Fwd: CAPITALIST CRISIS AND CORPORATE CRIME

[claudia westermann]

>
>CAPITALIST CRISIS AND CORPORATE CRIME
>By Walden Bello*
>
>The unraveling of the reputations of firms that were once the toast of
>Wall Street continues and the end is not in sight.  But one thing is
>certain: already fragile prior to Enron, the legitimacy of global
>capitalism as the dominant system of production, distribution, and
>exchange will be eroded even further, even in the heartland of the
>system.  During the halcyon days of the so-called "New Economy" in
>2000, a Business Week survey found that 72 per cent of Americans
>felt that corporations had too much power over their lives.  That figure
>is likely to be much higher now.
>
>Like the massive overvaluation of stocks that led to the dot.com
>collapse on Wall Street in 2000-2001, corporate fraud was an
>essential feature of the "New Economy."  To understand this, one
>must begin with two developments that were central to the dynamics
>of global capitalism in the 1980s and 1990s: finance capital's
>becoming the driving force of the global economy and the crisis of
>overcapacity or overproduction in the real economy.
>
>The last two decades saw the deregulation of financial markets, with
>barriers to the movement of capital across borders and across sectors-
>e.g., the US Glass-Steagall Act banning financial institutions from
>engaging in both investment banking and commercial banking-being
>progressively eliminated.  The result was a tremendous burst of
>speculative activity that made finance the most profitable sector of the
>global economy.  So profitable was speculation that in addition to
>traditional activities like lending and dealing in equities and bonds, the
>eighties and nineties witnessed the development of ever more
>sophisticated financial instruments such as futures, swaps, options-the
>so-called trade in derivatives, where profits came not from trading
>assets but from speculation on the expectations of the risk of
>underlying assets. 
>
>The attractiveness of finance relative to other sectors of the economy,
>like trade and industry, was underlined by the fact that in the late
>1990s, the volume of transactions per day in foreign exchange
>markets came to over $1.2 trillion, which was equal to the value of
>trade in goods and services in an entire quarter. 
>
>With the speculative sector awash in cash, much of it from outside the
>US, industrial firms became more and more dependent on massive
>credit and the sale of shares for financing instead of on retained
>earnings.  This dependence became even more marked in the late
>1990's, as the boom of the Clinton years began to taper off.  This
>boom had resulted in a burst of global investment activity that led to
>tremendous overcapacity all around.  By the late 1990's, the
>indicators were stark.  The US computer industry's capacity was
>rising at 40 per cent annually, far above projected increases in
>demand.  The world auto industry was selling just 74 per cent of the
>70.1 million cars it built each year.  So much investment took place in
>global telecommunications infrastructure that traffic carried over fiber-
>optic networks was reported to be only 2.5 per cent of capacity. 
>Retailers suffered as well, with giants like K-Mart and Wal-Mart hit
>with a tremendous surfeit of floor capacity.  There was, as economist
>Gary Shilling put it, an "oversupply of nearly everything."
>
>Profits apparently stopped growing in the US corporate sector after
>1997, leading firms to a wave of mergers, some motivated by the
>elimination of competition, others by the hope to extract renewed
>profitability from some mystical process called "synergy." The most
>prominent of these were the Daimler Benz-Chrysler-Mitsubishi union,
>the Renault takeover of Nissan, the Mobil-Exxon merger, the BP-
>Amoco-Arco deal, the blockbuster "Star Alliance" in the airline
>industry, the AOL Time Warner deal, Worldcom's takeover of long
>distance carrier MCI.  In fact, many mergers ended up consolidating
>costs without adding to profitability, as was the case, for instance,
>with the much-ballyhooed AOL Time Warner deal.
>
>Where mergers could not be effected, cutthroat competition ruled,
>resulting in bankruptcies such as that of giant retailer K-Mart.
>
>With profit margins slim or nonexistent, survival increasingly meant
>greater and greater dependence on Wall Street financing, which
>increasingly came under the sway of hybrid investment-commercial
>bankers like JP Morgan Chase, Salomon Smith Barney, and Merrill
>Lynch, which aggressively competed to put together deals. With little
>to show in terms of an attractive bottom line, some firms took the
>route of trading future promise for hard cash in the present, something
>that creative investment managers were especially good at in the high
>tech sector. It was this seemingly innovative technique of trading on
>illusion that resulted in the stratospheric rise of share values in the high
>technology sector, where they lost all relation to the real state of
>companies. Amazon.Com, for instance, saw a constant rise in its
>share values even as it had yet to turn a profit.   Other start-ups lost all
>connection to production and served mainly as mechanisms to inflate
>share prices to enable venture capitalists and managers with stock
>options to make a killing from an early sale, after which the firm was
>left to languish and eventually collapse. 
>
>But in the end, trading on illusion could only get you so far.  Reality
>intervened in 2000, resulting in the wiping out of $4.6 trillion in
>investor wealth in Wall Street, a sum that, as Business Week pointed
>out, was half of the US Gross Domestic Product and four times the
>wealth wiped out in the 1987 crash.  Its boom extended artificially for
>three or four years by the dot.com craze, the US economy entered
>into recession in 2001.  And precisely because reality was masked so
>long by the illusion of prosperity, the longer it would take to rectify the
>massive structural imbalances that had built up, if at all.
>
>In the end, there was no getting around the fact that your balance
>sheet had to show an excess of revenue over costs to continue to
>attract investors.  This was the simple but harsh reality that led to the
>proliferation of fancy accounting techniques such as that of Enron
>finance officer Andrew Fastow's "partnerships," which were
>mechanisms to keep major costs and liabilities off the balance sheet,
>as well as cruder methods like Worldcom's masking of current costs
>as capital expenditures.   In the context of deregulation and the benign
>approach to the private sector that accompanied the reigning
>neoliberal, "hands-off-business" outlook, it was easy for such
>pressures to erode the so-called "firewalls"-between management and
>board, stock analyst and stockbroker, auditor and audited.  Faced
>with the common specter of an economy on the downspin and
>slimmer pickings for all, the watchdogs and the watched threw off the
>pretense of being governed by a system of checks and balances and
>united to promote the illusion of prosperity-and thus maintain the
>financial lifeline to unsuspecting investors--as long as possible. 
>
>This united front could not be maintained for long, however, since it
>was very tempting for those who knew the real score to sell before
>the mass of investors got wise to what was happening.  In the end,
>business acumen was reduced to figuring out when to sell, take the
>money, and run...and avoid prosecution.  Enron CEO Jeffrey Skilling
>read the handwriting on the wall, resigned, and made off with $112
>million in the sale of his stock options a few months before the fall. 
>Not so lucky was Tyco's Dennis Kozlowski, who was not content
>with raking off $240 million and was still trying to milk his cash cow
>when his company went under; he is currently under prosecution for
>tax evasion.
>
>More culprits will be unmasked no doubt, and who knows, the cast of
>odious characters may ultimately even include George W. Bush and
>Dick Cheney.  But it is worthwhile to remember that while there are
>villains aplenty, it is the dynamics of the system of deregulated, finance-
>driven global capitalism that is the central problem, and this is not
>something that can be banished by Georgian pieties like "There is no
>capitalism without conscience," or addressed with quaint solutions like
>"good corporate governance."
>
>In the meantime, foreign investors are fleeing the US, the dollar is on a
>downspin, and the overhang of overcapacity is greater than ever.  The
>mixture of this deepening structural crisis of the economy with the
>crisis of legitimacy of neoliberal capitalism promises a volatile future
>indeed.
>
>*Executive Director of Focus on the Global South.




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