| geert lovink on Sun, 7 Jul 2002 23:33:02 +0200 (CEST) |
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| <nettime> from the dotcom observatory |
[Motto of this edition of the Dotcom Observatory, the 90s favorite Chinese
saying: "May we live in interesting times." Enjoy. Geert]
1. Lina Saigol/FT: Financial analysts to face media curbs
2. GIVE US A LOAN OR WE'LL CALL YOU A TERRORIST
3. Mokhiber & Weissman: Cracking Down on Corporate Crime
4. Pointers from Phil Agre
5. Jim Pinkelton: Keeping the dollar strong, dammit.
6. Paul Krugman/NYT: Everyone is Outraged
7. REMAINING U.S. CEOs MAKE A BREAK FOR IT
8. LA Times: Last Straw for Small Investors?
9. The Observer: Trent Lott and WorldCom
10. Fucked Comany: Run for the hills
11. CNN's Lou Dobbs: Danger for Pentagon
12. Larry Elliott: Capital isn't Working
13. Justice for the Janitors at Yahoo!
14. Joseph Nocera: System Failure
15. George Gilder: A Corporate Crime Wave?
16. Kelly Mills: Big screen heroes belittle real-life IT (again)
17. Katharine Mieszkowski: The Long Boom" is back!
18. Thomas Friedman/NYT: Webbed, Wired and Worried
19. Dotcom bombs get a second life
---
1. Financial analysts to face media curbs
<http://www.transparency.org/cgi-bin/dcn-read.pl?citID=40227>
Financial Times 05 Jul 2002
By Lina Saigol in London
Financial analysts' appearances on business television programmes around
the world will be hit by new US disclosure requirements.
Analysts are the mainstay of many programmes - the business television
channel CNBC interviews up to 30 a day. From Tuesday, analysts talking
about US-listed companies on air will have to make five disclaimers.
The introduction of the rules follows concerns that investors could be
misled by analysts with conflicts of interest.
But it has aroused fears that that the result will be to prevent retail
investors hearing the latest views on stocks. Media companies say that
their job will be more difficult and investment banks are concerned about
the effect on clients.
Jeff Randall, the BBC business editor, said: "It is going to make life very
difficult. In some cases, the disclaimer will be longer than the answer
given by the analyst." Mr Randall said, however, that he understood why the
regulators were taking this step.
The disclaimers include stating any financial interest the analyst has in
the company; whether the analyst's firm holds 1 per cent or more in any
company covered; and if a subject is an investment banking client of the
firm. Alternatively, the disclaimers can be made as graphics or a scroll.
To demonstrate compliance, investment banks will have to keep copies or
transcripts of all broadcasts.
Julian Heynes, producer at CNBC, the business television channel, said that
one of the biggest problems would be coordination between CNBC's bureaux
around the world.
"We are concerned about producing the guidelines in a coherent and logical
way," Mr Heynes said. "But we want to make clear that we are on the side of
the investor and are helping the drive towards transparency," Mr Heynes
added.
One bank's representative said: "We have a huge private client investor
base and it is important to be able to market through the broadcast media."
---
2. GIVE US A LOAN OR WE'LL CALL YOU A TERRORIST
"Both commercial and national security interests rely upon
WorldCom's operations continuing without disruption."
WorldCom CEO John Sidgmore, threatening to take his Internet
and go home if the government doesn't bail out the near-
bankrupt telco, The Washington Post, 3 July 2002
http://www.silicon.com/a54303
Ditherati appears daily on weekdays. An archive is
online at http://www.ditherati.net/archive/
---
3. Cracking Down on Corporate Crime, Really
By Russell Mokhiber and Robert Weissman
Here is one of the most remarkable aspects of the still-unfolding
financial scandals swirling around Worldcom, Xerox, Global Crossing,
Enron, Arthur Andersen, Tyco and a growing number of other companies:
The fraud occurred in the most heavily regulated and monitored area of
corporate activity.
If an epidemic of corporate malfeasance could occur in the financial
arena, how serious is the more general problem of corporate crime?
Consider the checks and balances in place that should have stemmed the
wave of corporate wrongdoing which has reportedly angered even American
CEO George Bush:
* Disclosure requirements for corporate financial performance are
extensive, and by far the most detailed for any element of corporate
activity.
* There is a distinct industry -- made up of accounting firms -- whose
function is to review the financial numbers, audit corporate books and
certify the validity of financial statements.
* There is another distinct industry, separate from the accountants --
this is the Wall Street investment firms -- whose function is to
scrutinize the corporate reports, interview corporate executives,
analyze market performance and provide investors with independent
evaluations of company prospects.
* There is a legal duty for corporate executives to advance the interest
of an important and powerful class of people -- shareholders -- and
significant numbers of these shareholders are increasingly organized and
assertive of their rights (including through pension funds). There is no
comparable legal duty for corporate executives to serve consumer or
worker interests, say.
* An array of Securities and Exchange Commission regulations establish
rules for financial reporting, and are backed by the enforcement power
of the agency, as well as the threat of private litigation from
shareholders in case of violation.
Other aspects of corporate activity are simply not subject to such
robust scrutiny and control.
Given what is now the apparent blatant corporate disregard for the law,
even in areas where executives are most closely watched, what should we
expect is occurring elsewhere? What's happening with consumer rip-offs,
sales of unsafe products, endangerment of workers, pollution of the
environment?
Even with inadequate law enforcement, reporting requirements or
organized countervailing institutions, we know enough to know that the
epidemic of corporate crime, fraud and abuse is at least as severe
outside of the financial arena as within.
To take just two examples from recent months: In May, drug maker
Schering-Plough signed a consent decree with the Food and Drug
Administration, agreeing to pay a record $500 million in connection with
charges that over a three-year period it produced about 125 different
prescription and over-the-counter drugs in factories that failed to
comply with good manufacturing practice. And in April, the Justice
Department announced that it collected more than $1.3 billion in 2001 in
connection with enforcement actions related to health care fraud, and
that last year 465 defendants were convicted for health-care fraud
crimes. This kind of revelation occurs regularly, but news accounts
rarely combine them -- as they are now doing with the financial scandals
-- to make clear the breadth and depth of the problem.
With the most recent round of disclosures of financial wrongdoing at
Worldcom and other companies, it no longer appears that Big Business's
Congressional allies are going to be able to block all meaningful
remedial measures, and the Bush administration is now preparing a reform
package.
If those reforms are limited to addressing financial fraud, however, the
biggest and most serious corporate criminal activity will be able to
flourish.
What we need is a full set of restraints on corporate crime. But even
small steps could significantly reduce the toll of corporate crime and
violence. Here are three measures that should be adopted this year,
before Congress recesses and momentum for corporate reform slows:
First, the Federal Bureau of Investigation should be required to compile
an annual report on corporate crime in American, to accompany its
current Crime in the United States report, which is unfortunately
confined to street crime.
Second, the federal government should refuse to do business with
companies that are serious and/or repeat law breakers, as well as deny
other privileges (for example, granting broadcasting licenses) to
corporate criminals. This would involve some new or strengthened laws
and regulations, as well more stringent enforcement of debarment,
contractor responsibility and good character laws now on the books.
States and local governments should adopt similar measures.
Third, whistleblowers and private citizens should be able to enforce
laws regulating corporate conduct. One way to facilitate this
enforcement approach would be to expand and creatively adapt the False
Claims Act, which currently enables whistleblowers to initiate lawsuits
against entities which have defrauded the government, and which reclaims
for the government every year hundreds of millions of dollars stolen by
unethical contractors.
"Cracking down on corporate crime" -- the mantra of the moment -- cannot
be limited just to financial crime, already the most policed form of
corporate wrongdoing.
(Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor, http://www.multinationalmonitor.org. They are
co-authors of Corporate Predators: The Hunt for MegaProfits and the
Attack on Democracy, Monroe, Maine: Common Courage Press, 1999;
http://www.corporatepredators.org).
---
4. Pointers from "Phil Agre" <pagre@alpha.oac.ucla.edu>
"Red Rock Eater News Service"
Bush decries executives who "fudge the numbers"
(that's funny: Bush personifies the culture of corporate number-fudging)
http://money.cnn.com/2002/06/28/news/companies/worldcom/index.htm
Bush Violated Security Laws Four Times, SEC Report Says
http://www.public-i.org/story_01_100400.htm
http://www.public-i.org/story_01_040400.htm
http://www.nytimes.com/2002/07/02/opinion/02KRUG.html
SEC Chief Vows Ongoing Audit Probe of Halliburton
http://www.washingtonpost.com/ac2/wp-dyn/A5561-2002Jun30?language=printer
http://news.independent.co.uk/business/news/story.jsp?story=310471
the destruction caused by systemic fraud at WorldCom
("of the 29 or 30 carriers, easily 20 of them could declare bankruptcy")
http://www.nytimes.com/2002/06/30/business/yourmoney/30TELE.html?pagewanted=
print
http://www.businessweek.com/technology/content/jun2002/tc20020628_3955.htm
The Collapse of Enron: A Bibliography of Online Resources
http://www.llrx.com/features/enron.htm
the new adventures of Ken Starr
http://arktimes.com/reporter/020628reportera.html
Market Extremists Amok
http://www.prospect.org/print/V13/13/phillips-k.html
The Power of the Super-Rich
http://www.nybooks.com/articles/15605
Bush: I am not a crook
(let's appoint a special prosecutor as far left as Ken Starr was to the
right)
http://www.washingtonpost.com/wp-dyn/articles/A15500-2002Jul2.html
background on the George Bush's Enron-like business career
(for some non-mysterious reason the media ignored this during the campaign)
http://www.findarticles.com/cf_0/m1111/1797_300/59086099/print.jhtml
Bush's changing stories about his SEC forms are remarkably Enron-like as
well
(the media are concentrating on the forms, but they are the least of it)
http://www.washingtonpost.com/wp-dyn/articles/A19419-2002Jul3.html
http://www.washingtonpost.com/wp-dyn/articles/A21953-2002Jul3.html
http://www.cnn.com/2002/ALLPOLITICS/07/03/bush.stock/
Bush can't fire corrupt staff because the same standard would be applied to
him
http://www.washingtonmonthly.com/features/2001/0207.green.html
allegations of Harken-like business practices at Vivendi
http://www.lemonde.fr/article/0,5987,3234--283270-,00.html
http://www.vivendiuniversal.com/vu2/en/news/00000980.cfm
http://news.ft.com/servlet/ContentServer?pagename=FT.com/Page/SpecialLevel1&;
cid=1024578214823
http://www.vivendiuniversal.com/vu2/en/who_we_are/history.cfm
http://fr.biz.yahoo.com/vu.html
http://dailynews.yahoo.com/fc/World/Media_Watch/
a page on the Vivendi site that now produces a 404
(and a cached version that is probably temporary)
http://www.vivendiuniversal.com/vu2/en/who_we_are/bio_messier.cfm
http://216.239.33.100/search?q=cache:iwzzVbF5fRYC:www.vivendiuniversal.com/v
u2/en/who_we_are/bio_messier.cfm+&hl=en&ie=UTF-8
Recusals Doom an SEC Case
(Ernst & Young is immune because two Bush commissioners had worked for it)
http://www.washingtonpost.com/ac2/wp-dyn/A16265-2002Jul2?language=printer
jargon watch: "critics suggest that Pitt somehow caused Enron and WorldCom"
(change the subject with a crazy straw man, then call it crazy)
http://slate.msn.com/?id=2067755&device=
CEO's Will Have to Swear to Numbers
(okay, it's a start)
http://www.msnbc.com/news/776495.asp
How Everyone Missed WorldCom
("part of the problem is companies have gotten incredibly large and
complex")
http://www.businessweek.com/bwdaily/dnflash/jul2002/nf2002073_5726.htm
Trent Lott's "Mississippi Wall of Fame"
(which happens to include one Bernard J. Ebbers)
http://lott.senate.gov/ms/fame.html
Gary Winnick still has the money to restore his 64-room Bel Air mansion
(I thought you'd be relieved to know that)
http://www.latimes.com/news/printedition/asection/la-fi-mansion4jul04005102.
story
Accounting Concerns Focus on GE Pension Fund
(you'll recall that looting of pension funds was central to the 1980s
scandals)
http://news.bbc.co.uk/hi/english/business/newsid_2076000/2076235.stm
Standard and Poor's Says US Giants Inflating Their Profits by Billions
(does anyone have a URL for this report?)
http://news.independent.co.uk/business/news/story.jsp?story=310455
---
5. Jim Pinkerton's column for Tuesday 6/1/02
Americans are justifiably focused on the rotten state of American
corporate financing, and President Bush is coming to New York City next
week to give the fatcats a spanking. But maybe it's too late to avoid
substantial damage, because foreigners have reached a negative judgment
about the US economy--a judgment that has already eroded the value of
our money, that could even cause a crash in our stock market.
As the London-based Financial Times noted last week, in 2000, the inflow
of foreign investment into the United States was $228 billion. In the
second half of 2001, the inflow had reversed; the US suffered an outflow
of $16 billion.
Should ordinary Americans really be worried? After all, growth in our
gross domestic product in the first quarter of 2002 was recently revised
upward, to a sizzling 6.1 percent. But the best single measure of any
economy in a worldwide context is the worth of its currency. Put
simply, strong economies have strong currencies. In the 70s, as America
slumped, the dollar fell by a quarter against the world's currencies.
But for most of the last two decades, strong growth brought the dollar
back up again.
And so smug Americans dismissed the Euro, the new trans-European
currency that debuted in January 1999. The Euro started trading at 117
percent of the dollar, but it skidded to just 83 percent in October
2000. Why? Because the globalized money markets concluded that
Europe's economy was stagnating, while America's was booming. But in
the past few months, the Euro has shot back up to parity with the
dollar, as speculators figure that maybe Uncle Sam isn't so great after
all; the dollar is even weakening against the long-sick Japanese Yen.
Some say that a falling dollar is good, since it makes Americans exports
cheaper. But at the same time, of course, imports, from electronics to
oil, get more expensive. And over the long run, a cheaper dollar
stokes inflation, because, as each dollar can purchase less, sellers
must raise their prices to stay even.
Indeed, the weaker dollar has already started a vicious cycle of
disinvestments in America. Foreigners think the dollar is going to be
worth less, and so they hold fewer dollar-denominated assets, such as
American stocks or bonds. And yet as they scale back investment, the
weakening demand depresses the greenback further.
