Enron Fallout Proves Personal Loss Can Have Big Political Consequences
The congressional firestorm surrounding the Enron Corp.’s collapse could mark a turning point that signals increasing political consequences from the surge of American families into the stock market.
Since the early 1980s, the share of American households that own stock has soared from about 1 in 5 to 1 in 2 today, with many of those investments concentrated in 401(k) retirement savings plans. And as Main Street’s stake in Wall Street has increased, so has the political system’s sensitivity to issues surrounding investor and pension protection--as Enron is graphically demonstrating in waves of hearings, denunciations and reform proposals.
“Because of this change, there is extreme sensitivity among members of Congress to these issues,” says Rep. Richard H. Baker (R-La.), who chairs the House Financial Services subcommittee on capital markets. “It is no longer a few well-heeled investors losing a couple of hundred thousand dollars. Now it is the pensioner losing her retirement. As a result, there’s an environment that did not previously exist in Congress.”
This new environment is confounding expectations of how the widening market participation might affect politics.
For years, many conservative strategists have hoped that as more workers own shares they would absorb the predominantly small-government attitudes of business owners. That hasn’t happened to any significant extent; in the 2000 presidential race, stock owners were only slightly more likely to support George W. Bush, the more conservative candidate, than voters who didn’t own stock, exit polls found.
But the Enron furor suggests that the most immediate effect of widening stock ownership may be to increase the constituency for government action to safeguard investments and pensions from fraud. A recent Times poll found that Americans who own 401(k) plans, though broadly pro-business in attitude, were much more likely than non-investors to support new government regulations aimed at accountants and the managers of pension plans.
“As you have more people invest in capitalism, the theory was that that would lead to a hands-off view toward government,” said Democratic pollster Stanley B. Greenberg. “In fact the opposite may be true post-Enron. That stake in capitalism has been put in jeopardy by reckless behavior and we are back at the old-time question of ‘Who can arbitrate for ordinary people?’ It turns out to be government.”
‘It Is Clear the Stakes Have Risen’
The mass public move into the stock market has been one of the most powerful economic and demographic changes of the last quarter-century. New figures from the Investment Company Institute show that about half of all American households own stock mutual funds.
“Just to put this in historical terms, when the stock market crashed in 1929, 1.2% of the American public owned stocks, yet it was remembered as a historical calamity,” said Joel Seligman, dean of the Washington University School of Law in St. Louis and a historian of securities law. “When you see a situation like Enron, and you are dealing with about half the households, it is clear the stakes have risen.”
Broadly speaking, both political parties have supported this migration into the markets and both want to reinforce the trend.
The most dramatic manifestation of that is President Bush’s call to partially privatize Social Security by allowing workers to divert part of their payroll tax into an investment account they could invest in stocks or mutual funds.
But the most popular Democratic alternative would also encourage more workers into the market by creating “add-on” Social Security accounts that could be invested in stocks.
Last week, House Minority Leader Richard A. Gephardt (D-Mo.) offered another variation, proposing to establish a $500 investment account for all Americans at birth, with tax subsidies for additional contributions from their parents until they turn 18. Last year, both parties supported a tax credit to encourage more low-income workers to participate in 401(k) plans.
All of these ideas envision--indeed encourage--a future in which the market’s performance would directly affect the finances of an ever-growing proportion of American families.
Already the rising stake of ordinary Americans in the markets may be measured by the extraordinary interest in the Enron story.
The controversy may be attracting so much attention because so many more Americans than a generation ago can imagine themselves in the shoes of the Enron employees, decimated after the company stock in their 401(k) plans cratered. In the recent Times survey, about half of adults said they have 401(k) plans and a head-turning 71% of those said they are closely following the Enron story.
“With the crossover into [401(k)] plans and the movement of so many people into the market in the high-tech boom of the 1990s, people have a sense of investment as owners they didn’t have before,” says Sarah Teslik, executive director of the Council of Institutional Investors, an alliance of pension plans that manages about $2 trillion in assets. “So they are paying more attention to the details.”
In the Times poll, that attention translated into nuanced attitudes that showed clear evidence of investors seeing a common interest in new public protections after Enron.
Like other studies, the poll found that more affluent and better-educated families were the most likely to be invested in the market. Nearly 3 in 5 Republicans said they owned a 401(k) plan; nearly 3 in 5 Democrats said they didn’t.
Not surprisingly, given those demographics, those who owned 401(k) plans were considerably more likely than those who didn’t to express confidence in business generally and somewhat more likely to support the Bush administration’s handling of the Enron controversy.
But the investors were also more likely to support a ban on accounting firms providing other consulting services for the companies they audit (as former President Clinton’s administration proposed), and a limit on the share of company stock that can be held in a retirement plan (as congressional Democrats have proposed over Bush’s objections).
Many Ideas Put Forth on Investor Reforms
This post-Enron public concern has been powerful enough to at least force onto the table a much broader corporate and investor reform agenda than seemed imaginable in recent years. In the last few weeks, Congress and the Bush administration have disgorged a torrent of ideas to reform the accounting industry, corporate financial disclosures and the safeguards for pension plans; by early next month, a high-level administration working group is planning to release proposals aimed at improving the way corporations are governed.
“We are looking at the incentive structures that get corporations to disclose information and put it out,” said one senior administration official. “I think there is a consensus that some greater accountability of corporate leaders is desirable and now we are into the fine points.”
What’s not clear is whether the interest in reform among the new investing class will be broad and sustained enough to force through significant changes, analysts say. Though both parties are advancing reform proposals, they are separated by a familiar divide, with Democrats across the board arguing for more intensive government intervention than Republicans.
