The unraveling of the reputations of firms that were
once the toast of Wall Street continues and the end is not in sight. But one
thing is certain: already fragile prior to Enron, the legitimacy of global capitalism
as the dominant system of production, distribution, and exchange will be eroded
even further, even in the heartland of the system. During the halcyon days of
the so-called "New Economy" in 2000, a Business Week survey found
that 72 per cent of Americans felt that corporations had too much power over
their lives. That figure is likely to be much higher now.
Like the massive overvaluation of stocks that led to the dot.com collapse on
Wall Street in 2000-2001, corporate fraud was an essential feature of the "New
Economy." To understand this, one must begin with two developments that
were central to the dynamics of global capitalism in the 1980's and 1990's:
finance capital's becoming the driving force of the global economy and the crisis
of overcapacity or overproduction in the real economy.
The last two decades saw the deregulation of financial markets, with barriers
to the movement of capital across borders and across sectors-e.g., the US Glass-Steagall
Act banning financial institutions from engaging in both investment banking
and commercial banking-being progressively eliminated. The result was a tremendous
burst of speculative activity that made finance the most profitable sector of
the global economy. So profitable was speculation that in addition to traditional
activities like lending and dealing in equities and bonds, the eighties and
nineties witnessed the development of ever more sophisticated financial instruments
such as futures, swaps, options-the so-called trade in derivatives, where profits
came not from trading assets but from speculation on the expectations of the
risk of underlying assets.
The attractiveness of finance relative to other sectors of the economy, like
trade and industry, was underlined by the fact that in the late 1990's, the
volume of transactions per day in foreign exchange markets came to over $1.2
trillion, which was equal to the value of trade in goods and services in an
entire quarter.
With the speculative sector awash in cash, much of it from outside the US, industrial
firms became more and more dependent on massive credit and the sale of shares
for financing instead of on retained earnings. This dependence became even more
marked in the late 1990's, as the boom of the Clinton years began to taper off.
This boom had resulted in a burst of global investment activity that led to
tremendous overcapacity all around. By the late 1990's, the indicators were
stark. The US computer industry's capacity was rising at 40 per cent annually,
far above projected increases in demand. The world auto industry was selling
just 74 per cent of the 70.1 million cars it built each year. So much investment
took place in global telecommunications infrastructure that traffic carried
over fiber-optic networks was reported to be only 2.5 per cent of capacity.
Retailers suffered as well, with giants like K-Mart and Wal-Mart hit with a
tremendous surfeit of floor capacity. There was, as economist Gary Shilling
put it, an "oversupply of nearly everything."
Profits apparently stopped growing in the US corporate sector after 1997, leading
firms to a wave of mergers, some motivated by the elimination of competition,
others by the hope to extract renewed profitability from some mystical process
called "synergy." The most prominent of these were the Daimler Benz-Chrysler-Mitsubishi
union, the Renault takeover of Nissan, the Mobil-Exxon merger, the BP-Amoco-Arco
deal, the blockbuster "Star Alliance" in the airline industry, the
AOL Time Warner deal, Worldcom's takeover of long distance carrier MCI. In fact,
many mergers ended up consolidating costs without adding to profitability, as
was the case, for instance, with the much-ballyhooed AOL Time Warner deal.
Where mergers could not be effected, cutthroat competition ruled, resulting
in bankruptcies such as that of giant retailer K-Mart.
. With profit margins slim or nonexistent, survival increasingly meant greater
and greater dependence on Wall Street financing, which increasingly came under
the sway of hybrid investment-commercial bankers like JP Morgan Chase, Salomon
Smith Barney, and Merrill Lynch, which aggressively competed to put together
deals. With little to show in terms of an attractive bottom line, some firms
took the route of trading future promise for hard cash in the present, something
that creative investment managers were especially good at in the high tech sector.
It was this seemingly innovative technique of trading on illusion that resulted
in the stratospheric rise of share values in the high technology sector, where
they lost all relation to the real state of companies. Amazon.Com, for instance,
saw a constant rise in its share values even as it had yet to turn a profit.
But in the end, trading on illusion could only get you so far. Reality intervened
in 2000, resulting in the wiping out of $4.6 trillion in investor wealth in
Wall Street, a sum that, as Business Week pointed out, was half of the US Gross
Domestic Product and four times the wealth wiped out in the 1987 crash. Its
boom extended artificially for three or four years by the dot.com craze, the
US economy entered into recession in 2001. And precisely because reality was
masked so long by the illusion of prosperity, the longer it would take to rectify
the massive structural imbalances that had built up, if at all.
In the end, there was no getting around the fact that your balance sheet had
to show an excess of revenue over costs to continue to attract investors. This
was the simple but harsh reality that led to the proliferation of fancy accounting
techniques such as that of Enron finance officer Andrew Fastow's "partnerships,"
which were mechanisms to keep major costs and liabilities off the balance sheet,
as well as cruder methods like Worldcom's masking of current costs as capital
expenditures. In the context of deregulation and the benign approach to the
private sector that accompanied the reigning neoliberal, "hands-off-business"
outlook, it was easy for such pressures to erode the so-called "firewalls"-between
management and board, stock analyst and stockbroker, auditor and audited. Faced
with the common specter of an economy on the downspin and slimmer pickings for
all, the watchdogs and the watched threw off the pretense of being governed
by a system of checks and balances and united to promote the illusion of prosperity-and
thus maintain the financial lifeline to unsuspecting investors--as long as possible.
This united front could not be maintained for long, however, since it was very
tempting for those who knew the real score to sell before the mass of investors
got wise to what was happening. In the end, business acumen was reduced to figuring
out when to sell, take the money, and run…and avoid prosecution. Enron CEO Jeffrey
Skilling read the handwriting on the wall, resigned, and made off with $112
million in the sale of his stock options a few months before the fall. Not so
lucky was Tyco's Dennis Kozlowski, who was not content with raking off $240
million and was still trying to milk his cash cow when his company went under;
he is currently under prosecution for tax evasion.
More culprits will be unmasked no doubt, and who knows, the cast of odious characters
may ultimately even include George W. Bush and Dick Cheney. But it is worthwhile
to remember that while there are villains aplenty, it is the dynamics of the
system of deregulated, finance-driven global capitalism that is the central
problem, and this is not something that can be banished by Georgian pieties
like "There is no capitalism without conscience," or addressed with
quaint solutions like "good corporate governance."
In the meantime, foreign investors are fleeing the US, the dollar is on a downspin,
and the overhang of overcapacity is greater than ever. The mixture of this deepening
structural crisis of the economy with the crisis of legitimacy of neoliberal
capitalism promises a volatile future indeed.
*Executive Director of Focus on the Global South.