11/26/05 10:57 AM Created: 9/21/05 10:33 AM last printed: 5/18/09 3:30 PM Dont Blame Me.

The Decline and Fall of Accountability in America by Frank B. Gibney Jr. Introduction

The Country of Easy Answers

This has always been the country of easy answerswere the country of the endless frontier, of the big sky, of manifest destiny, of unlimited resources, of go west, young man, of opportunity for all, of rags to riches, mass production, nothing to fear but fear itself, technical know-how, a chicken in every pot, gung ho and can do. For 200 years weve worked pretty hard and with great success, but we didnt have to think about it very much. Simple, clear-cut answers: lick the Indians, lick the British, lick the wilderness, lick the Germans and make the world safe for democracywe have won all the marbles and it just isnt enough. -- Henry Luce, in a 1962 speech to the Chicago YMCA. The Land of the Free

When Bernie Ebbers heard U.S. District Court Judge Barbara Jones sentence him to 25 years in jail, he cried. He turned to Kristie, his wife of 6 years, and they hugged a gesture of desperate intimacy in front of a crowd of anecdote-hungry reporters, gloating plaintiffs, and the voyeurs who add a little zest to the otherwise drab arenas of the courthouse complex near New Yorks City Hall. It was sweltering outside that morning, July 15, 2005, and even inside, the filtered air felt close. Ebbers was 64, and 25 years meant the rest of his life, unless he was lucky, which at this point, was about all he could hope for. Convicted on 9 felony counts of fraud, conspiracy and filing false claims with regulators, it should hardly have surprised him that he was going to jail. But as he and Kristie followed the lawyers and police who pushed past the paparazzi outside the building, the sweat glistened on his forehead, and Ebbers, usually quick with a quip, barely answered even the reporters he knew. This polar bear of a man, known for his folksy cowboys confidence, was not just disturbed, he was clearly disoriented. Bernard J. Ebbers and his chief financial officer, Scott Sullivan, had been found guilty in March of presiding over the largest single corporate fraud in U.S. history, a little bookkeeping sleight of hand which magically turned budget line items from capital costs into an astonishing $12 billion in revenue. The massive fraud ruined WorldCom, and when the company declared insolvency in July 2002 it also became the biggest bankruptcy in U.S. history. That distinction had previously been held by Enron, the onetime natural gas pipeline company-turned-global electronic trader of everything and by 2001, the icon of bad behavior in American business. Yet the $160 million bill left by WorldCom is more than twice Enrons. If you factor in the associated losses 50,000 jobs and the value of pension and health plans, not to mention the damage to suppliers WorldComs failure amounts to three times the Gross State Product of Mississippi.

Yet Ebbers wasnt about to take responsibility for it. From the beginning of the trial, he had maintained in his Aw, Shucks, way that he was innocent, more the college dropout and inspirational coach than the tough, hands-on CEO who had overseen nearly 70 acquisitions over a decade, to transform a tiny local communications company into a global giant. He blamed Sullivan and other lieutenants for cooking the company books a process he claimed he couldnt possibly have comprehended, much less authorized. He put on an appropriately righteous performance for an upstanding regular member of the congregation at the EastHaven Baptist Church. But Bernie was a little too righteous at times, too quick to disassociate himself from Sullivan (who had admitted his role in the fraud and cooperated with the investigation), even calling him a liar a serious charge anywhere, not least in front of 12 randomly selected New Yorkers. It didnt take much for the prosecution to show that in fact the younger man had been not only Ebberss principal financial strategist but one of his closest friends for a decade. The trial lasted a modest six weeks and the jury needed only several hours to decide that, even lacking a college degree, Bernie Ebberss country bumpkin act was just that. In effect, his own testimony had buried him. The only Mania that ever Mattered. In sheer dollar value, WorldCom was the biggest disaster in a financial mania which has proved to be the most potent, far-reaching and sustained in American history. There have been plenty of cycles in our 230 years during which the intoxicating prospect of a quick killing in the markets or the oil fields cut us all loose from the traditional parameters of accountability established in the Declaration of Independence and the Constitution. In fact, the last time we went through similar economic and cultural turmoil was in the years surrounding the turn of the 20th century. The incendiary blend of technological progress (the railroads, telegraph and telephone, the assembly line and the electric light) that began in the 1880s brought out our inner robber baron, and by the 1920s, the thirst for good living and quick profits ran all the way from men named Rockefeller, Morgan and the ill-reputed deal-making wizard Jay Gould right down to the two-bit hustlers and news boys who panned the alleys around Wall Street for inside stock tips.