So where will this dollar-depreciation lead? A June 19 study published
last month by four Goldman Sachs economists asserts, "We have long
regarded the strength of the US dollar as unjustifiable." The report
goes on to forecast that the dollar will decline by another eight
percent against world currencies over the next 12 months. Yet even
then, the study continues, the dollar will still have further to fall.
Given the rotten state of corporate America, such a further
dollar-decline might be inevitable, and yet the Goldmanites note a
greater danger if our money loses too much too soon. Their report
recalls a brief interlude of dollar deterioration, from 1985-1988, when
the dollar fell by about a third. During those years, the decline in
the dollar destabilized financial markets in the United States, and this
destabilization was "the trigger mechanism that helped to generate the
1987 stock market crash."
Yikes. Remember Black Monday, October 19, 1987, when the Dow Jones
Industrial Average fell 508 points -- 22.6 percent?
Could that happen again? The Goldman folks don't think so, because they
don't see a sharp decline in the dollar. But others do. Famed
currency trading tycoon George Soros told The Wall Street Journal on
Friday that he wouldn't be surprised to see the dollar lose a third of
its value over the next few years. And since a one-third drop in the
dollar helped trigger the '87 crash, a dollar-watching doomsayer could
predict another Black Day for the market sometime soon.
In today's numbers, such a fall would clip off about 2000 points from
the Dow. That would be ruinous to many investors, but it's not so hard
to imagine, because it's happened before. So of course Bush should
lecture Wall Street, but he should also keep in mind that the world
market is watching, too, looking for signs that he is focused on the
economy, stupid. And that means keeping the dollar strong, dammit.
---
6. Paul Krugman/NYT: Everyone is Outraged
July 2, 2002
Arthur Levitt, Bill Clinton's choice to head the Securities and Exchange
Commission, crusaded for better policing of corporate accounting - though he
was often stymied by the power of lobbyists. George W. Bush replaced him
with Harvey Pitt, who promised a "kinder and gentler" S.E.C. Even after
Enron, the Bush administration steadfastly opposed any significant
accounting reforms. For example, it rejected calls from the likes of Warren
Buffett to require deduction of the cost of executive stock options from
reported profits.
But Mr. Bush and Mr. Pitt say they are outraged about WorldCom.
Representative Michael Oxley, the Republican chairman of the House Financial
Services Committee, played a key role in passing a 1995 law (over Mr.
Clinton's veto) that, by blocking investor lawsuits, may have opened the
door for a wave of corporate crime. More recently, when Merrill Lynch
admitted having pushed stocks that its analysts privately considered
worthless, Mr. Oxley was furious - not because the company had misled
investors, but because it had agreed to pay a fine, possibly setting a
precedent. But he also says he is outraged about WorldCom.
Might this sudden outbreak of moral clarity have something to do with polls
showing mounting public dismay over crooked corporations?
Still, even a poll-induced epiphany is welcome. But it probably isn't
genuine. As the Web site dailyenron.com put it, last week "the foxes assured
Americans that they are hot on the trail of those missing chickens."
The president's supposed anger was particularly hard to take seriously. As
Chuck Lewis of the nonpartisan Center for Public Integrity delicately put
it, Mr. Bush "has more familiarity with troubled energy companies and
accounting irregularities than probably any previous chief executive." Mr.
Lewis was referring to the saga of Harken Energy, which now truly deserves a
public airing.
My last column, describing techniques of corporate fraud, omitted one method
also favored by Enron: the fictitious asset sale. Returning to the ice-cream
store, what you do is sell your old delivery van to XYZ Corporation for an
outlandish price, and claim the capital gain as a profit. But the
transaction is a sham: XYZ Corporation is actually you under another name.
Before investors figure this out, however, you can sell a lot of stock at
artificially high prices.
Now to the story of Harken Energy, as reported in The Wall Street Journal on
March 4. In 1989 Mr. Bush was on the board of directors and audit committee
of Harken. He acquired that position, along with a lot of company stock,
when Harken paid $2 million for Spectrum 7, a tiny, money-losing energy
company with large debts of which Mr. Bush was C.E.O. Explaining what it was
buying, Harken's founder said, "His name was George Bush."
Unfortunately, Harken was also losing money hand over fist. But in 1989 the
company managed to hide most of those losses with the profits it reported
from selling a subsidiary, Aloha Petroleum, at a high price. Who bought
Aloha? A group of Harken insiders, who got most of the money for the
purchase by borrowing from Harken itself. Eventually the Securities and
Exchange Commission ruled that this was a phony transaction, and forced the
company to restate its 1989 earnings.
But long before that ruling - though only a few weeks before bad news that
could not be concealed caused Harken's shares to tumble - Mr. Bush sold off
two-thirds of his stake, for $848,000. Just for the record, that's about
four times bigger than the sale that has Martha Stewart in hot water. Oddly,
though the law requires prompt disclosure of insider sales, he neglected to
inform the S.E.C. about this transaction until 34 weeks had passed. An
internal S.E.C. memorandum concluded that he had broken the law, but no
charges were filed. This, everyone insists, had nothing to do with the fact
that his father was president.
Given this history - and an equally interesting history involving Dick
Cheney's tenure as C.E.O. of Halliburton - you could say that this
administration is uniquely well qualified to chase after corporate
evildoers. After all, Mr. Bush and Mr. Cheney have firsthand experience of
the subject.
And if some cynic should suggest that Mr. Bush's new anger over corporate
fraud is less than sincere, I know how his spokesmen will react. They'll be
outraged.
---
7. REMAINING U.S. CEOs MAKE A BREAK FOR IT
Band of Roving Chief Executives Spotted Miles from Mexican Border
San Antonio, Texas (SatireWire.com)
Unwilling to wait for their eventual
indictments, the 10,000 remaining CEOs of
public U.S. companies made a break for
it yesterday, heading for the Mexican border,
plundering towns and villages along the way
and writing the entire rampage off as a
marketing expense.
"They came into my home, made me pay for my
own TV, then double-booked the revenues," said
Rachel Sanchez of Las Cruces, just north of
El Paso. "Right in front of my daughters."
Calling themselves the CEOnistas, the chief
executives were first spotted last night along
the Rio Grande River near Quemado, where they
bought each of the town's 320 residents by
borrowing against pension fund gains. By
late this morning, the CEOnistas had
arbitrarily inflated Quemado's population to
960, and declared a 200 percent profit for the
fiscal second quarter.
This morning, the outlaws bought the city of
Waco, transferred its underperforming areas to
a private partnership, and sent a bill to
California for $4.5 billion.
Law enforcement officials and disgruntled
shareholders riding posse were noticeably
frustrated.
"First of all, they're very hard to find
because they always stand behind their
numbers, and the numbers keep shifting," said
posse spokesman Dean Levitt. "And every time
we yell 'Stop in the name of the
shareholders!', they refer us to investor
relations. I've been on the phone all
damn morning."
"YOU'LL NEVER AUDIT ME ALIVE!"
The pursuers said they have had some success,
however, by preying on a common executive
weakness. "Last night we caught about 24 of
them by disguising one of our female officers
as a CNBC anchor," said U.S. Border Patrol
spokesperson Janet Lewis. "It was like moths
to a flame."
Also, teams of agents have been using high-
powered listening devices to scan the plains
for telltale sounds of the CEOnistas. "Most of
the time we just hear leaves rustling or
cattle flicking their tails," said Lewis, "but
occasionally we'll pick up someone saying, 'I
was totally out of the loop on that.'"
Among former and current CEOs apprehended with
this method were Computer Associates' Sanjay
Kumar, Adelphia's John Rigas, Enron's Ken Lay,
Joseph Nacchio of Qwest, Joseph Berardino of
Arthur Andersen, and every Global Crossing CEO
since 1997. ImClone Systems' Sam Waksal and
Dennis Kozlowski of Tyco were not allowed to
join the CEOnistas as they have already been
indicted.
So far, about 50 chief executives have been
captured, including Martha Stewart, who was
detained south of El Paso where she had cut
through a barbed-wire fence at the Zaragosa
border crossing off Highway 375.
"She would have gotten away, but she was
stopping motorists to ask for marzipan and
food coloring so she could make edible snowman
place settings, using the cut pieces of wire
for the arms," said Border Patrol officer
Jennette Cushing. "We put her in cell No. 7,
because the morning sun really adds texture to
the stucco walls."
While some stragglers are believed to have
successfully crossed into Mexico, Cushing said
the bulk of the CEOnistas have holed
themselves up at the Alamo.
"No, not the fort, the car rental place at the
airport," she said. "They're rotating all
the tires on the minivans and accounting for
each change as a sale."
---
---------------------------------------------------------------------------
Copyright 2002 Los Angeles Times
---------------------------------------------------------------------------
www.latimes.com/business/la-fi-stocks1jul01.story
July 1 2002
Last Straw for Small Investors?
STOCKS: ANALYSTS FEAR CORPORATE SCANDALS COULD
DRIVE OUT THOSE HANGING ON THROUGH BEAR MARKET.
By TOM PETRUNO and KELLY YAMANOUCHI
Times Staff Writers
The stock market peaked 27 months ago, and with every new decline since
then the same question has been asked about individual investors: How
much can they lose before they can stand to lose no more?
For some Americans whose trillions of dollars in savings helped drive the
great 1990s bull market, the threshold of pain may finally have been
crossed.
Bob Friend, a Redondo Beach aerospace engineer who has invested in stocks
for 20 years, says he plans to move more of his investments into
interest-bearing bonds, or perhaps gold, in the next month.
Stung by his portfolio losses and disheartened by mounting revelations of
corporate fraud -- the latest WorldCom Inc.'s bombshell last week of
$3.9 billion in accounting irregularities -- Friend says his faith in
the market has waned.
"There's a complete lack of trust in corporate leadership," he said. "I
think the lack of ethical behavior has destroyed investor confidence."
Comments like those are sending a chill through Wall Street. Individual
investors were a big source of fuel for the stock market's unprecedented
gains in the 1990s, a decade in which the total value of the 5,000
largest U.S. stocks soared from $3.4 trillion to $14 trillion -- a
wealth boom that, in turn, helped power the economy.
Perhaps more important, the public's willingness to largely stay in the
market through the devastating decline of the last two years may have
kept stocks' losses from becoming far worse.
Now, some analysts fear that many small investors are on the verge of
giving up on the market.
"The new concern is that we have lost a generation of individual
investors, much the way we did after the Great Crash" of 1929, said
Edward Yardeni, market strategist at brokerage Prudential Financial in
New York.
Souring on Stocks
Investors also soured on stocks en masse in the 1970s, after the market
plunge of 1973-74. Measured from 1972 to 1981, the net gain in the
blue-chip Standard & Poor's 500 index was a minuscule 3.8% as investors
stayed away.
The worries about another lost generation of investors may yet prove to
be overblown. What's more, even if Americans have had their fill of
stocks, it isn't clear that the implications would be dire. The economy
doubtless would survive without a rising stock market. Savings that might
have been earmarked for equities would simply flow elsewhere -- into
banks, for example, or the real estate market.
The housing market, red hot this year while stocks have fallen, already
appears to be luring money that might otherwise have gone to Wall Street.
But an equity market that stalls out, or declines further, could make it
far more difficult for U.S. companies to raise capital needed to grow.
Likewise, poor returns in the stock market would change the financial
outlook for the tens of millions of people whose retirement nest eggs
still are locked up in stocks.
Even now, many older Americans must rethink their retirement spending
plans as share prices have tumbled. The S&P 500 has dropped 35% from its
record high in March 2000. That is the deepest sustained decline in the
index since it dived 48% in 1973-74 amid the Arab oil embargo, surging
inflation and President Nixon's resignation.
An investor whose retirement portfolio has tracked the S&P 500, and who
had $500,000 at the market peak in 2000, has $325,000 now.
More exasperating for investors has been the duration of this slide and
the volatility along the way. Twice in the last 15 months, stocks staged
sharp rallies that appeared to mark the end of the bear market. Instead,
the rallies quickly gave way to renewed downturns.
The S&P 500 hit a three-year low on Sept. 21 in the aftermath of the
terrorist attacks. The market then rocketed in the fourth quarter as
investors bet that the U.S. military would prevail in Afghanistan and
that the economy would soon emerge from recession -- both correct
bets, as it turned out.
But as 2002 dawned, many stocks crumbled anew. And last week,
long-distance titan WorldCom's revelation that it understated expenses by
$3.9 billion over the last five quarters, effectively hiding a sea of red
ink behind phony profit statements, triggered a wave of selling that
drove the S&P index briefly below its close on Sept. 21.
There are various ways to measure "bull" and "bear" market cycles. But if
the S&P 500's dip last week below the September low means the bear market
didn't end after the terrorist attacks, it is now 27 months old. For the
S&P index, that would be the longest decline since the 1940s.
A Third Year in the Red
The harsh financial reality for many buy-and-hold investors is that their
portfolios are deep in the red for a third straight year -- a rarity
in modern market history. If the trend holds through December, this will
be the first time the market has fallen three consecutive calendar years
since 1939-41.
Investors in the giant Fidelity Magellan stock mutual fund, for example,
lost 9.3% in 2000, 11.7% in 2001 and are down 14.6% this year.
The erosion of stock values has left more investors mulling Will Rogers'
famous line about investing: "I am not so much concerned with the return
on capital as I am with the return of capital."
So far this year, Americans have pumped $203 billion into regular savings
accounts at banks and savings and loans, Federal Reserve data show. By
contrast, through May net new purchases of stock mutual funds totaled $72
billion, according to the funds' chief trade group.
That is a dramatic shift from years past. In 2000, stock mutual funds
attracted $310 billion in new money while savings accounts took in $142
billion.
At Charles Schwab Corp., the nation's largest discount brokerage,
customer trading volumes have dropped more than 25% in two years as
interest in the market has ebbed.
Bryan Carichner, a 27-year-old Web site developer in Los Angeles, says he
is keeping all of his savings in a money market account, even though
interest rates on those accounts are typically less than 1.5%.
"I feel that it's safer," Carichner said. "When I first got out of
college, the stock market seemed like an amazing place to supplement your
income and get ahead very quickly. Now I think you really need to know
what you're doing, whereas before it seemed you could just throw anything
against the wall and something was going to stick."
