<nettime> Brooklyn Rail review of Prins, _Other People's Money_

[nettimers_anonymous <nettime@bbs.thing.net>]

     < http://www.brooklynrail.org/books/jan05/offtheshelves.html >

   Off the Shelves
   by Bookstaff
   January 2005

   Screwing the Little Guy

   by Stanley Morgan

   Nomi Prins, Other People's Money: The Corporate Mugging of America
   (The New Press, 2004)

   After all the press coverage of the Enron scandal of 2001, how many
   people know the details of what actually happened? The facts of the
   case, complicated as they are, are important for several reasons:
   First of all, the sophistication and broader economic impact of the
   company's misdeeds make this far more than a simple case of corporate
   greed gone wild. Equally important, Enron's story is but one chapter
   in the larger tale of how overzealous deregulation and cronyism fueled
   a huge wave of bankruptcies in the nineties and replaced a reasonably
   effective regulatory system with one that's built for abuse.

   Former Wall Street banker Nomi Prins is well positioned to describe
   how all this happened. Having worked at the top echelons of several
   Wall Street firms in the lead-up to the crash, she witnessed much of
   the chicanery up close. Other People's Money: The Corporate Mugging of
   America describes in head-spinning (but compulsively readable) detail
   how Enron and other companies gamed the system, using labyrinthine
   networks of shell companies, astute political maneuvering, and
   outright fraud to make their officers incredibly rich, leaving
   everyone else to foot the bill.

   The main culprit in Prins's eyes was the repeal of the New Deal-era
   Glass-Steagall Act. Glass-Steagall prohibited traditional banks from
   underwriting stocks and bonds (the domain of investment banks),
   thereby preventing them from hawking the securities of companies that
   they also lent money to. The dismantling of Glass-Steagall--Wall
   Street's wet dream--created a group of superbanks that could virtually
   blackmail companies into issuing more and more bonds (which brought in
   whopping underwriting fees) in exchange for getting the loans they
   craved to fund acquisitions. This led to the issuance of mountains of
   debt and fueled expansion for its own sake. Since the interest rate a
   company has to pay to its bondholders is based on the company's
   financial condition, this situation created an incentive for these
   companies to use sleight of hand to artificially prettify their books.
   The result: an epidemic of accounting fraud the likes of which the
   world has never seen.

   Enron was no means the only company playing these games. The story of
   (former) telecommunications giants WorldCom and Global Crossing
   follows the same path: massive debt issuance, massive accounting
   fraud, massive gains for insiders, massive bankruptcy, and massive
   losses for the many suckers on the outside--including employees who'd
   been strong-armed into buying large quantities of company stock for
   their retirement accounts.

   Another thing all these onetime highfliers had in common was access.
   None of these spectacular blowups could have happened without help
   from the "regulators" and lawmakers who are supposed to be preventing
   this kind of thing. For example, Robert Rubin moved from Goldman Sachs
   to the White House (as President Clinton's treasury secretary) and
   then back to Wall Street, where he lobbied successfully for the repeal
   of Glass-Steagall on behalf of Citigroup and made a fortune doing it.
   Wendy Gramm, former head of the Commodity Futures Trading Commission
   and wife of Texas senator Phil Gramm (the second-largest recipient of
   Enron campaign contributions), granted Enron an exemption from
   government disclosure rules at the company's request; shortly
   afterward, she resigned from the CFTC and joined Enron's board of
   directors.

   In addition to the repeal of Glass-Steagall, deregulation of the
   energy and telecommunications industries themselves ran wild in the
   late nineties. One result of energy deregulation was the California
   energy crisis of 2000-2001, which saw consumers overcharged tens of
   billions of dollars for electricity as market manipulation ran amok.
   The 1996 deregulation of the telecommunications industry led to a
   frenzy of mergers and takeovers that cost millions of jobs; to
   maintain the illusion of profitability, these newly created telecom
   giants also booked billions of dollars in fraudulent transactions to
   artificially pump up revenues.

   Predictably, the cost of these scams to their perpetrators has been
   minimal. According to Prins, Bernie Ebbers, the head of WorldCom ("the
   biggest fraud in world history at $11 billion and counting") walked
   away from the company's smoldering hulk with a severance package of
   $1.5 million a year for life. Gary Winnick left Global Crossing with a
   net worth of over $735 million. Other big players have been similarly
   "punished." Is there no justice?

   Well, no. But Prins has obviously put a lot of thought into the
   question of what can be done about it. She offers a whole chapter of
   suggested remedies for the kind of no-fault fraud that was freely
   perpetrated in the late nineties: reinstating Glass-Steagall, for
   example, or imposing more realistic fines on the guilty parties, or
   prodding the regulatory agencies, like the Federal Energy Regulatory
   Commission, that have been asleep at the wheel in the wildly
   business-friendly climate of the last decade.

   But it's going to be an uphill battle. After the mega-criminality of
   Enron et al. and the fecklessness of the regulatory agencies that
   Prins outlines in her meticulously researched book, two commissioners
   of the Securities and Exchange Commission recently came down against
   some of the relatively benign fines that the SEC has imposed,
   primarily because of their chilling effect on shareholders and
   potential investors. According to Commissioner Cindy Glassman, "When
   the boards and management are agreeing to these penalties, they're
   agreeing to pay with other people's money."

   Thanks for thinking of us, commissioner.

        Stanley Morgan works on Wall Street.


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