The manic pursuit of wealth and power at the turn of the 21st century is distinguished for its sheer size and intensity and because it was no simple outbreak of financial greed. The excesses of the 1990s represent a cultural tipping point in America, when far too many people set aside their traditional allegiance to a greater whole whether family, fraternity, company or congregation for the sake of their personal agendas; The sky was no limit. Despite the conventional wisdom that the Dot Com implosion marked the end of our collective suspension of disbelief, we still havent acknowledged that two decades of easy money aided by the Federal Reserves tinkering with interest rates the way a nurse adjusts the flow of morphine into a post-operative patient have softened us. As the national debt and our international trade imbalance continue to set new records, so will the economic blow that follows the inevitable housing market crash, or when China, Japan and Korea decide to stop buying U.S. Treasury Bills, or civil strife in India disrupts the back office operations of so many American companies. The soaring 90s were not just about a decade. Despite a sharp, but brief recession in 1991, the stock markets had been ticking steadily upward since 1982. The mania was firmly rooted in the Reagan era the revolution of tax cuts, deregulation, mega-mergers and coincidentally, the popularization of the personal computer. Black Monday (October 19, 1987) barely caused the market barkers a stutter before they resumed their bellowing call and the indexes began climbing again. The recession of 91 seemed as if it might never end. Yet a wave of innovation and productivity increases, not to mention the palpable sense of opportunity brought on by the end of the Cold War and the sudden availability of a swath of humanity that stretched from Prague to Vladivostok these were just a few of the factors that sent waves of adrenaline pulsing through the collective capitalist instincts of Americans and Europeans alike. The economy rebounded as if it had been coiled precisely to spring forth at that moment. Companies like Apple, Microsoft and Dell became household names almost overnight. The magic of the Internet inspired even more unlikely start-ups a dozen pet supply companies, personal shoppers and butlers for hire, even a national dog walking service. Many failed.

In the middle of the decade a previously obscure operation called Netscape the company didnt even make anything went public. As Adam Lashinsky put it in Fortune in 2005, It was the spark that touched off the Internet boom. On Wednesday, Aug. 9, 1995, a 16-month-old Silicon Valley startup called Netscape tried to go public, but demand for the shares was so high that for almost two hours that morning, trading couldn't open. The stock, which had been priced at $28 a share, zoomed as high as $75 that day and closed at $58. Measured against the market frenzies that came later, its rise might have seemed predictable. Until then, Silicon Valley was just a place where microchips were made, not the fountainhead of global commerce. The public was oblivious to the Internet; "surfing" meant catching a wave in the ocean or mindlessly flicking the TV's remote control. But Netscape mesmerized investors and captured America's imagination. More than any other company, it set the technological, social, and financial tone of the Internet age. Netscapes IPO ignited the afterburners on what would become know as the New Economy. America Online, Yahoo!, Amazon and the online auction house eBay became so popular by the end of the decade that their market value overshadowed that of the likes of General Motors and Exxon. Wall Streets demands for higher returns induced the most competitive environment corporate America has ever seen. What fueled much of this, of course, had no intrinsic connection to technology itself, but was a completely new phenomenon: Americans everywhere were plowing their savings into the stock markets. In 1990, mutual funds took in a grand total of $12 billion; in 1996: $99 billion. That was just mutual funds. Millions of people invested directly in the hot issues of the moment: AOL, WorldCom, Global Crossing, Cisco. Delbert Currens, a cattle rancher in Panama, Oklahoma, saw AOL chairman Steve Case touting the online service on television and snapped up more than 1,000 shares.1 Until August 1991, it had never occurred to Shirley Sauerwein to buy stock. But the Redondo Beach social worker was driving to work when she heard a story on the radio about some company that was investing in Russia, where Communism was giving way to Capitalism, and she opened a brokerage account the next day2. By 1999, her initial $1,200 investment had grown to $16,000 and that was just a fraction of what had become a mid-six figure portfolio that included America Online, TK and TK.