Certainly, by now most Americans know some of the fundamental reasons the
1990s bull market died: The economy had peaked after a stellar 10-year
expansion; the Federal Reserve had raised interest rates to counter what
it believed were inflation threats; and, perhaps most significant,
technology stocks had begun to implode after being driven to
stratospheric price levels by rampant speculation rooted in the popular
mania over the Internet.
Just as technology shares enjoyed incredible gains in the late 1990s,
they have borne the brunt of the market's losses since March 2000. The
tech-dominated Nasdaq composite stock index peaked at 5,048.62 in that
month. It now stands at 1,463.21, down 71% from the peak, as once-star
stocks such as those of Intel Corp., Cisco Systems Inc. and Sun
Microsystems Inc. have collapsed.
That loss rivals the near-90% decline in the Dow Jones industrial average
between 1929 and 1932.
Unlike the early 1930s, however, this bear market hasn't coincided with
an economic depression. Indeed, the 2001 recession was one of the mildest
on record, as measured by the decline in gross domestic product. Consumer
spending has remained surprisingly strong, especially on autos and homes.
But for many U.S. companies the recession's effect on profits was
crushing, amid high debt loads, rising foreign competition and a downturn
in spending by other businesses, particularly on tech equipment.
At the start of this year, worries about companies' earnings remained the
market's most vexing problem, as investors questioned how long it would
take for profits to get back on a growth track. Earnings, after all, are
what ultimately drive stock prices.
Fear of more terrorist attacks also has weighed on investors' confidence,
since stocks represent a bet on future prosperity.
Increasingly, however, blame for the market's ongoing decline has been
laid at corporate America's door: The succession of accounting scandals
and tales of executive chicanery -- from Enron Corp. to WorldCom -- have
left investors angry and disgusted.
The revelation by WorldCom, parent of the MCI long-distance network,
drilled deep into a public nerve. "It makes people lose faith in the
system," said Allan Spring, a 45-year-old computer programmer in
Irwindale.
Ron Kahn, head of a $65-billion stock portfolio at Barclays Global
Investors in San Francisco, said investors' collective doubt about the
trustworthiness of corporate financial data "is much more serious than
[the issue of] a lot of stocks that were overvalued coming back to fair
value."
The accounting scandals "are what could drive individual investors out of
the market," he said.
Concerned With Timing
Yet instinctively, some small investors sense that bailing out of stocks
at a time of crisis is a foolish move. Spring said he is tempted to shift
his money into bonds, gold or money market accounts, "but then this other
side of me says that once I do that, [stocks] will turn around."
Some market experts say that while the corporate scandals may chip
further at investors' confidence, the public's turn away from stocks had
already become self-reinforcing.
In his April 2000 book "Irrational Exuberance," Yale University economics
professor Robert Shiller described the late-1990s bull market as a
spectacular financial bubble that would inevitably be followed by a long
period of lousy returns on stocks.
Just as investors' bullish behavior fed on itself as stocks rocketed from
1995 to early 2000, so too their pessimism would feed on itself once the
market began to slide, Shiller wrote.
Many investors, he said, will become far more interested in preserving
whatever capital they have left. That could become an acute concern for
the ranks of near-retirees who plan to start tapping their savings in a
few years.
In an interview last week, Shiller said he is not optimistic about a
market rebound and that he sees no reason to change his view that
buy-and-hold investors in U.S. blue-chip stocks will earn no net return
through the end of this decade.
That was a heretical view in 2000, but "I'm not so unique anymore,"
Shiller said. "As the market goes down, all kinds of theories that didn't
seem plausible begin to look more plausible."
The fundamental problem, he said, is that the average big-name stock
still is overvalued by historical standards.
A common way to measure a stock's relative value is to compare the price
with the company's earnings per share, excluding one-time charges. Based
on Wall Street's average earnings expectations, the S&P 500 index is
priced at about 20 times this year's estimated earnings per share.
But the historical average price-to-earnings ratio for blue-chip shares
is about 14, Shiller said. For the market just to be valued at average
levels, then, the S&P 500 index should be 30% below its current value.
Yet many experts say there are good reasons for above-average prices on
stocks, and good reasons to expect investors to stay in the market,
unlike after the plunge of 1973-74.
What's different from the late 1970s is that the U.S. economy enjoys low
inflation, high worker productivity and low capital-gains taxes, said Jay
Mueller, economist at Strong Capital Management in Milwaukee.
All of those factors benefit the stock market, he said. In addition,
stock investing is automatic for millions of investors today, via
retirement savings plans. People tend to be slow to make changes in how
they allocate those dollars, and there is no sign this year of any
wholesale selling of stocks in retirement accounts.
But investor surveys, and anecdotal evidence, suggest more investors are
growing wary. And in a weak market, even a small number of new sellers
can tip the scales, driving prices lower.
U.S. Trust Co., which periodically surveys wealthy households (defined as
those with annual gross income of $300,000 or more, or net worth greater
than $3.75 million), in June found that 25% of 150 respondents said they
have sold off some or all of their stocks since March 2000. But the
majority --52% -- said they are "waiting to see what happens."
'I'm Not Giving Up'
For many individual investors, the decision so far has been to halt new
purchases of stocks, while holding on to what they have.
"I'm not giving up on stocks, but I'm putting my money into more liquid,
more secure investments until I feel the storm has passed," said investor
Alton Pabom, an auditor in Los Angeles.
Still, he said, "I know it [the market] is coming back for sure. The U.S.
economy is very resilient. I still maintain the optimism that it will
bounce back, so I'm not selling."
Wei Chi, manager of global diversity for oil company BP North America,
said he isn't planning to invest any additional money in the stock market
for the next three to six months. "Now, it's just wait and see if the
crisis is resolved," he said, referring to the corporate accounting
scandals. But he continues to hold on to stock investments meant to
finance his children's college education.
Chi, 49, worries more about the scandals' effect on younger people's view
of the market as a long-term investment. "For the younger investors, it's
very discouraging. It may actually scare them away for a long time," he
said.
---
8. Last Straw for Small Investors?
www.latimes.com/business/la-fi-stocks1jul01.story
July 1 2002
STOCKS: ANALYSTS FEAR CORPORATE SCANDALS COULD
DRIVE OUT THOSE HANGING ON THROUGH BEAR MARKET.
By TOM PETRUNO and KELLY YAMANOUCHI
Times Staff Writers
The stock market peaked 27 months ago, and with every new decline since
then the same question has been asked about individual investors: How
much can they lose before they can stand to lose no more?
For some Americans whose trillions of dollars in savings helped drive the
great 1990s bull market, the threshold of pain may finally have been
crossed.
Bob Friend, a Redondo Beach aerospace engineer who has invested in stocks
for 20 years, says he plans to move more of his investments into
interest-bearing bonds, or perhaps gold, in the next month.
Stung by his portfolio losses and disheartened by mounting revelations of
corporate fraud -- the latest WorldCom Inc.'s bombshell last week of
$3.9 billion in accounting irregularities -- Friend says his faith in
the market has waned.
"There's a complete lack of trust in corporate leadership," he said. "I
think the lack of ethical behavior has destroyed investor confidence."
Comments like those are sending a chill through Wall Street. Individual
investors were a big source of fuel for the stock market's unprecedented
gains in the 1990s, a decade in which the total value of the 5,000
largest U.S. stocks soared from $3.4 trillion to $14 trillion -- a
wealth boom that, in turn, helped power the economy.
Perhaps more important, the public's willingness to largely stay in the
market through the devastating decline of the last two years may have
kept stocks' losses from becoming far worse.
Now, some analysts fear that many small investors are on the verge of
giving up on the market.
"The new concern is that we have lost a generation of individual
investors, much the way we did after the Great Crash" of 1929, said
Edward Yardeni, market strategist at brokerage Prudential Financial in
New York.
Souring on Stocks
Investors also soured on stocks en masse in the 1970s, after the market
plunge of 1973-74. Measured from 1972 to 1981, the net gain in the
blue-chip Standard & Poor's 500 index was a minuscule 3.8% as investors
stayed away.
The worries about another lost generation of investors may yet prove to
be overblown. What's more, even if Americans have had their fill of
stocks, it isn't clear that the implications would be dire. The economy
doubtless would survive without a rising stock market. Savings that might
have been earmarked for equities would simply flow elsewhere -- into
banks, for example, or the real estate market.
The housing market, red hot this year while stocks have fallen, already
appears to be luring money that might otherwise have gone to Wall Street.
But an equity market that stalls out, or declines further, could make it
far more difficult for U.S. companies to raise capital needed to grow.
Likewise, poor returns in the stock market would change the financial
outlook for the tens of millions of people whose retirement nest eggs
still are locked up in stocks.
Even now, many older Americans must rethink their retirement spending
plans as share prices have tumbled. The S&P 500 has dropped 35% from its
record high in March 2000. That is the deepest sustained decline in the
index since it dived 48% in 1973-74 amid the Arab oil embargo, surging
inflation and President Nixon's resignation.
An investor whose retirement portfolio has tracked the S&P 500, and who
had $500,000 at the market peak in 2000, has $325,000 now.
More exasperating for investors has been the duration of this slide and
the volatility along the way. Twice in the last 15 months, stocks staged
sharp rallies that appeared to mark the end of the bear market. Instead,
the rallies quickly gave way to renewed downturns.
The S&P 500 hit a three-year low on Sept. 21 in the aftermath of the
terrorist attacks. The market then rocketed in the fourth quarter as
investors bet that the U.S. military would prevail in Afghanistan and
that the economy would soon emerge from recession -- both correct
bets, as it turned out.
But as 2002 dawned, many stocks crumbled anew. And last week,
long-distance titan WorldCom's revelation that it understated expenses by
$3.9 billion over the last five quarters, effectively hiding a sea of red
ink behind phony profit statements, triggered a wave of selling that
drove the S&P index briefly below its close on Sept. 21.
There are various ways to measure "bull" and "bear" market cycles. But if
the S&P 500's dip last week below the September low means the bear market
didn't end after the terrorist attacks, it is now 27 months old. For the
S&P index, that would be the longest decline since the 1940s.
A Third Year in the Red
The harsh financial reality for many buy-and-hold investors is that their
portfolios are deep in the red for a third straight year -- a rarity
in modern market history. If the trend holds through December, this will
be the first time the market has fallen three consecutive calendar years
since 1939-41.
Investors in the giant Fidelity Magellan stock mutual fund, for example,
lost 9.3% in 2000, 11.7% in 2001 and are down 14.6% this year.
The erosion of stock values has left more investors mulling Will Rogers'
famous line about investing: "I am not so much concerned with the return
on capital as I am with the return of capital."
So far this year, Americans have pumped $203 billion into regular savings
accounts at banks and savings and loans, Federal Reserve data show. By
contrast, through May net new purchases of stock mutual funds totaled $72
billion, according to the funds' chief trade group.
That is a dramatic shift from years past. In 2000, stock mutual funds
attracted $310 billion in new money while savings accounts took in $142
billion.
At Charles Schwab Corp., the nation's largest discount brokerage,
customer trading volumes have dropped more than 25% in two years as
interest in the market has ebbed.
Bryan Carichner, a 27-year-old Web site developer in Los Angeles, says he
is keeping all of his savings in a money market account, even though
interest rates on those accounts are typically less than 1.5%.
"I feel that it's safer," Carichner said. "When I first got out of
college, the stock market seemed like an amazing place to supplement your
income and get ahead very quickly. Now I think you really need to know
what you're doing, whereas before it seemed you could just throw anything
against the wall and something was going to stick."
Certainly, by now most Americans know some of the fundamental reasons the
1990s bull market died: The economy had peaked after a stellar 10-year
expansion; the Federal Reserve had raised interest rates to counter what
it believed were inflation threats; and, perhaps most significant,
technology stocks had begun to implode after being driven to
stratospheric price levels by rampant speculation rooted in the popular
mania over the Internet.
Just as technology shares enjoyed incredible gains in the late 1990s,
they have borne the brunt of the market's losses since March 2000. The
tech-dominated Nasdaq composite stock index peaked at 5,048.62 in that
month. It now stands at 1,463.21, down 71% from the peak, as once-star
stocks such as those of Intel Corp., Cisco Systems Inc. and Sun
Microsystems Inc. have collapsed.
That loss rivals the near-90% decline in the Dow Jones industrial average
between 1929 and 1932.
Unlike the early 1930s, however, this bear market hasn't coincided with
an economic depression. Indeed, the 2001 recession was one of the mildest
on record, as measured by the decline in gross domestic product. Consumer
spending has remained surprisingly strong, especially on autos and homes.
But for many U.S. companies the recession's effect on profits was
crushing, amid high debt loads, rising foreign competition and a downturn
in spending by other businesses, particularly on tech equipment.
At the start of this year, worries about companies' earnings remained the
market's most vexing problem, as investors questioned how long it would
take for profits to get back on a growth track. Earnings, after all, are
what ultimately drive stock prices.
Fear of more terrorist attacks also has weighed on investors' confidence,
since stocks represent a bet on future prosperity.
Increasingly, however, blame for the market's ongoing decline has been
laid at corporate America's door: The succession of accounting scandals
and tales of executive chicanery -- from Enron Corp. to WorldCom -- have
left investors angry and disgusted.
The revelation by WorldCom, parent of the MCI long-distance network,
drilled deep into a public nerve. "It makes people lose faith in the
system," said Allan Spring, a 45-year-old computer programmer in
Irwindale.
Ron Kahn, head of a $65-billion stock portfolio at Barclays Global
Investors in San Francisco, said investors' collective doubt about the
trustworthiness of corporate financial data "is much more serious than
[the issue of] a lot of stocks that were overvalued coming back to fair
value."
The accounting scandals "are what could drive individual investors out of
the market," he said.
Concerned With Timing
Yet instinctively, some small investors sense that bailing out of stocks
at a time of crisis is a foolish move. Spring said he is tempted to shift
his money into bonds, gold or money market accounts, "but then this other
side of me says that once I do that, [stocks] will turn around."
Some market experts say that while the corporate scandals may chip
further at investors' confidence, the public's turn away from stocks had
already become self-reinforcing.
In his April 2000 book "Irrational Exuberance," Yale University economics
professor Robert Shiller described the late-1990s bull market as a
spectacular financial bubble that would inevitably be followed by a long
period of lousy returns on stocks.
