Scandals Called a Threat to Recovery
Federal Reserve Chairman Alan Greenspan warned Congress on Tuesday that corporate scandals threaten to injure the nation’s slowly mending economy and should be treated with stiff new penalties for executives who cheat.
Within hours, a Republican-controlled House dropped its previous reluctance and rushed to join the Democrat-controlled Senate in substantially increasing jail time for securities fraud and corporate misconduct.
Greenspan dispensed with his usual caution in predicting that new revelations of corporate corruption “will no doubt surface in the weeks ahead” and in recommending a harsh response.
“Even a small increase in the likelihood of large, possibly criminal, penalties for egregious behavior of CEOs can have profoundly important effects,” he told the Senate Banking Committee.
Washington had hoped in advance of his testimony that the central banker would calm skittish markets, and he was even interrupted by lawmakers’ updates on the market’s gyrations during his remarks. Although the market initially rose, Greenspan proved no more successful than President Bush in convincing investors it is again safe to buy stocks.
The Dow Jones industrial average opened with a sharp drop, then trimmed its losses as Greenspan spoke. But the Dow lost 166.08 points, or 1.8% of its value, to close at 8,473.11, its seventh straight day of decline. Other market measures also fell, despite the announcement of better-than-expected quarterly profits by several companies, including Merrill Lynch & Co., General Motors Corp. and Nextel Communications Inc.
Boding ill for today, semiconductor giant Intel Corp. said after the close of trading Tuesday that it will cut 4,000 jobs, or almost 5% of its work force, after sales in the April-through-June quarter slipped and profit did not grow as much as analysts had predicted.
Greenspan laced his testimony with some good economic news, but that was overwhelmed by his caveats and warnings. He skipped over a portion of his prepared remarks that said the Fed is boosting its forecast of economic growth for the year to as much as 3.75% from 2.5% to 3%.
“The U.S. economy is poised to resume a pattern of sustainable growth,” the central bank chairman said. But only, he added, after current problems “linger for a bit longer ... and absent significant further adverse shocks.”
In perhaps the most striking moment of his appearance, the nation’s foremost exponent of free-market capitalism sounded like one of its most radical critics.
He railed against the ‘90s stock boom for engendering “an outsized increase in opportunities for avarice.” He charged that ballooning executive pay and stock options “perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising.”
He warned that once stocks recover and the economy goes back to growing, Americans are apt to forget the lessons of the 1990s.
“An infectious greed seemed to grip much of our business community. Our historical guardians of financial information were overwhelmed,” he said of the decade.
“It is not that humans [became] any more greedy than in generations past,” he said. “It is that the avenues to express greed had grown so enormously.”
Greenspan called for Congress “to create ... a legal structure which very significantly penalizes malfeasance.” His suggestion was taken up with a vengeance by some committee members.
“Personally, I think that one way we could restore some confidence in the market would be for the public to see some of the executives who have committed fraud to walk around in handcuffs and orange jumpsuits,” said Sen. Jim Bunning (R-Ky.)
Having issued his call for stiffer penalties, Greenspan veered from most other proposals for changing the way corporate America is run.
Although he appeared to favor a Senate-approved measure to create an independent board to oversee the accounting profession, he suggested that accountants’ own standard-setting body, the Financial Accounting Standards Board, can handle most problems.
He said he saw no need to change a 1995 law that restricts class-action lawsuits against companies. With stock prices tumbling, he said, the problems created by excessive stock option grants have vanished on their own.
He appeared to oppose Congress doing anything to change the way U.S. companies are governed. “Remember, the system is frayed, but it is not broken,” he told lawmakers.
Sen. Paul S. Sarbanes (D-Md.), chairman of the Banking Committee, bristled at Greenspan’s go-slow approach on everything but penalties, saying it amounts to a recipe for inaction.
The chief sponsor of the Senate’s corporate reform package said he had talked with the authors of a series of past proposals for changing accounting rules and corporate structure. “The constant refrain we heard from them was that they had made very important recommendations that had not been adopted” because the immediate crisis passed, Sarbanes warned.
For now, the mood in Washington is anything but go-slow. The drive to curb corporate corruption appeared to pick up steam Tuesday when the House reversed course and voted 391 to 28 in favor of a measure that among other things would make securities fraud a federal crime and boost the maximum sentence to 25 years.
That is even tougher than the Senate measure, which would raise the maximum sentence to 10 years from five, and represents a sharp about-face for the GOP-controlled House, which passed a corporate reform package only a few months ago that contained no penalties.
Reflecting Washington’s mounting concern about the fragile condition of U.S. financial markets, senators interrupted Greenspan at several points to report on how stock indexes were responding to his remarks.
When the Dow Jones industrial average pared its morning losses to 130 points from 200 points, Sarbanes suggested that Greenspan speak indefinitely. “That’s right,” cried Sen. Christopher Dodd (D-Conn.). “A filibuster by the chairman of the Fed!”
“I thought you were going to dismiss me for the rest of the day,” retorted Greenspan to gales of laughter.
In the end, the Fed chairman’s ability to nudge markets upward proved as minimal as that of the president, who in speeches last week and again Monday tried to highlight the economy’s strengths.
Although the Fed has increased its growth forecast for this year and next, Greenspan acknowledged Tuesday that most of the extra economic activity will be the result of efficiency improvements and won’t produce new jobs.
Fed economists predict the unemployment rate will fall from its current 6% rate to between 5.25% and 5.5%, but not until the end of 2003.
Greenspan acknowledged that the pace of employment growth will be slow largely because productivity gains allow firms to make more goods and deliver more services without adding workers. But he said the gains, which he has long touted as one of the economy’s most important improvements, eventually will level off, resulting in renewed hiring.
In the meantime, he said, productivity gains have given the economy the bounce to come back from a string of setbacks, including the latest scandals.
“The U.S. economy appears to have withstood a set of blows--major declines in equity markets, a sharp retrenchment in investment spending, and the tragic terrorist attacks of last September--that in previous business cycles almost surely would have induced a severe contraction,” Greenspan said.
The fact the nation has not taken a steep fall to date is a testament to the economy’s new “resilience and flexibility,” he said.