1 2

fbg/kas interview 1/21/04 WSJ 12/13/1999, The Soaring 90s: Behind the Investing Giants and Stocks that Marked a Decade.
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Unfortunately for Sauerwein and millions of others that first investment was in Bernie Ebberss WorldCom. Between losses there and at AOL and Enron and EToys3, she was down $TK by 2002, and hopping mad. Just like the rest of Americans who werent already wealthy enough to write it off as chump change. WorldComs rise and fall, its leaders transformation from a scrappy motel owner to an Imperial CEO, and his lieutenants inability to do the right thing and say no instead of betting on a few dollars more nearly all the characteristics of this story are common to the financial debacles of the era, whether they involved gargantuan concerns like Enron, HealthSouth, Adelphia and AOLTime Warner (now known again as Time Warner), or complete unknowns, like Bayou Capital, the Stamford, [Link] hedge fund whose principals defrauded their clients including some prominent bankers themselves of a good $300 million before it was revealed in the summer of 2005 that Bayou had been insolvent for years. White Collar, Blue Collar, Clerical Collar For reasons that are explored later in this book, the tradition since World War II has been to treat convicted white collar criminals with considerably more lenience than your average bank robber even though the former generally hauls in far more loot than Willie Sutton could have imagined. Bernie Ebberss 25 year sentence reflected public anger over the breadth and magnitude and the cost of the fraudulent behavior that seemed to have swept through all of American business during the 1990s. Besides the WorldCom executives, a dozen more were put behind bars in 2005 alone, and an everincreasing number have been fined or formally censured by the Securities and Exchange Commission, the Department of Justice, or local Attorneys General. In Colorado, a financial consultant named Will Hoover, an ordinary man who many of his clients say did well by them for decades, is now serving 100 years for swindling some of them.

check

Even though most of the original investigations began in 2001, new allegations continue to surface weekly. Which begs a couple of questions: are new investigations being launched because regulators previously didnt bother much with the complexities of financial forensics and from now on will be vigilant? Or is it just the political trend these days to get as many collars as possible, and that as soon as eager prosecutors like New York Attorney General Eliot Spitzer move on to higher office, the heat will be off? There is little doubt that juries, at least, feel compelled to take these cases more seriously than ever before. The two most infamous corporate hucksters of the era, Enrons Kenneth Lay and Jeffrey Skilling, will not be tried until sometime in 2006. But if recent sentences are any indication, they ought not to hope for lenience. Despite support from local officials and editorials in the Coudersport , Adelphia Cable systems chairman John Rigas, age 80, was given 15 years and his son Tim, 8, for conspiracy, bank and securities fraud. Sam Waksal, the chairman of biotech company Imclone, was caught giving inside stock tips to family and friends, including lifestyle doyenne Martha Stewart. She served a token sentence herself. But Waksal got 7 years and a $4 million fine. Six weeks after Ebberss sentencing, Dennis Kozlowski and Mark Schwarz, the CEO and Chief Financial Officer of conglomerate Tyco International, were not merely handed 8 to 23 years, but Kozlowski was denied bail while his appeal was pending. For years, Dennis Kozlowski was held up as a model Chief Executive, regularly invited to participate in educational and professional panels, including a 1999 panel on ethics at Harvard Universitys Graduate School of Business. One thing Kozlowski never expected was to be led off to jail in handcuffs without a chance to change his English-tailored shirt.