Just as investors' bullish behavior fed on itself as stocks rocketed from
1995 to early 2000, so too their pessimism would feed on itself once the
market began to slide, Shiller wrote.
Many investors, he said, will become far more interested in preserving
whatever capital they have left. That could become an acute concern for
the ranks of near-retirees who plan to start tapping their savings in a
few years.
In an interview last week, Shiller said he is not optimistic about a
market rebound and that he sees no reason to change his view that
buy-and-hold investors in U.S. blue-chip stocks will earn no net return
through the end of this decade.
That was a heretical view in 2000, but "I'm not so unique anymore,"
Shiller said. "As the market goes down, all kinds of theories that didn't
seem plausible begin to look more plausible."
The fundamental problem, he said, is that the average big-name stock
still is overvalued by historical standards.
A common way to measure a stock's relative value is to compare the price
with the company's earnings per share, excluding one-time charges. Based
on Wall Street's average earnings expectations, the S&P 500 index is
priced at about 20 times this year's estimated earnings per share.
But the historical average price-to-earnings ratio for blue-chip shares
is about 14, Shiller said. For the market just to be valued at average
levels, then, the S&P 500 index should be 30% below its current value.
Yet many experts say there are good reasons for above-average prices on
stocks, and good reasons to expect investors to stay in the market,
unlike after the plunge of 1973-74.
What's different from the late 1970s is that the U.S. economy enjoys low
inflation, high worker productivity and low capital-gains taxes, said Jay
Mueller, economist at Strong Capital Management in Milwaukee.
All of those factors benefit the stock market, he said. In addition,
stock investing is automatic for millions of investors today, via
retirement savings plans. People tend to be slow to make changes in how
they allocate those dollars, and there is no sign this year of any
wholesale selling of stocks in retirement accounts.
But investor surveys, and anecdotal evidence, suggest more investors are
growing wary. And in a weak market, even a small number of new sellers
can tip the scales, driving prices lower.
U.S. Trust Co., which periodically surveys wealthy households (defined as
those with annual gross income of $300,000 or more, or net worth greater
than $3.75 million), in June found that 25% of 150 respondents said they
have sold off some or all of their stocks since March 2000. But the
majority --52% -- said they are "waiting to see what happens."
'I'm Not Giving Up'
For many individual investors, the decision so far has been to halt new
purchases of stocks, while holding on to what they have.
"I'm not giving up on stocks, but I'm putting my money into more liquid,
more secure investments until I feel the storm has passed," said investor
Alton Pabom, an auditor in Los Angeles.
Still, he said, "I know it [the market] is coming back for sure. The U.S.
economy is very resilient. I still maintain the optimism that it will
bounce back, so I'm not selling."
Wei Chi, manager of global diversity for oil company BP North America,
said he isn't planning to invest any additional money in the stock market
for the next three to six months. "Now, it's just wait and see if the
crisis is resolved," he said, referring to the corporate accounting
scandals. But he continues to hold on to stock investments meant to
finance his children's college education.
Chi, 49, worries more about the scandals' effect on younger people's view
of the market as a long-term investment. "For the younger investors, it's
very discouraging. It may actually scare them away for a long time," he
said.
---
Trent Lott and WorldCom
Ed Vulliamy (UK) Observer Sunday 30 June
http://www.observer.co.uk/worldview/story/0,11581,746636,00.html
No one has yet suggested that the WorldCom scandal could strike at the
heart of the Bush administration quite as starkly as Enron, but there are
embarrassing connections that could spiral into a political scandal.
Details are emerging of a highly amicable and lucrative relationship
between the shamed WorldCom conglomerate and Republican Senate Majority
Leader Trent Lott, one of Bush's closest confidants on Capitol Hill.
The new Trent Lott Leadership Institute received a $1 million donation from
WorldCom to underwrite a fundraising event as recently as 23 May. While the
regulations limit the amount a company like WorldCom and its telecom
subsidiary MCI can contribute to Lott's campaign, there are no such
restrictions on giving to certain types of charitable foundations.
At the same time, Lott has named a senior representative at WorldCom to the
commission studying internet commerce. WorldCom, until now one of the
largest employers in Lott's home state of Mississippi, has a significant
interest in the shape of potential legislation on internet commerce. In
fact, the company has recently lobbied for legislation to compete with
rival telecoms company AT&T's expanding service. Lott has denied that the
appointment to the commission was related to MCI's support of his
Leadership Institute.
WorldCom was seeking political influence at the core of the administration
right up to the eleventh hour before admitting its fraud and rubbing
shoulders with the President. Only last week, the company gave a $100,000
donation to a gala at which Bush was guest of honour; WorldCom's gift was
sufficient to have the firm feature as a Vice-chair of the event on its
programme.
---
10. Fucked Comany: Run for the hills
Hey,
I know none of you Sporadic subscribers give a fuck about business n
stuff... but still, I have to say... we're in red-alert mode. FC usually
receives a few internal memos everyday, but it's usually stupid shit like
cafeteria menu changes, office supply bandits, and "stop stealing my lunch
out of the fridge" type of stuff.
But the last flurry has been hardcore... in the past few days alone, hefty
memos from Worldcom, Lucent, Cnet, Digex, Accenture, Excite, 3com, Verio,
Hewlett Packard, Dell, and more... heed this warning people. Run for the
hills.
For the super-secret link to read all of the memos published to FC (334 and
counting), click here. Note that these are just the ones that have been
published publically... there are thousands more in the subscribers area,
but you're just a bunch of cheap bastards aren't you.
OH OH and hey if you're at work, you might want to wait till nobody's around
before you watch this most excellent Flash animation about Digital
Entertainment Network, and their founders who are wanted for child
molestation (always a fun topic! ugh). Still, the animation is WELL worth
the download (just make sure nobody's around...)
Hope I got your morning off to a bright and cheery start, have a good
weekend!
rock on, or something.
pud
Here are some of today's newest fucks. As usual, many more new ones on the
site.
http://www.fuckedcompany.com/
Worldcorn
Regarding layoffs at Worldcom, "2000 will be contractors, 3000 will be
attrition, 5000 will be......" according to this memo distributed to some
employees. More FC Worldcom "coverage" here.
Company: Worldcom
Points: 194
---
http://www.cnn.com/TRANSCRIPTS/0206/27/mlld.00.html
LOU DOBBS: [....] The Pentagon could face some severe problems
because of the WorldCom scandal. WorldCom handles a third of the
unclassified communications traffic for the U.S. military, but the
Pentagon says it could transfer that to other companies, should that
be necessary.
The WorldCom contracts include participation in a $7 billion project
to build the Navy and Marine Corps Intranet, a $4 billion contract
for fiber and satellite services to the Middle East, the Caribbean,
South America, and the Asia-Pacific region, and a $400 million deal
to provide services for the Defense Information Systems Agency.
------
DOBBS: Do you find any irony in the fact that it's the conservatives
in the House who are creating a problem for the Republican
administration?
RUBIN: Life is full of ironies, Lou. And I remember the difficulties
they created for me, and I watch this with some interest.
fwd from jonathan prince
http://KillYourTV.com
http://Photographica.org
---
Rod Dreher: Confessions of a Martha Stewart Fan
Why they hate her
June 24, 2002 8:45 a.m.
http://www.nationalreview.com/dreher/dreher062402.asp
This is National Dump on Martha Stewart Week. Even though we are, at
last word, still at war with Islamofascism, the Palestinians are still
massacring Jews, and nuclear war is still a possibility between India
and Pakistan, the American media find Martha Stewart's $228,000 sale of
ImClone stock to be "What's Happening Now." The New York tabs are
getting their second wind, ABC's This Week decided to lead with
Marthagate, and the Leona Helmsley of the 21st Century has made the
cover of the Newsweek out today.
Can I ask one question? Who, aside from the media, cares? I have no idea
if Martha Stewart is guilty of insider trading or not, but even if she
is, I can't work up much outrage about it. After all, it's not like she
blew herself up on a Jerusalem bus, dropped plutonium sachets into
upstate reservoirs, or abused a child. And though it may be legal, the
$1 million a year ex-Time-Warner honcho Gerald Levin is receiving to be
a "consultant" to the company whose stock he piledrived into the ground
is a more outrageous testimony to the financial rewards of insiderdom
than Martha's dodgy $228K.
Don't misunderstand: If Martha is guilty, then she should be held
accountable for it. But judging by the inordinate amount of media
coverage this story is receiving, based on such flimsy evidence against
her, it seems that Martha's greatest offense was ignoring Walter
Winchell's advice to be nice to the people you meet on the way up,
because they're the same people you'll meet on the way down. Everybody
in the New York media knows that Martha Stewart has a reputation as a
royal bitch, and more than a few people who feel personally insulted or
mistreated by her have been praying for the day when she receives her
comeuppance.
Bu there's something else driving this Martha-bashing, I think. A lot of
people who have never given a second's thought to how Martha Stewart
treats her gardener reflexively despise the woman who rode the 1990s
nesting wave to fame and fortune, becoming America's undisputed goddess
of domesticity.
As with Rush Limbaugh and the late, lamented Oprah's Book Club, people
hate Martha Stewart without ever having experienced what she does
firsthand. I know I did. Years ago, I loved to make fun of my mom for
subscribing to Martha Stewart Living, because, well, everybody knew what
a joke Martha Stewart was. Didn't they? One weekend, I was visiting my
folks with my fiancée, and I caught her up late one night reading Mama's
copy of Martha Stewart Living. We traded snarky comments about the
thing, but Julie still tore out a recipe. Sheepishly.
One day, after we married, a copy of MSL showed up at our Manhattan
apartment. We would have been less embarrassed, I think, had it been
Hustler. We called my mother, who said, "Well, y'all kept tearing out
articles when you'd come to visit, so I thought I'd buy you your own
subscription." Oh God she noticed! Well, as long as we're not paying for
it, I thought, I might as well read it for kicks.
As it turned out, MSL's lush photography and crisp design was really
impressive, and had a way of drawing reluctant readers like me into
stories about the most quotidian topics. You came out the other side
educated about things that suddenly seemed useful to know. A couple of
months later, reading MSL in bed next to my wife, I turned to her and
said, "Hey, I didn't know all this about butter." There was no denying
it from that point on: I was a Martha Stewart fan.
It had everything to do with the fact that I was also a newlywed husband
who was struggling to learn how to cook and set up a household. I never
learned to cook growing up (woman's work!), and interior design was
chiefly a matter of thumbtacks and movie posters. Julie was infinitely
more sophisticated on the design front, but inasmuch as she went
straight from being a college senior to being a wife, there was a lot of
practical information she needed to know. She grew up with a working mom
who didn't have the time to do much cooking around the house, so she was
as clueless as I was. In short, we needed to learn how to cook and keep
house like grown-ups, and Martha Stewart Living made it seem stylish and
modern, like the the kind of thing swell young Manhattanites might care
about.
Happily, my wife and I soon discovered a mutual passion for cooking. In
a city in which you can get just about any ingredient you want, it pays
to know the difference between various kinds of butter, and to learn
what you can do with kaffir lime leaves. MSL helped us get over the
ridiculous idea that cooking was drudge work, or that doing it well was
beyond our talents. That has proven to be a very good thing indeed.
Nothing gives my wife and me more satisfaction than to cook for friends.
Martha got us started on what's become an unexpected passion.
What's more, MSL teaches you things you may not have got at home, either
because your mom didn't know how, or you couldn't be bothered to learn.
How to care for silver. How to plant a garden in a tiny urban space. How
to deal with water damage in your house or apartment. How to shop for
the kitchen knives. How to pick out the healthiest tulips. This sort of
thing might sound silly, until you find yourself standing outside the
Korean deli with orders from the missus to bring home fresh flowers for
the big dinner party, and it means everything to the one you love that
you do this right.
Some people hate Martha for the same reason they hated Oprah's Book
Club: snobbery. One of the great consumer revolutions of the past 20
years has been the mass-marketing of tasteful design. When I was a kid
in the 1970s, decent-looking clothing and furniture was something for
the well-off. The rest of us had to take what we could get at Sears, or
worse. And it was all ugly. That has changed. Now, Michael Graves and
Philippe Starck are doing appliances for Target, and the less exalted
Martha Stewart has her own line of products at Kmart. The other day,
some publication mentioned that Martha's lines at Kmart weaned the
proles off polyester sheets and taught them the value of cotton -- as if
this were a bad thing. Why is it objectionable to make aesthetic quality
affordable and available to the masses? Of course the Martha Stewart
cult of personality is obnoxious. But you don't have to make Martha your
personal savior or personal shopper to give her credit for being a good
influence.
It's a lot easier to like Martha if you don't watch her TV show, where
she really does come across as the neurotic, icy perfectionist of the
stereotype. And you can't read MSL without laughing at the more
ridiculous manifestations of the personality cult. Every month, MSL
publishes "Martha's Calendar," a to-do list that surely bears no remote
resemblance to this media mogul's actual schedule. The May 16 entry
says: "Groom cats and dogs; spring-clean canary cage." If you believe
Martha Stewart's hands come within a mile of her cat's fleas or her
canary's droppings, I'll meet you on Ebay to sell you my Duncan Phyfe
Adirondack chair.
It gets even more unbearably precious. I'm sitting here with the April
2002 issue on my lap, open to page 38, which has a full-page ad hawking
a CD called "Martha Stewart Living Quiet Time." It's the soft-rock
nesting soundtrack, and the CD cover art features Martha in a terry
cloth robe, her hair up in a towel, sipping tea. "We've also included
some of our favorite projects for the home, along with a recipe for
cranberry oatmeal cookies," the ad copy reads.
That's called Asking For It. And there are plenty of people ready to
give it to Martha Stewart, right between the eyes. They're taking their
best shots now. It has been said that the vehement anti-Martha backlash
is evidence of a sexist double standard, and, like I said, it's been
attributed to Martha's legendary nastiness. There's probably some truth
in both views.
I have a third theory: that some of this vitriol comes from media people
who resent the fact that Martha Stewart became rich and famous by
propagating the anti-feminist notion that homemaking is a good thing,
and showing women how to find satisfaction by doing domestic tasks
tastefully and well? Whatever her sins, I think Martha Stewart makes a
lot of these career-obsessives feel guilty about neglecting their home
life. And she's not going to get away with it, not if they can help it.
