Bankruptcies in the black hole clean-up

JUDGING from the respective rewards produced, baseball has been supplanted as America's number one sport by profit manipulation. Giving vast sums to the bosses via stock options plays a key role in the game.

Just a few years ago, at a Jackson Hole conference, US Federal Reserve chairman Alan Greenspan denied that this strategy was leading investors astray. He has now changed his mind, evidenced by a recent testimony to Congress. He now blames those options for nearly every ill to which the economy is heir, excepting only the common cold.

Stock options are not the only way in which US profits are invented rather than earned. The scandal at failed energy trader Enron, among others, has shown that greed, just as much as necessity, can be the mother of invention.

Nonetheless, Greenspan's view is that bad stock option accounting has, by itself, made an important contribution to this deception. He remarked, in his own inimitable style, that such accounting had 'the effect of accelerating the earnings outlook, which had in turn been very significantly propelled by the structural change in productivity'.

This statement by the Fed chairman is bizarre in content as well as style. US profits have fallen in recent years. National accounts show that the most recent profits were lower than those posted at the end of 1995. If they have not grown, they have not accelerated. So profits cannot have been propelled by productivity.

Greenspan's use of economic data is increasingly subject to criticism. Economist John Kay recently wrote in the Financial Times that 'Alan Greenspan has endorsed an overstatement of US economic performance comparable to Enron's accounting methods'. Not surprisingly perhaps, in view of this sort of comment, Greenspan told Congress that 'Enron is not a significantly negative event for the economy'.

BUT Enron is very important, whatever he claims. It has alerted America to the scandalous decline that has taken place in US standards of accounting and corporate governance. This has long been obvious to many, but their arguments have not been heeded until now. This follows the usual pattern. Problems are uncomfortable and thus denied. It therefore takes events rather than arguments to convince people they must be addressed.

The Financial Accounting Standards Board is central to the debate. It is, to put it mildly, anxious that other major accounting firms do not follow the likely demise of Andersen. At the same time, it does not want better standards to bring down too many major companies.

The FASB naturally feels that having fewer companies to audit would be even worse than fewer firms to audit them. A key issue is whether companies should have to consolidate their off-balance sheet debt. While this is fine in theory, it could in practice cause widespread bankruptcy. 'It's not billions. I suspect that we're talking about hundreds of billions,' said FASB's Tim Lucas.

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