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Some Financial Villains-to-Be When the Blame Game Starts

IHT Opinion Page November 2, 1999

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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