---
Capital isn't working
Larry Elliott
Tuesday June 25, 2002
The Guardian
The stock market euphoria of March 2000 seemed a long time ago
yesterday as shares in London and New York resumed their downward
slide. Back then, Kevin Keegan was England's manager, Bill Clinton
was president of the United States and the long bull market in
share prices was about to end.
For anyone with money invested in a pension plan or an endowment
mortgage, Lastminute.com's debut on the stock market seems like a
relic from a different age.
Did the Nasdaq really hit 5,000 as investors loaded up with shares
in hi-tech companies that had never made a cent's profit and were
never likely to? They did. Were investors seduced by the patter of
snake-oil salesmen who said the good times would last for ever?
They were.
There has been time to repent at leisure. The bear market has been
under way for more than two years and shows little sign of ending.
Rallies on stock markets in the autumn of last year proved to be
false dawns, a sad reprise of the irrational exuberance that had
propelled them to such ridiculous heights either side of the
millennium. The Nasdaq is trading at less than one third of its
peak and the S&P 500 in New York and the FTSE 100 in London are
within a whisker of the lows they reached last autumn.
Six months ago, it was assumed that September 11, terrible as it
was, had been cathartic for the markets, generating one last wave
of panic selling but clearing the decks for recovery.
Expansionary policies - cheaper money, lower taxes, higher public
spending - would reverse the global economy's drift into recession
by boosting growth. Higher growth would mean higher corporate
profits. Higher profits would mean higher share prices.
Anticipating the return of the good times, the markets went up,
only to slide all the way back down again during 2002, even as
optimism grew that the full-scale global recession prophesied in
the aftermath of September 11 had been averted.
Policymakers - especially in the US and Britain - responded
quickly and aggressively late last year to cut the cost of
borrowing and flood financial markets with liquidity. At first,
markets rose sharply in anticipation of stronger growth, but now
there are signs of a pick-up in activity they have given back
nearly all the gains they made. Growth picked up markedly in the
US in the first quarter of the year and there are hopes that the
rise in unemployment may have been capped at 6%.
Britain's economy, according to the official data, stagnated in
both the fourth quarter of 2001 and the first quarter of 2002, but
there is justifiable scepticism about whether the figures paint an
accurate picture. Upward revisions to the growth estimates are
likely; in any case, the strength of the housing market and a
rebound in manufacturing suggests that the second quarter will be
much stronger.
So what is going on in the stock markets? Is there any rational
explanation for their behaviour, or are they exhibiting the
personality traits of a manic depressive, veering between
excessive optimism and deepest gloom?
One theory is that we are in the darkest hour before the dawn. Not
only is global recovery now well under way, but all the bad news -
the spread of Enronitis, the possibility of further terrorist
attacks on the US, war against Saddam Hussein - is already
discounted by the markets.
In historical terms, the recession of 2001 was the merest of blips
that was choked off by the coordinated actions of the world's
central banks. The fact that the Federal Reserve, the Bank of
England and the European Central Bank may all raise interest rates
over the coming months is clear evidence that the worst is over,
and that once the markets recognise this a durable rally will
start.
A second argument is that markets are still overvalued,
particularly since the ferocity of global competition means that
companies are finding it increasingly hard to push up prices.
The 1990s saw the longest period of uninterrupted profits growth
in the US in the post-war period, aided by the weakness of the
dollar in the first half of the decade, favourable tax treatment
of the corporate sector, a weakening of labour's bargaining power
and the pioneering role of America in the development of the new
technololgies. Markets were right when they said something
significant had happened to the US economy. But they were wrong to
think that earnings could continue to rise inexorably for ever,
justifying higher and higher share prices.
A stronger dollar since the mid-1990s, a tighter labour market and
wasteful investment that led to overcapacity all contributed to
the pricking of the equity bubble. Profits always go up and down
with the economic cycle but since 2000, the annualised decline in
profits for the S&P 500 companies has been the sharpest in the
post-war period.
'Unsually modest'
With large amounts of spare capacity, prices have been slashed.
Ford and General Motors have been offering fantastically generous
car deals, computer manufacturers such as Dell have been accused
of predatory pricing - all of which is good news for consumers,
bad news for corporate earnings. And, as a result, bad news for
share prices - and investment plans such as pensions linked to
stock market performance.
Peter Oppenheimer, a global strategist at HSBC said: "The rebound
in world stock markets following two years of decline has, so far,
been unusually modest by the standards of history.
"From the September 20 lows, world stock markets have risen around
10%, compared with an average rise of around 20% six months after
previous bear market lows. There has been a range of factors that
have no doubt contributed to the continued weakness, from
accounting issues to valuations. But underlying all of these are
structural factors that will lead to low returns in stock markets
for a long time. Interest rates cannot continue to decline as they
have done over the past 20 years, the risk premium may be rising
and profit prospects are deteriorating."
Mr Oppenheimer says the scope for sustained rises in equity prices
is limited. "Indeed, while it is commonly thought that September
20 marked the end of the bear market, if one excludes the sharp
fall in the immediate aftermath of September 11, and then the
sharp rebound that followed, the trend in the equity markets is
still downwards."
Even assuming this is the case, it may have little impact on the
real economy in Britain. Traditionally, there have been long
periods in the 1950s and 1960s when full employment and low
inflation coincided with modestly performing share prices. Michael
Saunders, UK economist at Citibank, says: "The economy probably
has more than enough support from low interest rates to overcome
the drag from modest weakness in equity markets. Despite equity
weakness, surging house prices have probably lifted household
wealth slightly over the past year."
Mr Saunders also believes that the plunge in profits among UK
quoted companies seems to greatly overstate the weakness of
profits for the overall UK business sector. He says the stock
market indices give too little weight to the domestic
market-oriented service sector and construction firms - which have
benefited from the consumer boom - and too much to companies that
rely heavily on overseas earnings.
Doomsday scenario
For the FT 350 companies, 58% of profits come from outside the UK.
By contrast, the government's accounts show that for the corporate
sector as a whole, only 22% of profits come from outside the UK.
The real danger for the UK is not a fall in the stock market to
more realistic levels, but the threat of a double-dip recession in
the US. Some analysts see the recovery so far this year as merely
the first leg of a double-dip recession.
Robert Brenner, author of the recently published The Boom and the
Bubble, is the best exponent of the doomsday scenario. "The
deflation of the stock market bubble is propelling a US economy,
heavily burdened by manufacturing overcapacity, toward a serious
recession, and in the process detonating further recession all
across an advanced capitalist world that is similarly held down by
superfluous productive power.
"The resulting downturn is weighing particularly heavily on the
triangle of interlinked economies in East Asia, Japan and the US
itself, so that a mutually reinforcing downturn seems in
prospect."
Mr Brenner says there might be a mass exodus from US financial
markets, prompting a full-scale run on the dollar. The Federal
Reserve would then be in the nearly impossible situation of having
to cut interest rates to keep the economy afloat and of needing
higher interest rates to attract a flow of funds from overseas to
fund the US current account deficit.
This remains a minority view. Officially, the US economy is on the
way back, and dragging the rest of the world along in its
slipstream. But concern is growing that the recovery may stall,
and there is no possible way in which the Federal Reserve will
raise rates tomorrow.
Indeed, there are some who think the severity of the bear market
will require the next move to be down. It's not only investors who
are getting nervous.
---
13. Justice for Janitors at Yahoo!
Over the past two months, janitors who clean the Yahoo! office in
San Jose, California, have been the target of an intense campaign of
fear and intimidation in response to their attempts to raise wages,
secure health care, and have a voice at work by joining the
Service Employees International Union.
Most janitors at Yahoo! earn about $16,000 a year and
have no health insurance for themselves and their
families.
"I feel bad when I walk around Yahoo!," says Francisco Casteneda,
Yahoo! janitor. "I can see that Yahoo! has money, but they don't
ensure that we are paid well, and we don't have health care for our
families."
** GET INVOLVED **
-Send a letter to Yahoo! CEO Terry Semel and ask that Yahoo's
cleaning sub-contractor, Team Services, meets industry standards and
follows federal labor law. Yahoo! janitors want to provide high
quality standards and services, but they also want respect on the
job. http://www.unionvoice.org/campaign/boohooyahoo
-Tell your friends about the janitors' efforts.
http://www.unionvoice.org/join-forward.tcl?domain=Yahoo1877
-Need more info? Check out www.BooHooYahoo.com -- a
site recently launched by the janitors to dramatize
their efforts to secure decent wages and basic
benefits. Thanks for your help!
---
14. Joseph Nocera: System Failure
Corporate America has lost its way. Here's a road map for restoring
confidence.
FORTUNE
Monday, June 24, 2002
http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=208314
Goldman Sachs CEO Hank Paulson is not a touchy-feely guy. Even by
Wall Street standards, he's fairly buttoned down. But the daily
drumbeat of news about horrifying corporate behavior would get to
anyone--and it's clearly getting to Paulson. "In my lifetime,
American business has never been under such scrutiny, and to be
blunt, much of it deserved,'' he said in a recent speech. To FORTUNE
he added, "You pick up the paper, and you want to cry.''
You sure do. Every day, it seems, a new scandal bursts into public
view. Bankrupt Kmart is under SEC investigation for allegedly cooking
the books. Adelphia's founding family is forced to resign in disgrace
after it's revealed that members used the company as their own
personal piggy bank, dipping into corporate funds to subsidize the
Buffalo Sabres hockey team, among other things. Former telecom
behemoths WorldCom, Qwest, and Global Crossing are all being
investigated. Edison Schools gets spanked by the SEC for booking
revenues that the company never actually saw. Dynegy CEO Chuck Watson
denies that his company used special-purpose entities to disguise
debt a la Enron--until the Wall Street Journal reports that, lo and
behold, the company does have one, called Project Alpha. (Watson has
just stepped down.) Most recently, of course, Tyco CEO Dennis
Kozlowski resigns after informing his board that he is under
investigation for evading sales tax on expensive artwork he
purchased. Kozlowski has since been indicted--but even before the
most recent disclosures, Tyco's stock was pummeled by the widespread
suspicion that it used accounting tricks to boost revenues (a claim
the company has consistently denied).
Phony earnings, inflated revenues, conflicted Wall Street analysts,
directors asleep at the switch--this isn't just a few bad apples
we're talking about here. This, my friends, is a systemic breakdown.
Nearly every known check on corporate behavior--moral, regulatory,
you name it--fell by the wayside, replaced by the stupendous greed
that marked the end of the bubble. And that has created a crisis of
investor confidence the likes of which hasn't been seen since--well,
since the Great Depression.
Even Harvey Pitt and Bill Lerach, who are poles apart on most issues,
agree on this point. "I'm really afraid that investor psychology in
this country has suffered a very serious blow," says the
controversial Lerach, the plaintiffs attorney best known as the lead
counsel representing Enron's beleaguered shareholders. SEC Chairman
Pitt, who made his name defending big corporations, concurs: "It
would be hard to overstate the need to remedy the loss of
confidence,'' he said at a recent conference at Stanford Law
School. "Restoring public confidence is the No. 1 goal on our
agenda."
Declining investor confidence is not the only reason the stock market
is hurting, of course. (The S&P 500 is down 10% so far this year,
while the Nasdaq has fallen 20%.) For one thing, the world is an
unsettling place right now, with Pakistan and India busy saber
rattling, the Mideast in turmoil--and the threat of more terrorist
attacks on U.S. soil very much in the air. For another, stocks remain
high by historical standards: Even with a 20% drop since its peak in
March 2000, the price/earnings ratio for the S&P 500 is still 29,
compared with the norm of 16.
Despite the constant reports of misconduct, investors can't cast all
the blame for the market's troubles on the actions of CEOs and Wall
Street analysts--much as they might like to. There was a time not too
long ago when everyone, it seemed, was day trading during lunch
breaks. As Gail Dudack, chief strategist for SunGard Institutional
Brokerage, puts it, "A stock market bubble requires the cooperation
of everyone."
Still, the unending revelations--and the high likelihood that there
are more to come--have underscored the extent to which the system has
gone awry. That has taken a toll on investors' psyches. According to
a Pew Forum survey conducted in late March, Americans now think more
highly of Washington politicians than they do of business executives.
(Yes, it's that bad.) A monthly survey of "investor optimism"
conducted by UBS and Gallup shows that the mood among investors today
is almost as grim as it was after Sept. 11--and has sunk by nearly
half since the giddy days of late 1999 and early 2000. Similarly, the
average daily trading volume at Charles Schwab & Co.--another good
barometer of investor confidence--is down 54% from the height of the
bull market. "People deeply believed, as an article of faith, in the
integrity of the system and the markets," Morgan Stanley strategist
Barton Biggs wrote recently. "Sure, it may at times have seemed like
a casino, but at least it was an honest casino. Now many people are
questioning that basic assumption. Are they players in a loser's
game?" Investing, notes Vanguard founder John C. Bogle, "is an act of
faith." Without that faith--that reported numbers reflect reality,
that companies are being run honestly, that Wall Street is playing it
straight, and that investors aren't being hoodwinked--our capital
markets simply can't function.
Throughout history, bubbles have been followed by crashes--which in
turn have been followed by new laws and new rules designed to curb
the excesses of the era just ended. After the South Sea bubble in
1720, points out Columbia University law professor John Coffee, the
formation of new corporations was banned for more than 100 years. In
the wake of the 1929 Crash--and the subsequent discovery that
insiders had used their positions to skim millions from the market--
dramatic reforms were enacted, including the creation of the SEC, the
passage of the Glass-Steagall Act separating banks from investment
houses, and the outlawing of short-selling by corporate officers.
Is the situation today as dire as it was in 1929? Of course not. But
it is serious--serious enough that real reform is once again needed
to restore confidence in the system. Already there has been a flood
of proposals, which range from the good to the not-so-good. For
instance, the New York Stock Exchange's recently announced plan to
strengthen boards of directors has been widely lauded--praise, we
believe, that is quite deserved (see item 5). If enacted, the NYSE
reforms will help prod boards to finally act in the interest of
shareholders--which, after all, is supposed to be their job.
Similarly, the SEC's decision to crack down on Edison Schools sends
an enormously important signal. Money that was going to pay, say,
teachers' salaries was being booked by the company as revenue--even
though the money never actually flowed through Edison. Believe it or
not, Edison's accounting abided by Generally Accepted Accounting
Principles, or GAAP. In going after Edison, the SEC was saying that
simply staying within GAAP is no longer good enough--not if the
spirit of the rules is being violated, as was clearly the case with
Edison.
