WASHINGTON -- Corporate corruption is a "moral cancer that ... is threatening
this great system and our economic health." These "sins of omission, malfeasance
and misfeasance" are "eroding shareholder value for all corporations and public
confidence in critical elements of our economic system." This is a "betrayal of
capitalism" in which the "most fundamental principles of our market system were
Corporate scourge Ralph Nader? Mirthful muckraker Michael Moore? No, these
quotes come from leaders of America's financial community--Pete G. Peterson, Blackstone
Group co-founder and former U.S. Commerce secretary; John Snow, chairman and CEO
of CSX Corp.; and Felix Rohatyn, a former Lazard Freres partner. All are calling
for rapid, bold institutional and legal reforms to revive investor confidence.
But these financial giants are discovering that if they want to save capitalism
from itself, they'll have to rely on liberals to lead the way. Despite the dire
warnings from Wall Street, it is still business as usual in Washington. The scandals
have merely stirred dozens of industry associations and hundreds of corporations
into action to bottle up even watered-down reform. For example, Thomas Donohue,
president of the U.S. Chamber of Commerce, issued an "action call" urging opposition
to accounting reforms offered by Senate Banking Committee Chairman Paul S. Sarbanes.
He accused the Maryland Democrat of having a "knee-jerk, politically charged reaction"
to the Enron scandal. The American Institute of Certified Public Accountants,
which gave $14.7 million in campaign donations to both Democrats and Republicans
during the last election cycle, according to the Center for Responsive Politics,
denounced Sarbanes' reforms as a "de facto government takeover" of the profession.
The Republican majority in the House has been happy to pass legislation pre-approved
by the business lobby. In the Senate, Phil Gramm (R-Texas) has served as de facto
administration point person. Congressional Quarterly reported that he urged lobbyists
to "stall, stall, stall" to avoid reform legislation. Gramm denies the charge.
The Bush administration's initial response to Enron's bankruptcy was to dismiss
it. Treasury Secretary Paul H. O'Neill said the company's fall was evidence of
the "genius" of capitalism. As the scandals have mounted, the administration has
acknowledged, in the president's words, "some bad apples" in the corporate world
but remains opposed to broad legal reform. Harvey L. Pitt, chairman of the Securities
and Exchange Commission and the administration's lead on the issue, has rejected
most of the proposed reforms, such as restrictions on stock options or conflict-of-interest
limits on auditors or stock analysts.
New Democrats and Blue Dog Democrats--the corporate money wing of the party--have
been reluctant reformers, at best. Senate Governmental Affairs Committee Chairman
Joseph I. Lieberman (D-Conn.) has essentially punted, warning of the "twin dangers
of doing too little and doing too much." As Bruce Josten, executive vice president
of the U.S. Chamber of Commerce, crows, reform Democrats "have problems on their
side of the aisle, not just with Republicans."
So, rescuing U.S. capitalism is left to liberals, just as it was after the
excesses of the 1920s led to the stock market crash and the Great Depression.
Sen. Edward M. Kennedy (D-Mass.) has pushed for pension reforms and legislation
regulating stock analysts. Sarbanes' bill, among other things, would create a
new regulatory board to monitor auditors and partly curb auditors' conflicts of
interest by prohibiting some types of consulting. Sen. Jon Corzine (D-N.J.), former
chairman of Goldman Sachs, has been the most vocal advocate of significant legislation,
often joined by Sen. Barbara Boxer (D-Calif.), whose husband, Richard Blum, is
a major investor. The two senators have introduced a bill that would allow employees
to invest no more than 20% of their 401(k) funds in shares issued by their employers.
At the state level, New York's liberal attorney general, Eliot Spitzer, exposed
the conflicts plaguing stock analysts and embarrassed Merrill Lynch into a settlement.
But liberals don't have a majority in either house of Congress. So despite
the continuing scandals and the economic damage they may cause, Corzine has warned
that "it is unlikely that we will get strong reform unless there is a new event
that captures the [public's] imagination." Even Martha Stewart's alleged
insider trading and WorldCom's staggering $3.9-billion exaggeration of profits,
which is giving new impetus to Sarbanes' accounting reform bill and goading the
president to speak out, may not suffice.
At the turn of the 20th century, when the country was debating what rules to
impose on the emerging industrial economy, reformers faced a similar dilemma.
The dominant corporate Republican majority, led by William McKinley and Mark Hanna,
opposed new regulation. Muckrakers and political movements helped push through
change at the state and local level, beginning with the eight-hour day, minimum
wage and basic fire and safety laws. Maverick Republican Theodore Roosevelt laid
out a larger agenda and made some progress. But the market fundamentalists resisted
regulation throughout the manic 1920s, until the stock market crash and the Great
Depression catapulted Franklin D. Roosevelt and a reform majority to power.
The question is how to reform U.S. capitalism without having to endure another
crash. For this to happen, alarmed financial leaders would be wise to ally themselves
with reformers on Capitol Hill, however uncomfortable that may be for them, and
mobilize the political clout represented by millions of small investors who have
watched their 401(k) plans plummet in value. To dramatize the urgency of the matter,
Sarbanes' Senate Banking Committee should stage a televised hearing to establish
just how perilous the current loss of investor confidence is and how ideologically
resistant some segments of the business establishment are to reform. Then liberal
Democrats and financial gurus would be wise to enlist the Republican maverick,
Sen. John McCain (R-Ariz.), to help lead the fight for the core reforms on pension
protection, auditor independence, stock options, accounting standards and investment
bank conflicts of interest.
With sufficient exposure, President Bush, already scrambling to limit the political
fallout from burgeoning corporate scandals, might even begin to support meaningful
legislation. But for this to happen, the conservative doyens of Wall Street must
make public their common cause with the few remaining liberals in the Congress.
Robert L. Borosage is co-director of the Campaign
for America's Future and editor of the Next Agenda.
Copyright 2002 Los Angeles Times