Saturday, January 28, 2006

Not Just a Few Bad Apples

The trial of Enron's Kenneth Lay and Jeffrey Skilling begins in Houston on Monday. Some think the Enron scandal is an example of a few bad apples. They are dead wrong.

John C. Bogle has his new book, The Battle for the Soul of Capitalism, reviewed by Jeff Madrick in this week's NYT Sunday Book Review. John C. Bogle is a the founder of Vanguard Mutual Fund, the first to offer low charge index funds, and is a Wall Street Legend. His book is highly critical of the current state of capitalism.

Here are some excerpts from the book review regarding conflicts of interest and misstated financial statements.

In this book, Bogle abhors what he sees as rampant cheating among his peers - not only mutual fund managers but brokers, bankers, lawyers and accountants. It's not just a few bad apples, he says: "I believe that the barrel itself - the very structure that holds all those apples - is bad."

. . .

When Attorney General Eliot Spitzer of New York State charged a wide swath of investment banks with similar conflicts of interest, however, 8 of the 10 largest companies on Wall Street decided they had better settle the suit. Goldman Sachs, Morgan Stanley and Merrill Lynch, among others, gave back profits and paid penalties of $1.4 billion, and altered the inherent conflicts in their managerial policies as well.

Nor was it only a handful of notorious companies like Enron and WorldCom that, under the tutelage of the most prestigious lawyers, bankers and accountants in the business, overstated their profits. Bogle totes up about 60 major corporations that had to restate their earnings - and this was not an inclusive list. Their stock market value equaled $3 trillion. That is "an enormous part of the giant barrel of corporate capitalism," he writes.

I am sure this means nothing to the apologists of the system. About the only thing that will turn their heads is a guilty verdict and long prison sentences for Lay and Skilling.


At 4:45 PM, Blogger Edie said...

It is always nice to see the barrel get its due credit.

At 7:10 PM, Blogger Devang said...

hmm... I'm going to have to read this after irrational exuberance, which says similar things about the barrel, but isn't as critical. I'm not done with it yet :)

At 8:48 PM, Blogger Lynn said...


I read Irrational Exuberance right around the crash. It's a good book.


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