On the other hand, the tepidness of some other reform ideas is
disheartening. Sure, New York attorney general Eliot Spitzer
extracted $100 million from Merrill Lynch for its analysts' abuses,
but he didn't do anything to change the system that allows analysts
to participate in investment-banking deals. And Harvey
Pitt's "solution" to the analyst problem--that analysts be forced to
sign a statement saying their pay was not contingent on how they
rated a particular stock--would be laughable if it weren't so tragic.
Meanwhile, one of the NYSE's most notable proposals--that option
grants be approved by shareholders--is already being opposed by the
Business Roundtable. Don't America's business leaders understand how
corrosive their egregious pay packages are to fundamental faith in
the system? This sends precisely the wrong signal.
What follows is our own package of reforms for cleaning up the system
and restoring investor confidence. We do not claim that they are the
most politically palatable ideas, or the most likely to be adopted in
the short term. In some cases--as with our proposed reforms for Wall
Street analysts and IPOs--they're quite radical. To which we say: So
be it. There are times that cry out for radical reform. We are living
in one of those times.
1. Earnings--Trust but Verify
When it comes to reporting earnings, U.S. companies have about as
much credibility these days as the judges of Olympic figure skating.
So how do you begin to restore investor confidence post-Enron, post-
Tyco, post-you-name-it? By having companies state profits in a way
that is more meaningful and less subject to manipulation. It's not as
hard as it sounds.
First, get rid of the absolute funniest numbers--the so-called pro
forma earnings companies use to divert attention from their real
results. We're talking about things like adjusted earnings, operating
earnings, cash earnings, and Ebitda (earnings before interest, tax,
depreciation, and amortization). If companies want to tout such
random, unaudited, watch-me-pull-a-rabbit-out-of-my-hat figures in
their press releases, well, fine. But investors should immediately be
able to compare these figures with full financial statements prepared
in accordance with Generally Accepted Accounting Principles (GAAP)
rather than have to wait 45 days or more for the company's SEC
filing.
True, GAAP earnings aren't perfect. They, too, can--and must--be
improved. Right now, for instance, they don't reflect the real cost
of stock options. It's past time to make this happen, no matter how
much Silicon Valley screams.
Next, stop the abuse of restructuring charges. The cost of things
like plant closings and lay-offs is just part of doing business and
should count as an operating expense, not as a special one-time
charge. Plus, companies too often set up a reserve to cover
restructuring costs, then later quietly shift some of that money back
into profits. If that happens, investors ought to know about it. The
SEC should make sure they do.
Another favorite accounting trick that has to go: the use of
overfunded pension plans to boost income. Standard & Poor's, in its
newly formulated "core earnings'' measure, excludes pension income
altogether, while including any pension costs. That's not a bad
solution, since pension expenses are real, but a company can get its
hands on pension income only by dissolving the plan, distributing
benefits, and then paying ridiculously high taxes on the remaining
money. At the very least companies should be forced to recognize the
actual gains and losses of their pension plans--not simply estimate
them based on prior years' returns.
None of this will make one iota of difference unless companies adhere
to the spirit of accounting rules, not just the letter. Here's one
way to help make sure that happens: Donn Vickrey, executive vice
president of Camelback Research Alliance, thinks auditors shouldn't
just sign off on clients' financial statements. They should also have
to grade the quality of their earnings. A company that was
ultraconservative in its accounting would get an A, while one that
arguably complied with GAAP but used aggressive accounting tricks
would receive a D. "Companies would then be under pressure to not
just make their numbers but also get the highest-quality ratings,''
Vickrey says. Sure, auditing firms might then be under pressure to
inflate grades. But earnings will never mean anything anyway if
auditors remain pushovers.
Jeremy Kahn
2. Rebuild the Chinese Wall
Here's the single most important fact about securities research at
the big Wall Street firms: It loses money. Lots of money. According
to David Trone at Prudential Financial, the typical giant brokerage
firm spends $1 billion a year on research. But big institutional
investors--the clients--only pay about $500 million in trading
commissions in return for research. (Historically research has been
paid for with trading commissions.) And if you want to understand why
research became so corrupted during the late, great bubble--and so
tied to investment banking--that's the reason. By serving as an
adjunct of their firm's investment bankers, research analysts were,
in effect, attaching themselves to a huge profit center.
Participation in banking deals is why analysts felt justified
commanding seven-figure salaries--and why bankers (and companies for
that matter) felt justified in demanding that analysts say only nice
things in their research reports to investors. As a respected
research analyst puts it, "Corporations are indirectly subsidizing
research on themselves because they pay the banking fees that pay for
what is called objective research."
When analysts first started participating openly in dealmaking some
30-odd years ago, they were said to have "jumped the wall"--a
reference, of course, to the Chinese wall that was supposed to
separate analysts from investment bankers. Today nobody uses that
phrase. Why would they? There is no Chinese wall anymore.
We should know by now that research with integrity is simply not
possible without a Chinese wall. But the most common reform proposal
being kicked around--that researchers should not be paid directly for
their investment-banking work--doesn't go nearly far enough in
resurrecting it. It's way too easy to get around. Still, there is a
surprisingly simple fix: Enact a regulation that forbids analysts
from being involved in banking deals, period.
Think about it for a second: Why are analysts involved in deals in
the first place? The standard answer you get from Wall Street is that
they are there to protect investors. They are supposed to "vet" deals
on behalf of the investing public--and if they think an IPO doesn't
pass the smell test, they are supposed to have the power to force the
firm to pass on it. But we all know that is not how it works in
reality--if it ever did. In fact, analysts serve as a marketing tool,
implicitly (and sometimes explicitly) promising favorable coverage if
their firm is allowed to underwrite the deal.
Under our proposal, investment bankers will have to do their own
vetting, something they're perfectly capable of handling, thank you
very much. Having been shut out of the banking process, the analyst
will be able to evaluate the company only after it has gone public--
when he can make his own decision about whether to cover it. Indeed,
shut out of banking, analysts will once again serve only one master:
the investor.
How will analysts earn their seven-figure salaries--and how will the
big firms make money on research? We don't know--but we don't really
care. Fixing their broken business model is the brokerage industry's
problem, not ours. It's possible that analysts will have to take big
pay cuts. More likely brokerage firms will have to make a choice:
Either openly subsidize research--on the grounds that it offers value
to the firm's clients--or shut down their research operations and
leave serious securities analysis to dedicated research boutiques
like Sanford Bernstein or Charles Schwab, which is trying to set up a
system to provide objective research for small investors. Either way
we'll be better off than we are now, getting research we can't trust
from analysts mired in conflicts of interest.
David Rynecki
3. Let the SEC Eat What It Kills
For months it has been the underlying question--surfacing with the
Enron collapse, and again with Global Crossing, and again with Kmart,
and again with the scandal over Wall Street research: Where the heck
is the SEC? Where is the watchdog?
The answer, certainly, is MIA.
As any careful newspaper reader can tell you, the Securities and
Exchange Commission has launched one probe after another in recent
months. (Indeed, the rate of new investigations from January to March
was double that of the first quarter of 2001.) But the agency's
enforcement staff is stretched so thin that many of the
investigations are likely to fall by the wayside. It sounds like a
parable from Sun Tzu: An army that is everywhere is an army nowhere.
Consider the SEC's mandate as sheriff of Wall Street. The agency by
law is charged with reviewing the financial filings of 17,000 public
companies, overseeing a universe of mutual funds that has grown more
than fourfold (in assets) in the past decade, vetting every brokerage
firm, ensuring the proper operation of the exchanges, being vigilant
against countless potential market manipulations, insider trading,
and accounting transgressions--and investigating whenever anything
goes wrong. Yet as the $12 trillion stock market becomes ever more
complex, the SEC hasn't been given enough resources even to read
annual reports. Seriously. One of the agency's chief accountants
admitted in a speech last year that only one in 15 annual reports was
reviewed in 2000. Take your guess on Enron.
How many lawyers, you ask, does the SEC have to study the disclosure
documents of 17,000 public companies? About 100, says Laura S. Unger,
the commission's former acting chairwoman. The number of senior
forensic accountants in the enforcement division--the kind of experts
who can decipher Enron's balance sheets--is far fewer than that. And
as if that isn't bad enough, staffers are leaving in droves. The
reason is a familiar one: money. Forget about how poor civil service
pay is compared with that of the private sector. The SEC's attorneys
and examiners are paid 25% to 40% less than those of even comparable
federal agencies, like the FDIC and the Office of the Comptroller.
Employee turnover is now at 30%--double the rate for the rest of the
government. Which means that in three years or so, virtually the
whole staff will be replaced. President Bush actually signed into law
a bill that would give SEC regulators pay parity with their federal
counterparts, but then Congress didn't bother to fund the raise in
its annual appropriations. In the meantime the SEC is left with worse
vacancy rates than the Ramallah Hilton.
The strangest part of the story, though, is that the money is already
there. Remember those corporate filings? Well, the SEC took in more
than $2 billion in processing fees last year--almost five times its
entire annual budget. A single company's registration fee, such as
that for Regal Entertainment ($31,740), which went public in May,
could nearly pay the annual salary for a junior examiner. These
dollars, according to the Securities Act of 1933, are supposed to
recover the costs related to securities registration
processes, "including enforcement activities, policy and rulemaking
activities, administration, legal services, and international
regulatory activities." They don't. Congress diverts the money to
other uses instead. Think of it as an expensive toll bridge in
disrepair--and the dollars we drivers are handing over for roadway
paving and safety inspections are being used for something else
entirely, like the National Archives (which, by the way, is growing
its staff at twice the rate of the SEC).
"Investors and corporate filers are paying way over and above the
cost of regulation, and they're not getting it," says
Unger. "Congress seems to see the money as an entitlement." A recent
law (the same one, in fact, that authorized pay parity) will bring
the fees sharply down starting in October, but even so there is
plenty of money to fund a comprehensive regulatory program--one that
brings in enough stock cops to make Wall Street safe for investors
again. The cost of not funding the SEC is more disasters like Enron.
You do the math.
Clifton Leaf
4. Pay CEOs, Yeah--But Not So Much
Before they stumbled, they cashed in. Enron's Jeff Skilling made $112
million off his stock options in the three years before his company
collapsed. Tyco's Dennis Kozlowski cashed in $240 million over three
years before he got the boot. Joe Nacchio, who's still in charge at
Qwest but has left investors billions poorer, made $232 million off
options in three years.
If you're looking for reasons corporate America is in such ill
repute, this kind of over-the-top CEO piggishness is a big one.
Investors and in some cases employees lost everything, while the
architects of their pain laughed all the way to the bank.
The funny thing is, we asked for it. "Pay for performance" was what
investors wanted--and to a significant extent, got: For the first
time in memory, CEOs' cash compensation actually dropped in 2001, by
2.8%, according to Mercer Human Resource Consulting. The value of top
executives' stock and options holdings in many cases dropped by a lot
more than that.
But while CEO pay has become more variable--and study after study has
shown it to be more closely linked to company performance than it
used to be--it has also grown unspeakably generous. Fifteen years ago
the highest-paid CEO in the land was Chrysler's Lee Iacocca, who took
home $20 million. Last year's No. 1, Larry Ellison of Oracle, made
$706 million.
There are a lot of complicated, difficult-to-change reasons for this.
Some are addressed in the next item, on corporate governance (see
also "The Great CEO Pay Heist" in fortune.com). Some may be
insoluble. In any case, we're probably due an acrimonious national
debate over just what a CEO is worth. But for now, here's a
straightforward suggestion: Force companies to stop pretending that
the stock options they give their executives are free.
It's probably safe to say that Oracle's board would never have paid
Larry Ellison $706 million in cash or any other form that would have
to show up on the company's earnings statement. All that money
(Ellison didn't get a salary last year) came from exercising stock
options that the company had given him in earlier years. And because
of the current screwed-up accounting for stock options, Oracle's
earnings statement says that Ellison's bonanza didn't cost the
company a cent.
Options are by far the biggest component of CEO pay these days.
Virtually all of the most eye-popping CEO bonanzas have come from
options exercises. While it is sometimes argued that options are
popular because they link the interests of executives with those of
shareholders, there are other, possibly better ways to do that--
outright grants of stock, for instance--that don't get used nearly as
much as options because they have to be expensed.
Do the markets really have trouble seeing through this kind of
financial gimmickry? Are boards really so influenced by an accounting
loophole? In a word, yes. "Anybody who fights the reported-earnings
obsession does so at their own peril," says compensation guru Ira Kay
of the consulting firm Watson Wyatt. So let's make companies charge
the estimated value of the options they give out against their
earnings, and see if the options hogs are up to the fight.
Justin Fox
5. Fire the Chairman of the Bored
Normally, if you ask Nell Minow what's wrong with corporate boards,
you get an earful. As a longtime shareholder activist and founder of
the Corporate Library, an online newsletter covering corporate
governance, Minow has been one of the most vocal and acerbic critics
of American boardrooms. But earlier this month she was
uncharacteristically chipper on the subject. "Today I'm just going to
be happy," she demurred when asked to go over her usual gripes about
boards.
What had Minow in such a good mood? A 29-page report released by the
New York Stock Exchange on June 6, proposing sweeping reforms to the
rules governing the boards of its listed companies. The reforms won't
go into effect until later this summer, when the NYSE's own board is
expected to approve them. Once that happens, companies trading on the
Big Board will have to adopt them--or risk being delisted. "I never
thought I'd see this from the New York Stock Exchange," says Minow.
It's easy to see why she's so ecstatic. The report calls for nearly
everything Minow and other shareholder activists have been clamoring
for--from a shareholder vote on stock option grants to annual
performance evaluations of directors to the requirement that each
board publish a code of ethics. The big one, though, concerns the
independence of boards.
As Enron and its ilk have shown, too often directors aren't really
independent. Even so-called outsiders end up having some ties to the
CEO. "On the surface Enron's board looked independent,'' says Jay
Lorsch, a governance professor at the Harvard Business School. "But
everybody on that board was selected by Ken Lay." And when the CEO
dominates, the rest of the board is often too cowed to question his
leadership. "Right now in many board meetings there is no dialogue,"
a prominent board consultant told Fortune. "Directors will just sit
and watch the presentations. At the end they nod and say, 'Great.' "
The Big Board plans to change all that. Under its proposal, a
majority of directors would have to be outsiders. Real outsiders.
