Thursday, February 28, 2002

A Kevin Phillips Issue

Federal Reserve Board Chairman Alan Greenspan said yesterday that while the recession appeared to be ending, the recovery would not be robust. The market, hearing the first part first, ran up. Hearing the second part next, it ran back down.

I was watching this on TV when a friend called to announce that he really liked K-Mart. Why not? Declare Chapter 11, break all your leases, close the stores that don’t deliver, stay in the stores that do (at now lower monthly rental rates), stiff your other creditors and in a year’s time, you too could be up 25%, maybe 30%. That was his professional view. "Of course," he said, "it's completely unethical."

These things are connected, politically. First, this recession is not over, not by any means. The collapse and the telecom collapse and the accounting scandals and deflation and the possibility of another terrorist attack (at any time) have not worked their way across all the dominoes. And the dominoes are leveraged, big time. Consumer debt is enormous. Corporate debt (which fueled the Millennial Boom) is higher than at any time in modern history. The Economist had a very good leader (editorial) on this subject a couple of weeks back (see the last issue in January). Their analysis, if a bit over-gloomy (they’re Brits after all, so they were born to worry), strikes me as basically correct.

Second, you have what can politely be called the corporate ethics scandal that is everywhere, all around you. The New York Times story today about former Global Crossing Chairman Gary Winnick’s $92 million home in the Bel Air section of Los Angeles is obscene. He paid $66 million in cash for a 23,000 square foot home, another $26 million for 2 adjacent properties. He is now proceeding with a $15 million home renovation.

A few years ago Global Crossing, under Winnick’s leadership, acquired Frontier, a telephone company based in Rochester, New York. Now 800 Frontier-turned-Global Crossing employees are being offered buy-out packages of $20,000 (at the most). The $20,000 package is for people who have worked there for more than 20 years. You don’t need to be Kevin Phillips to figure out the politics of that juxtaposition.

Disgust with corporate greed, corporate ethics, corporate malfeasance, corporate dishonesty, corporate felonies is the long political stock of this year. We’re just getting started. The number of companies that have had to “restate” earnings in the last year has doubled. The number of bankruptcies has risen dramatically. The Enron “pump and dump” scam, in which management hyped a $120-per-share price target as they sold their own holdings as fast as they could, will be an ongoing news story, as the SEC investigation tightens the noose. And we haven’t even begun to hear about the “round-trippers” and the “Lazy Susans” and the pension gains being counted as earnings and on and on and on.

And what will turbo-power the issue will be the revelation that all this corporate conduct, or at least most of it, was and is legal. It is indeed legal for IBM and GE to count as earnings the gains of the company’s pension fund. It is indeed within the rules of accounting to book a Lazy Susan deal (I give you $100 million, you give it right back to me and we both book it as revenue), so long as something is done with the money for some insignificant amount of time. It’s perfectly legal to lock down your employees in a sinking stock (as Enron did) by switching 401(K) fund administrators. We could go on for pages here, but you get the idea.

If you don't, just read The Wall Street Journal for a month. It's amazing what you find out. $80 billion in something called "goodwill" can disappear with the stroke of a pen. "Pro forma" earnings can be digitally green while "earnings" can be all red numbers, many digits.

Going into 2002, the Democrats had two issues for their base (gun control and abortion “rights”) and one issue for the larger electorate (health and pension security). If they had any idea what they were doing, they would be leveraging the corporate ethics scandal into a full-blown class warfare attack, which would enlarge their base and resonate across the wider electorate.

But alas the chairman of the Democratic Natrional Committee, Terry McAuliffe, was on the board of Global Crossing and turned a bunch of options into an $18 million profit-taking stock sale. The Democrat's leading spokesman on economic policy is former Treasury Secretary Robert Rubin, now a Vice Chairman at Citibank, who, in a stunningly ill-advised move, tried to get the US Treasury to under-write a federal bailout of Enron. I won’t bore you with the rest of the list. The point is, it’s hard for Democrats to get all lathered up into a populist rage when they've been partnering with the very people who are prime targets for political attack.

But this whole business of corporate conduct is fast becoming a big political issue. You can feel it and it will be felt.