Japanese fell into.
Glass-Steagall is testimony
to where the politicians of the Depression era sought to place the blame
- on inappropriate links between commercial and investment banking activities.
We can leave aside whether
this really was the root of the problem. Today the commercial banks
account for less than a quarter of financial assets compared with more
than half in 1929. But it seems reasonable to suppose that it takes
an informal coalition of interests, not just investor naivete or central
bank misjudgment to generate a boom of 1929 or 1999 proportions.
In no particular order, here
is a list of some of the potential targets of blame:
* Investment banks and other hugely profitable promoters of stock offerings
based on ludicrously exaggerated estimates of corporate earnings potential
and careful management of news and issue size
* The stockbrokers, mostly owned by the investment banks, who have tailored
their so-called analysis not to the needs of their pirvate and institutional
investor clients but to the primary issue business. Some analysis is
doctored to keep corporate clients of investment banks happy. Much else
is just regurgitation, under the guise of independent research, of news
management by corporate public relations executives.
* A mutual fund industry which claims to be concerned with long-term
investor interests but is run in a way emphasizes short term returns,
and rewards managers accordingly.
* The corporate executives whose stock options induce them to maximize
short- term share price performance and not long term shareholder value
- for example by borrowing money
at 8 percent to buy back shares yielding one percent.
* The banks which have both financed mega mergers and helped households
leverage their stock portfolios.
* Mammoth accounting/consultancy firms whose dwindling number and internal
conflicts of interest make them prone to represent the managements which
appoint them rather than the shareholders and public interests they
are supposed to guard.
* The media, which also have a dwindling number of major players, several
of them linked to telecom and multimedia industries that they assiduously
promote some directly involved in stock trading. Uncritical hyping of
tech stocks is everywhere and the Internet and computer industries are
accorded attention than their contribution to US business warrants.
The list is not exhaustive.
But the links, formal and informal, among the villains-to-be are clear
enough. The only winners will be the lawyers behind the rash of billion-dollar
class action suits sure to hound some of the above.
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