That means no ex-employees (they won't count as outsiders until
they've been gone five years) or anyone whose livelihood in any way
depends on the company. In addition, outsiders will have to meet
regularly without management present. This alone will have a huge
impact--after all, it's a lot easier to criticize a CEO behind his
back than to his face.
Of course, the NYSE's proposals are no cure-all. There are plenty of
reforms that it missed--like preventing directors from selling the
company's stock until after they've resigned, or rooting out
underqualified directors like ex-Dodger manager Tommy Lasorda, who
sits on troubled Lone Star Steakhouse's board. (Believe it or not,
O.J. Simpson was once on Infinity Broadcasting's audit committee.)
In the end, though, all the rules in the world won't change a thing
until directors realize that ultimately they've got to reform
themselves. They have to go beyond the rules: They have to ask
better, tougher questions, be more skeptical and critical of
management, and never forget that their No. 1 job is to watch out for
us, the shareholders, not their buddy, the CEO. "Boards are like
murder suspects: They need motive and opportunity," says Minow. Now
they've been given both. Let's hope they do the right thing.
Katrina Brooker
6. Put the "Public" Back In IPO
The new symbols of Wall Street sleaze are so-called celebrity
analysts, hapless promoters like Henry Blodget and Jack Grubman who
talked investors into buying all sorts of tech stocks they knew, or
should have known, were dogs. But to a certain extent they're really
just a sideshow. The main source of corruption in America's financial
markets is the sordid, antiquated world of initial public offerings.
It's the ultimate kickback business: Wall Street firms set offering
prices for startups far below their real value, then offer the cheap
shares to their best customers--mutual and hedge funds--in exchange
for inflated commissions. The funds then make a killing when the
shares invariably zoom on the first day of trading.
Nice for them. Nice for Wall Street. But it's an awfully raw deal for
the startups--and for the rest of us. During the tech bubble,
underpricing became outrageous. In 1999 and 2000, new companies
raised $121 billion through IPOs, but shares soared so high the first
day that they left $62 billion on the table, money they could have
used for R&D or building brands. In addition, startups must pay a 7%
fee that Wall Street refuses to negotiate. The upshot: For every
dollar startups raised in 1999 and 2000, they paid 58 cents in a
combination of fees and forgone proceeds. Meanwhile, according to Jay
Ritter, a professor at the University of Florida, the grateful funds
repaid Wall Street with at least $6 billion in inflated commissions
over that period.
The biggest losers, of course, are small investors. On average they
get only 20% of any IPO before the offering. "The perception is that
the rich milk goes to the fat cats," says Glen Meakem, CEO of
FreeMarkets, a Net auction company that went public in 1999. During
the tech bubble, big bankers like CSFB's Frank Quattrone even set
aside cheap shares for a select group of entrepreneurs and venture
capitalists, an ingenious way to woo future IPO business.
Why do the issuers put up with Wall Street's abuse? The reason is
twofold. First, gilded names like Goldman Sachs and Morgan Stanley
provide a comfort factor, ensuring that the deals run smoothly.
Second, going with a top house guarantees that a prestigious analyst
will tout your stock. Until recently that's been critical to
entrepreneurs eager to market their stock to powerful institutions.
Obviously, given the taint on Wall Street, such endorsements are
worth far less to companies today--and that opens the possibility of
reform. It should come in two forms. First, the SEC should ban all
officers of startups and their venture capitalists from accepting any
other firm's IPO shares from investment banks within a year of their
own company's filing to go public. Second, issuers should finally
show a little courage and destroy the old system.
Here's their weapon: Since 1998, W.R. Hambrecht & Co. has been
auctioning IPOs on the Internet. Though Hambrecht has done only seven
deals so far, its model is a good deal fairer than Wall Street's.
Small investors get to bid alongside the institutions. The shares go
to the highest bidder, and--voila--the IPO slush fund, that big pool
of money that feeds all the corruption, evaporates.
Founder Bill Hambrecht predicts that the breakthrough will take an
unusual route. "Issuers will start demanding that a Merrill or a
Goldman do IPO auctions, threatening to use us if they don't agree."
And who knows? One or two high-profile auctions may just be enough to
break the system, smashing the mystique that only the old way can
ensure a smooth offering. Over to you, startups.
Shawn Tully
7. Shareholders Should Act Like Owners
A mere 75 mutual funds, pensions, and other institutional
shareholders control $6.3 trillion worth of stock--or some 44% of the
market. With power like that, real reform is only a proxy vote away.
Such change is happening now. Don't believe it? Just ask the guy in
the next story.
---
15. George Gilder: A Corporate Crime Wave?
http://www.gilder.com/AmericanSpectatorArticles/CorporateCrimeWave.htm
January 11, 2002, commentary, The Wall Street Journal
Crime may have declined in the streets but, by the recent inflammation of
the pundits, you would think there has been an outbreak of corporate
criminality. The Internet, communications, and stock-market booms of the
1990s, it seems, were based on a pervasive series of felonious acts. A wide
array of businesses, from Global Crossing to Loral, from General Electric to
Enron, artfully inflated the worth of their shares through the creation of
Potemkin businesses. If you believe the news coverage, corporate leaders are
racing to despoil, mulct, defraud, poison, pillage, and ruin their own
businesses, their nation's soils and waters, their retirement funds, and the
world economy.
This flood of factitious crimes, this parade of snaffled fat cats and
scapegoats, happens every recession. Rather than ruing economic reverses as
effects of public policy errors and miscalculations, public officials turn
the tables and treat bankruptcy and crash as culpable schemes of particular
white-collar criminals.
Some of these alleged crime lords are familiar. Gary Winnick was party to a
previous potlatch at Drexel Burnham, where he played a key role in financing
the communications infrastructure through MCI, Telecommunications Inc.,
Turner broadcasting, and McCaw Cellular. Then he and his associates were
alleged to have ravaged savings and loans by inducing some of them to buy
those companies' high-yield securities before a government ban briefly
destroyed their value. Finally Mr. Winnick boldly launched the world-wide
fiber-optic networks of Global Crossing, with, it is implied, the intention
of bilking investors and crashing bandwidth prices in what Fortune calls
"perhaps the greatest executive ripoff in the history of enterprise" but
what is better described as the most efficient global buildout in telecom
history.
Osama Ken Lay
Jeffrey Mohammad Skilling, Osama Ken Lay, Mohammad Atta Gates, Mad Mullah
Welch. The names stream together, the rap sheets blur, but the statistics
mount along with the unemployment numbers, the bankruptcies, the
environmental cleanup costs. Behold these corporate predators wrecking vast
pension plans, sowing deadly cancers in the Hudson River, monopolizing the
computer market, blighting the steel industry with dumped scrap, wantonly
disrupting energy markets, insidiously subverting the global climate.
Recessions, however, spring chiefly from government mistakes. Compared to
these policy errors, crime in the suites is never a significant factor. That
was true of the savings and loan and Mexican crises of the early 1980s and
of the global crisis today, reaching from Japan and Indonesia to Turkey and
Argentina.
After a decade and a half of favorable policy, from the capital-gains tax
cut of 1978 to the general tax reductions of the 1980s, from the
deregulation of transport and communications to the collapse of inflation to
the downfall of global communism, politicians began taking prosperity for
granted. They allowed tax rates to drift back up to record levels. They
transformed telecommunications rules into a regulatory sclerosis that
wreaked a telecom depression. They ignored the implications of the global
reign of the dollar at a time of steady dollar appreciation and growing
Third World debt. They embarked on a crusade against chemical industries
vital in both war and peace.
In the face of this long siege of policy blunders, politicians today charge
Enron with concocting subsidiaries to conceal debt and self-dealing. But
company structure is almost always chiefly a response to kaleidoscopic tax
and regulatory law and the resulting threat of litigation. Launching
innovations in arenas as diversely regulated and taxed as natural gas and
broadband communications, Enron inevitably contrived a complex structure of
subsidiaries and financial instruments difficult to explain under Securities
and Exchange Commission rules that require simultaneous disclosure (or, more
safely, non-disclosure) to all.
A trading company such as Enron or a long-term infrastructure play such as
Global Crossing is no stronger than the confidence of investors and
customers in its solvency. In an environment of SEC-enforced ignorance, mere
rumors of crime and default can bring a company down.
The key to the debacle, though, was the debacle of money. Buffeting the
Enron staples of fuels and bandwidth and afflicting all commodity prices --
from coffee (at an all-time low) to cotton (at 15 year bottoms) to scrap
steel (down 55% in four years) -- deflation crashed the stock market and
stifled every large company and every Third World country with its debt
denominated in dollars.
K-Mart, Pacific Gas & Electric, Exodus, Globalstar, Enron, Argentina,
Turkey, Indonesia -- all made serious and unique errors from time to time;
all countries and companies do. But what these cases had in common was heavy
debt. Taking 40% of incremental income from investors through tax hikes, and
tightening monetary policy until entrepreneurial debtors have to repay 40%
more than they borrowed, is a sure route to ruin.
When all debtors are afflicted, the scientific method points not to a hunt
for particular infractions but to the isolation of a common source. And that
common source is a dangerously deflationary monetary policy in the U.S.
While the dollar has been surging since 1996 against the deflated yen, the
euro, commodities, and gold, the Federal Reserve adhered to its view that
dollars were too numerous and sucked them out of the most fertile frontiers
of the economy. The dollar dutifully rose, and strangled the Third World
countries with dollar denominated debt, the telecom infrastructure projects
supported by debt, the car and computer-leasing companies funded by debt,
the farmers, the steel producers, the energy prospectors who rely on debt
finance and a stable standard of value.
Rather than addressing the fundamental problem of deflation, the
administration enacted broad protection for the steel industry, thus
spreading the damage to all companies that use steel and all companies
dependent on trade. Rather than lowering tax rates on investments afflicted
with deflation, policy makers obsessed about such rearview figments as
"consumer confidence," an utterly meaningless statistic from the demand
side.
A supply-side crisis requires the supply-side remedies of a stable currency,
lower marginal tax rates, and deregulation of technology. These measures
offer the only way to raise the tax revenues that will be needed to fund a
war against terror and support a wave of retiring workers.
Money is a standard of value, a code for transmitting information about the
supply and demand for goods and services. For a decade, Alan Greenspan
seemed to adhere to a fixed standard of value, guided by a price rule based
on gold and commodities. But since 1996, he went astray, citing as policy
guides the "irrational exuberance of the stock markets," the productivity
explosion, the Internet bubble. Without guidance from gold, currency markets
lack any objective means to differentiate the "news" (a change in monetary
conditions) from the white noise of a thousand clamorous markets. When the
standard of value itself becomes a commodity, traded like any other on
currency markets, the most vital investment information is lost amid the
froth.
In essence, Mr. Greenspan blamed business for the errors of government,
including his own. He created the context for the "crime wave." To save his
exalted reputation, he must now return to a price rule.
Stop Tinkering
Meanwhile politicians must stop tinkering with the structure of law and
regulation under which entrepreneurial plans play out. Businesses find
themselves operating amid the turbulence of constant legal and monetary
change. In extremis, caught in a baffling web of often conflicting
bankruptcy, tax, regulatory, and securities laws, many executives make
decisions that in retrospect can be interpreted as incriminating.
Bankruptcy, though, is not a crime but a punishment. Virtually no one plans
for its concussive effects or expects them at all. The real source of the
"crime wave" is the undulation of policy and the babel of alibis from
politicians and bureaucrats searching for scapegoats.
---
16. Big screen heroes belittle real-life IT (again)
By Kelly Mills
28 May, 2002 9:45 Sydney, Australia
Source : Computerworld
Hollywood's to blame for users' "unrealistic" expectations of IT, according
to an analyst who also warned programmers are in for a very tough time.
If you're sick of users querying why files take more than half a millisecond
to download or why their keyboard is not 'intuitive', that is, able to
'sense' which keys the user meant to strike, thus eliminating the use of the
backspace key, then according to PricewaterhouseCoopers executive Terry
Retter, Hollywood is the villain.
Retter, director of strategy and technical program for PwC Technology
Centre, said movies like Mission Impossible display great technology on the
screen, leading users to expect it in the office and at home.
"Users want a robust, ubiquitous, fast and easy environment. And [as a
result of Hollywood] there is significant disconnect in expectations."
Retter said during a briefing on findings published in the latest PwC
Technology Forecast: 2002-2004, Volume 1: Navigating The Future of Software,
enterprise architecture has evolved from mainframes to client/server
computing to Web-based computing, currently state of the art, and will
progress in the future to services-based computing.
"Each change in technology architecture has enabled significant changes in
the business processes.
"[For example] the legacy of the dotcom era focused businesses on extending
the automation of business processes between the enterprise and suppliers
and customers."
Retter said we are now returning to "innovation" in technology. The move to
the next architecture Web-based and services-based computing is well under
way.
As a result new operating environments, development tools and user
interfaces will be required to deal with the increased complexity and
abstraction.
"Developers will have to work hard as they don't yet have the efficiency
tools. Skill sets will also have to change. This will be a very difficult
time for programmers.
To sum up the future of software, Retter said the future is components.
"The gold rush is over and the next gold rush is starting with the
conservative principles of profit.
"Vendors need to add value [to their offerings]. They have sold to their top
clients. [Now] they are focusing towards componentisation so they are able
to sell down to the mid-market."
Most major packaged application vendors, including leading ERP vendors, have
re-implemented their products as components or are in the process of doing
so. As vendors incorporate support for one or more of the major component
architectures into their products, it should become possible for customers
to construct their own application suites by combining components from
several vendors.
Hollywood's to blame for users' "unrealistic" expectations of IT, according
to an analyst who also warned programmers are in for a very tough time.
If you're sick of users querying why files take more than half a millisecond
to download or why their keyboard is not 'intuitive', that is, able to
'sense' which keys the user meant to strike, thus eliminating the use of the
backspace key, then according to PricewaterhouseCoopers executive Terry
Retter, Hollywood is the villain.
Retter, director of strategy and technical program for PwC Technology
Centre, said movies like Mission Impossible display great technology on the
screen, leading users to expect it in the office and at home.
"Users want a robust, ubiquitous, fast and easy environment. And [as a
result of Hollywood] there is significant disconnect in expectations."
