Straight Up |

Straight Up

The Greed Game. It is the only thing we need to understand to follow the Enron, Global Crossings and Qwest spectacles, which certainly are not the last of them. (Doesn’t the Nacchio story make you all warm and tingly inside when you send a check to Qwest)? And the problem involves a lot more than top management.What we are seeing is the inevitable result of a management philosophy geared exclusively to increasing the price of the company’s stock as opposed to increasing the fundamentals: revenue, profits, market share, capital accumulation, etc. This philosophy is ubiquitous and has been aided and encouraged by every single element of the investment community, and this certainly includes shareholders. The kicking and screaming of former Enron employees notwithstanding.A little background is necessary. The Internet has dramatically and irreversibly changed the investment world. The sheer amount and instantaneous availability of information coupled with the now relative ease of investing have created the spark that ignited that tinderbox called greed. Historically, for the most part, investing in the stock market was, relative to today, a careful, deliberative and time-consuming process based upon evaluation of a company’s fundamentals in consultation with one’s stockbroker. The Internet changed all of that literally overnight, by opening the market to millions and millions of inexperienced and uninformed folks, most of who have never known tough times. “Baby boomers,” if you will, and the name of the game for business management, politicians, government regulators, Wall Street shills and Alan Greenspan changed with it.Now, the shortest route to Easy Street and fabulous riches was through increasing the stock price of the company because the masses would not (and most assuredly could not) analyze the fundamentals of a company. But they sure could, and did, click their way into unimaginable gains based absolutely and totally on escalating stock prices. If they ever knew what P&L’s, P/E ratios, book values, etc. were, they certainly didn’t care about them now. After all they were “unnecessary,” technical, boring and slow. But most of all, way too much work.This Greed Game is what is responsible for the untoward salaries and especially the outrageous stock options of CEOs who were hired for the specific purpose of pumping up the company’s stock price. And if they were successful there was no amount of money that was too much to pay them. This is what explains the otherwise unfathomable practice of boards of directors awarding CEOs staggering bonuses, golden parachutes, etc., even as the company was going into the tank. Those CEOs and other top managers had delivered and they, board members, brokerage houses and other insiders became fabulously wealthy at the expense of you, me, Aunt Edna and grandma’s 401(k). And at the expense of gullible, uninformed and equally greedy employees a la Enron/Global Crossings who had been cheering on top management every step of the way with visions of sugarplums dancing in their heads. And most of whom were greedy enough to violate one of the cardinal principles of investing – right up there with “buy low, sell high” – DIVERSIFICATION.And the game was there for all to see. And for us to know, and the professionals did know it. The 5/14/2001 issue of BUSINESS WEEK ran an article entitled “The Numbers Game.” The first two sentences provided: “Companies use every trick to pump earnings and fool investors. The latest abuse: Pro Forma reporting.” In other words, Enron/Global Crossings/Qwest did not surprise the pros. Pro Forma reporting allows a company to omit any expenses it cares to choose and to report any profits it wants. To put Pro Forma reporting in the vernacular, I’ll quote a blurb from an investment letter I recently received:”In golf, my score is frequently below par on a pro forma basis. I have firm plans to restructure my putting stroke and therefore only count the swings I take before reaching the green.”‘Nuff said.The result? The P/E (that’s price to earnings) ratio is the highest since 1872 for the 500 largest U.S. companies. Something close to 3 times the historic average!But there is plenty of blame to go around. We have been in an essentially bear market since March of 2000, but you haven’t been allowed to recognize that because of the constant pounding of the bought and paid for Wall Street “Carnies” – to use a term recently rolled out during the Congressional Enron “hearings” by an irrelevant and showboating U.S. Senator from Illinois in his carefully scripted sound byte on national TV. And by their similarly compromised colleagues called “TV talking heads” or, to use the term quite loosely, “network talent.” And of course there is the unadulterated nonsense, which has been spewing from the mouth of Alan Greenspan for lo these many months. Do you get it yet?His job (for the banking industry) is to keep you placated – and invested in the stock market – to keep the economy (and thus bank loans) stable. Every rate cut was to be our deliverance and we have now had eleven of them. And I’ll bet you are still listening to him. I know you are because you are still in the stock market which ain’t even close to its bottom. Hanging for the “recovery,” huh? More next time on this hoax.If any of this makes sense to you, perhaps it will spare you some tears as the inevitable and inexorable shareholder lawsuits proceed. You see we are shifting gears from the “Greed Game” to the “Blame Game.” And I sincerely hope it will spare you some personal remorse for having been sucked in by the corrupt culture in business today. It has been an ugly lesson for many, but the investing public now understands how easily stock prices are manipulated and that there are liars and crooks out there at the highest levels. Besides in Congress, I mean. Whatever else can be said about Messrs. Lay, Skilling, Fastow, Winnick, Nacchio and many more to come, they are certainly qualified for politics – Washington, D. C., in particular. Nonpartisan crooks and thieves. Hey, better the devil you know!Thanks for listening.Bob Richardson’s column runs every other Friday in the Post Independent.

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