The gang that couldn't loot straight

The fall of the '90s bubble's icons shows just why Americans would be crazy to trust their retirement money to the stock market.

Published June 27, 2002 9:31PM (EDT)

Another day, another $3.8 billion fraud. After WorldCom's extraordinary admission of massive corporate malfeasance on Tuesday, it really can't be long now before our outrage meters are completely maxed out. There isn't enough time in the day to be properly livid at the sort of lying, cheating and stealing that appears to be the current norm in Fortune 500 management circles.

Martha Stewart is under investigation for insider trading, while former Tyco CEO Dennis Kozlowski is up on charges of avoiding millions of dollars of sales tax on art purchases. Bankruptcy follows bankruptcy -- Enron, Global Crossing, Adelphia and, soon undoubtedly, WorldCom -- like some godawful game of capitalism-in-meltdown dominoes. The corporate superstars of the '90s -- Enron's Kenneth Lay and Jeff Skilling, Qwest's Joseph Nacchio, WorldCom's Bernie Ebbers -- are in disgrace, guilty, at the very least, of excesses of greed and hubris that make your average Greek tragedy protagonist look like a piddling piker.

It would not be out of place at this point to cue the increasingly routine rant on how decades of deregulation and corporate lobbying got us into this mess. Anyone who has spent a day teaching a bunch of preschool kids will recognize the syndrome: If there are no rules, "Lord of the Flies" chaos inevitably ensues. Of course, with toddlers, the worst results involve crayons crushed into the carpet or hair-pulling -- while, with corporate America in the 21st century, we get hundreds of thousands of forced layoffs, trillions of dollars of losses and the potential strangulation of an economic recovery.

But don't look to President Bush to call a timeout. Not only is there no guarantee that reregulation would stop crooks who are determined to be crooks, but the current administration is merrily proceeding with its plans to relax the remaining controls on the markets. As Damien Cave reported in Wednesday's Salon, Bush's current nominees to fill two open seats on the Commodity Futures and Trading Commission were intimately involved in setting up the system that allowed Enron, specifically, to run wild.

The real lesson of the current rash of corporate accounting debacles may not be that more regulation and oversight is needed, but that the markets are an imperfect mechanism for safeguarding American financial security. Case in point: Bush wants to privatize Social Security, under the premise that greater returns on investment are available over the long run from the stock market than anywhere else.

The last two years of stock market doldrums have taken some of the steam out of this proposal, but the current antics of WorldCom et al. should permanently put it to rest. Putting America's retirement money in the hands of Ebbers, Lay, Skilling, Kozlowski and the rest of this band of kooks, while at the very same time doing everything possible to ensure that today's CEOs are under no meaningful supervision, is a recipe for utter disaster.

Conservative orthodoxy posits that, left to their own devices, markets are self-correcting mechanisms: They will solve their own problems. So if corporations engage in fraud on a massive scale, they will eventually be punished by imploding stock prices. The weak will go out of business, the strong will flourish.

There is no doubt that we are currently watching this principle at work on a grand scale. The last two years have witnessed a market correction that is gradually eating its way back through the entire '90s boom.

Imagine if your Social Security savings were invested in the stock market, but you weren't due to retire for another couple of years. Not only would you have watched helplessly as the value of your retirement nugget slipped and stumbled, but you would also run the danger of a premature heart attack as you came to realize that the custodians of your golden years were spending their days devising ever more ingenious ways to cheat -- with your money.

Who knows how long it will take the market to fully correct the excesses of the '90s? A year? Five years? Ten? Some economists think we could be entering a period of more or less continual stagnation propelled by the same kind of self-fulfilling prophecy that fueled the boom. If you think the market is going up, you'll buy more stock, and ensure that the market goes up; if you think the market is filled with companies that are run by megalomaniacs more concerned with buffing their art collections than generating real profits, then you are likely to keep your money out of the market, and ensure that stock prices continue to plunge.

Seems straightforward, doesn't it? It gets worse. Because while plans to privatize Social Security have yet to be implemented, and may even be permanently stifled by the current market nuttiness, Americans have already become alarmingly dependent on the stock market for their retirement planning via the near-ubiquitous 401K plan.

In their new book "The Great 401(k) Hoax: What You Need to Know to Protect Your Family and Your Future," authors William Wolman and Anne Colamosca make a compelling argument that the rush to move retirement money out of pension plans and into 401Ks is putting an entire generation at risk.

It was all fine and good during the boom years. It was a commonplace to note during the late '90s that one of the factors fueling the stock market's seemingly inexorable rise was the steady, automatic inflow of billions of dollars funnelled into stocks by 401K investments. It appeared almost as if society had stumbled upon a structural way to ensure the health of the stock market.

The hangover that follows such giddiness is always painful, as anyone who has glanced at their 401K portfolio recently can attest. Even without the potential nightmare of privatized Social Security, we, as a nation, are entrusting our future to a stock market that comes with no guarantees. And we are currently paying the price.

The ultimate fallback argument of stock market advocates is that in the long run the stock market does perform better than any other investment vehicle. But, as you will see in the fine print of almost any public company prospectus, past performance is no guarantee of future results.

Ponder, for example, what happened after the crash of '29. President Roosevelt instituted a vast set of safeguards and watchdogs to prevent any such thing from happening again. One can argue that those safeguards played an important role in ensuring the long-run success of the stock market. But today, the brakes are being taken off, and the watchdogs are being muzzled -- by both Democratic and Republican administrations.

And now we have proof that, left to its own devices, big business will cheat on a scale that beggars description. And yes, the market will self-correct to deal with that. Investors appear to be well aware that no one is minding the store, and so they have stopped investing.

So maybe we can trust the market. As loudly as it can, it is telling us to stay away.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Enron Martha Stewart Stock Market