Retter said during a briefing on findings published in the latest PwC
Technology Forecast: 2002-2004, Volume 1: Navigating The Future of Software,
enterprise architecture has evolved from mainframes to client/server
computing to Web-based computing, currently state of the art, and will
progress in the future to services-based computing.
"Each change in technology architecture has enabled significant changes in
the business processes.
"[For example] the legacy of the dotcom era focused businesses on extending
the automation of business processes between the enterprise and suppliers
and customers."
Retter said we are now returning to "innovation" in technology. The move to
the next architecture Web-based and services-based computing is well under
way.
As a result new operating environments, development tools and user
interfaces will be required to deal with the increased complexity and
abstraction.
"Developers will have to work hard as they don't yet have the efficiency
tools. Skill sets will also have to change. This will be a very difficult
time for programmers.
To sum up the future of software, Retter said the future is components.
"The gold rush is over and the next gold rush is starting with the
conservative principles of profit.
"Vendors need to add value [to their offerings]. They have sold to their top
clients. [Now] they are focusing towards componentisation so they are able
to sell down to the mid-market."
Most major packaged application vendors, including leading ERP vendors, have
re-implemented their products as components or are in the process of doing
so. As vendors incorporate support for one or more of the major component
architectures into their products, it should become possible for customers
to construct their own application suites by combining components from
several vendors.
---
http://www.salon.com/tech/feature/2002/04/30/longboom/index.html
Katharine Mieszkowski: The Long Boom" is back!
Recession? What recession? A coauthor of 1999's infamously optimistic screed
says the future is still bright.
April 30, 2002 | Rereading, at the late date of 2002, "The Long Boom: A
Vision for the Coming Age of Prosperity" is the intellectual equivalent of
dosing on nitrous oxide, guaranteed to bring on giddy nostalgia for
late-'90s techno-optimism.
First published as a cover story in Wired magazine in 1997, then as a book
in 1999, "The Long Boom" declared that technological progress would bring
about two more decades of economic expansion and ameliorate, if not
eliminate, such vexing bothers as cancer, poverty and global warming. It
epitomized the Left Coast, future-eating techno-idealism that helped fuel
Internet mania.
Ah, for the late '90s, when getting wired meant that our lives could only
get longer, happier, healthier and richer as we all got linked up in
history's first truly global society.
But in the early 2000s, such cockeyed optimism has become about as popular
as a Taliban T-shirt in a JFK gift shop. As a consequence, "The Long Boom"
suffered its own market correction, dismissed as just one more spatter of
froth from the dot-com bubble.
But suddenly, doomsaying about the state of the economy is also ringing
false. The U.S. economy grew 5.8 percent in the first quarter of 2002. Few
economists are ready to declare that boom times are back -- layoffs are
continuing at major corporations, and profits are still in short supply --
but the recent recession is being labeled one of the mildest on record, just
as the authors of "The Long Boom" predicted. Is it time for the
techno-optimists to do their own gloating in a chorus of merry
I-told-you-sos?
Peter Leyden was a coauthor of the original "Long Boom" manifesto as well as
of a forthcoming book, "What's Next? Exploring the New Terrain for
Business," to be published by Perseus in September. He's a "knowledge
developer" -- note the late-'90s job title -- for the Global Business
Network think tank.
>From his office in Emeryville, Calif., he talked about how the long boom
survived the dot-com implosion and the terrorist attacks of Sept. 11, and
why the new economy is alive and may soon even be well.
How do you evaluate the recession that we appear to be emerging from? Has it
really just been a blip on a larger growth path?
It's been an extremely shallow recession.
We were in a long boom, we are in a long boom and we're going to be in a
long boom for a while. It's analogous to what we saw in the wake of World
War II, the post-World War II boom.
People often think of the '50s and '60s as the great golden age of the
American economy. Everybody's boats were floating on the rising tide of
economic expansion as we built up the suburbs. But they forget that in fact
the postwar boom, which went on for about 25 or 30 years, was just
punctuated constantly by recessions. It had six clear recessions -- in fact
much more dramatic recessions than we've experienced in the last 20 years.
When the economy slows, let alone goes into a recession, that does not
negate the larger context of a vast economic expansion.
Many observers have suggested that the current recovery is fragile, however.
There continue to be announcements of huge job cuts at companies like
Lucent, and the stock market's performance has been tepid. The market is not
synonymous with the economy, obviously, but isn't it symptomatic of
something?
No, it's not. It's going to be confusing for a while, and that's a sign of
the confusion.
If you look again at how we came out of the last recession of the early
'90s, there's an amazing amount of parallels here. That recession
technically ended in 1991, but it took all the way into the mid-'90s until
there was a sense that the economy was going to start really moving in a
sustained way.
The more recent recession was not driven by a plunge in consumer spending.
If there is any dramatic pickup out of a recession, it's usually led by
resumed consumer spending at high rates. This recession was driven more by
business cutting off its spending because it had overbuilt its capacity and
inventories were built out; so this is more of a business-led recession. So
you're not going to see the dramatic pullout that people want to think
happens out of recessions.
As for big companies doing layoffs now, it's the small entrepreneurial
companies that actually hire quickest. It's these big lumbering giant
corporations, like Lucent, that are behind the curve, that are still
essentially playing out their recession scenarios and recession strategies
after the boom has already started.
We're watching a lot of the fundamentals picking up again, and meanwhile the
conventional wisdom is still caught in the doom and gloom.
"The Long Boom" came out at the height of dot-com mania, and many saw it as
another piece fueling the speculative bubble. When that bubble popped, much
of what had happened looked like a scam. How do you separate "The Long Boom"
from that bubble?
The "long boom" to us meant a fundamental economic boom of sustained growth
at high rates in both the American economy and the global economy. How the
stock markets fared was simply a symptom of the more fundamental boom.
Every single transformative technology, like the telephone and railroads,
has been accompanied by a frenzied stock market. But once you get through
the frenzy, once the valuations crash, once there's a shakeout of the
companies, once you get the kind of consolidation amongst the really viable
companies that can stay there for the long haul, then you've got the core
infrastructure of a new technology that anyone can leverage.
Transformative technology is not about whether the company that makes the
technology makes money or doesn't make money. Some do, some don't. It's not
a really big deal. The core thing of a transformative technology is that
almost all businesses and society at large are able to leverage that
technology and become more efficient, more productive, more successful.
And there's no doubt that the Internet, telecommunications and computer
technologies, taken together, are a transformative technology -- and that is
the thing that is driving and will continue to drive the growth of the
overall economy.
So even with the tech sector still quite depressed, you continue to position
technology as the great engine of economic expansion?
There was this glimpse in the late '90s of what was going to happen
relatively overnight, where everyone thought that it would happen in two or
three years, and essentially everyone was overstimulated in terms of how
quickly it could happen. It's just going to take longer than most people
thought.
When you look back at history, people will say: "Oh yeah, there was a stock
run-up," and "Oh yeah, there was a burst bubble." But they're also going to
see it as a transition, as a confusing kind of chaotic time that was part
and parcel of the ultimate build-out of this information infrastructure that
became the foundation of the global economy in the early part of the 21st
century. We kind of lose track of it now because we're still caught in the
confusing transition.
But people are starting to say: "Gosh, why was the recession so shallow? Why
was our economy able to absorb an enormous hit to it with the 9/11 attack?"
Global business went into a total freeze that lasted for weeks. An enormous
shock to the system happened in September, and despite all the trauma, and
despite all the emotionality that we all had, the economy was able to absorb
that kind of shock and was able to in fact continue on a pretty robust pace
and get us back on this trajectory.
This is an example of the robustness of this economy that should not be
underestimated. I think we're actually out of the period where everyone was
wringing their hands and looking at all the negatives and basically
doom-saying.
But couldn't the ongoing threat of terrorism derail this economic expansion?
The Sept. 11 terrorist attack was the closest thing to jeopardizing the long
boom.
The key issue in the next 10 years is whether we can avoid a weapon of mass
destruction going off on U.S. soil. If a suitcase nuke or a rogue nuke goes
off in the downtown of a major U.S. city, that could be a shock to the
psyche of the American people in a way that would make 9/11 just a small
beginning.
That is a very real possibility. In fact, one of the guys who we interviewed
for our next book, John Arquilla, from the Monterey Naval Academy, put the
odds at 1 in 4 that we're going to see, in the next decade, one of these
weapons of mass destruction going off. And he's part of the security
establishment that's desperately putting that on the front of the agenda of
what they need to stop.
The idea of the "new economy" became a whipping boy for the stock market
bust. Do you still believe in the new economy? And would you define it the
same way now that you did three years ago?
I fell prey to this as much as anybody. There was the real sense of throwing
out the old -- the old economy didn't get it; the new economy got it. The
older generation didn't get it; the younger generation gets it. That kind of
hubris, looking back on it, was really ridiculous and really misplaced. Now,
that being said, there is something really new happening here.
A networked economy does work very differently, an economy based on this
information infrastructure, this computer network, opens up possibilities
that are very different from the old economy. I think that's true, and it's
still true, and it's going to be increasingly true.
A lot of these things that we talked about in the '90s -- "Oh, everybody's
moving to the Internet!" -- in fact weren't the case. It's taking a long
time, and that's going to happen over this decade.
Are you still optimistic about some of the more rosy predictions your book
made -- like finding a cure for cancer?
I do think that we're going to cure cancer.
While everyone was wringing their hands about the collapse of the dot-coms,
biology, life sciences and energy technology have just gone gangbusters.
There's been incredible growth in fuel-cell technology, to the point where
it's almost becoming conventional wisdom, even among the auto companies,
that the shift to a fuel cell will happen. A couple of years ago people were
thinking it was science fiction that you could stimulate stem cells to grow
organs and replacement tissues, and now it's considered something that's
going to happen in the next 10 years.
There is room for optimism in these other fields, and I do feel -- if not as
giddy as I might have been in the peak moments of the late '90s -- I really
feel that there is plenty here to be looking forward to in the coming
decade.
---
Webbed, Wired and Worried
May 26, 2002 By THOMAS L. FRIEDMAN
Ever since I learned that Mohamed Atta made his reservation for Sept. 11
using his laptop and the American Airlines Web site, and that several of his
colleagues used Travelocity.com, I've been wondering how the entrepreneurs
of Silicon Valley were looking at the 9/11 tragedy - whether it was giving
them any pause about the wired world they've been building and the
assumptions they are building it upon.
In a recent visit to Stanford University and Silicon Valley, I had a chance
to pose these questions to techies. I found at least some of their
libertarian, technology-will-solve-everything cockiness was gone. I found a
much keener awareness that the unique web of technologies Silicon Valley was
building before 9/11 - from the Internet to powerful encryption software -
can be incredible force multipliers for individuals and small groups to do
both good and evil. And I found an acknowledgment that all those
technologies had been built with a high degree of trust as to how they would
be used, and that that trust had been shaken. In its place is a greater
appreciation that high-tech companies aren't just threatened by their
competitors - but also by some of their users.
"The question `How can this technology be used against me?' is now a real
R-and-D issue for companies, where in the past it wasn't really even being
asked," said Jim Hornthal, a former vice chairman of Travelocity.com.
"People here always thought the enemy was Microsoft, not Mohamed Atta."
It was part of Silicon Valley lore that successful innovations would follow
a well-trodden path: beginning with early adopters, then early mass-appeal
users and finally the mass market. But it's clear now there is also a
parallel, criminal path - starting with the early perverters of a new
technology up to the really twisted perverters. For instance, the 9/11
hijackers may have communicated globally through steganography software,
which lets users e-mail, say, a baby picture that secretly contains a
300-page compressed document or even a voice message.
"We have engineered large parts of our system on an assumption of trust that
may no longer be accurate," said a Stanford law professor, Joseph A.
Grundfest. "Trust is hard-wired into everything from computers to the
Internet to building codes. What kind of building codes you need depends on
what kind of risks you thought were out there. The odds of someone flying a
passenger jet into a tall building were zero before. They're not anymore.
The whole objective of the terrorists is to reduce our trust in all the
normal instruments and technologies we use in daily life. You wake up in the
morning and trust that you can get to work across the Brooklyn Bridge -
don't. This is particularly dangerous because societies which have a low
degree of trust are backward societies."
Silicon Valley staunchly opposed the Clipper Chip, which would have given
the government a back-door key to all U.S. encrypted data. Now some wonder
whether they shouldn't have opposed it. John Doerr, the venture capitalist,
said, "Culturally, the Valley was already maturing before 9/11, but since
then it's definitely developed a deeper respect for leaders and government
institutions."
At Travelocity, Mr. Hornthal noted, whether the customer was Mohamed Atta or
Bill Gates, "our only responsibility was to authenticate your financial
ability to pay. Did your name and credit card match your billing address? It
was not our responsibility, nor did we have the ability, to authenticate
your intent with that ticket, which requires a much deeper sense of
identification. It may be, though, that this is where technology will have
to go - to allow a deeper sense of identification."
Speaking of identity, Bethany Hornthal, a marketing consultant, noted that
Silicon Valley had always been a multicultural place where young people felt
they could go anywhere in the world and fit in. They were global kids.
"Suddenly after 9/11, that changed," she said. "Suddenly they were
Americans, and there was a certain danger in that identity. [As a result]
the world has become more defined and restricted for them. Now you ask,
Where is it safe to go as an American?" So there is this sense, she
concluded, that thanks to technology and globalization, "the world may have
gotten smaller - but I can't go there anymore."
Or as my friend Jack Murphy, a venture capitalist, mused to me as we
discussed the low state of many high-tech investments, "Maybe I should have
gone into the fence business instead."
---
19. Dotcom bombs get a second life (via The Australian)
www.businessplanarchive.org
Help future generations learn from your past experiences
The Internet boom and bust of 1996 to 2002 was the most important
business phenomenon of the past several decades. In the wake of this
historic period, we have an unprecedented opportunity to learn from our past
mistakes and successes.
To help us learn from history, we are creating the Business Plan
Archive (BPA) to collect business plans and related documents from the dot
com era. These plans - the "blueprints" that lay out the assumptions and
strategies of Internet entrepreneurs - will enable entrepreneurs and
researchers to conduct both qualitative and quantitative research.
The business plans we collect will ultimately be stored in the
Archives and Manuscript Library at the University of Maryland, College Park.
We zealously protect the privacy of all contributors and provide them with
control over how and when the documents are made accessible.
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