These men have much in common, but one particularly striking similarity is that they all pleaded not guilty. Several even vociferously challenged the indictments, always blaming somebody else: underlings did it; or, the board of directors approved it (the corporate equivalent of But Dad said I could!). Some, like Rigas, feigned complete ignorance. They all had reason to think they could get away with it. One reason for that, as we will see, is that building a case against an individual in business is extremely difficult. Theres rarely photographic evidence, and what would it show? Even when prosecutors rolled videotape on the bawdy extravaganza Dennis Kozlowski staged for his wifes 40th birthday on the island of Sardinia, the jury was unimpressed, despite the evidence that Tyco had footed half the $2 million bill. Forensic experts have had some luck with e-mail trails, but many of the highestranking executives of the era never bothered learning how to use a computer; and it has long been standard practice to put as little in writing as possible even, or particularly, the minutes of a board meeting. The reason for this is precisely that the fear of lawsuits and government investigation has taught company officers particularly Directors to destroy any evidence that might hold them responsible, even for saying the right thing in a discussion. Not that this is stated anyplace where it might be obvious, like in an Annual Report. Anybody who has ever tried to get the lowdown on what the Directors have discussed and why certain decisions were made is politely given the brush off. In effect, the message from the boardroom to shareholders has always been: We know the business; Trust Us. This time around, their ignorance and our complacence taught an expensive lesson. It is impossible to say exactly how much the Enron Era cost Americans, for it depends on how you measure cost. In 2004, the accepted number, strictly in terms of value lost because of declining stock prices or bankruptcy, was around $7 trillion. Apparently, this didnt make much difference: the U.S. economy seems to have weathered the storm. Its important numbers GDP growth, productivity, housing starts, unemployment are growing steadily or, in the case of unemployment have remained stable. Still, there are tens of thousands of middle managers who lost their jobs in 2001 and remain out of work. The overall national poverty level has risen. When Congress approved legislation over the summer of 2005 to stiffen the debt repayment rules for anyone who declares a bankruptcy reorganization, there was a September rush to file for protection.

A better way to get a sense for how wrong things went in the 90s is to tally up the value of the settlements companies have reached with the Securities and Exchange Commission and the Department of Justice and with attorneys for the tens of thousands of shareholders who lost their savings, if not their jobs, when stock prices crashed or when companies like WorldCom or Enron went bankrupt. The reason this number matters is not that it is necessarily exact; none of them are. But it is a very large number, divided among roughly a dozen companies. Remember, these are not necessarily the same companies whose executives have been punished. They are companies who have been charged with a variety of crimes, from breaking accounting rules to mis-stating earnings and conspiring to assist the likes of Enron to commit fraud. The list includes some of the biggest corporate entities in the world: Citigroup, JP Morgan Chase, Morgan Stanley, Merrill Lynch and Time Warner, Parmalat, Vivendi and Johnson & Johnson, to name a few. As a general rule, the size of these settlements has some correlation to both the magnitude of the allegations and managements concern over the potential damage caused by an indictment. So a crucial component of almost any settlement negotiation is that the company not be required to admit culpability. The government often reserves the right to keep its investigation open, but attorneys on both sides know that neither the SEC nor the Justice Department have the manpower or the money to nail down every lead. In the case against Time Warner, for example, the company deluged the SEC with millions of documents and electronic files enough to fill more than three conference rooms at the Commissions headquarters at 100 F Street in Washington. Yet more documentation went to the U.S. attorneys offices in Alexandria, VA. Still, there was enough damning evidence around to get Time Warner to cough up more than $3 billion. In the words of a Congressional source4 with access to detailed information on the case, this was a gift to get them out from under an investigation that could easily have stalled for years thereby keeping a cloud of uncertainty over the companys financial future. The Time Warner settlement represents very little. As of September 2005, adding up all such settlements since 2001 would yield the mind-boggling sum of $8.2 trillion. Which is enough to pay off the entire U.S. national debt with a few hundred million left over to rebuild New Orleans. Well, part of New Orleans.

source ID TK on agreement.
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It Wasnt Just the Suits. What is chilling about the fraud and the cheating of the 1990s is that it was epidemic. We were all participants, whether day-trading car mechanics or magazine editors looking for a success story to put on the cover. It wasnt just about robbing your shareholders or lying to regulators and analysts on Wall Street. It wasnt even just about the money. It was about being successful about winning. The Internet merely enhanced the competition. It made the world move much faster, gave it other dimensions or other veins to mine. It was an era in which keeping up with the Joness wasnt enough; you had to be ahead of them. And the competitive obsession wreaked havoc far beyond the world of business, in professions where honor and accountability have traditionally been recognized as the cornerstones of success. Professional sports. Why did it take so long for Major League Baseball to address the question of whether many of its star hitters used performance-enhancing drugs, even though several players boasted about it. Why was the official response so tepid, to the effect that very little has been done? Elsewhere, Lance Armstrong, American hero and seven-time Tour de France winner has been dogged by reports that he used drugs. Of course every accusation is suspicious, but so, now, is every response. Education. How is it that, like the Brooklyn High School principal who gave his son the answers to the New York State Regents test, so many teachers across the country have in recent years been caught cheating on behalf of their students giving away in advance answers to aptitude tests, changing grades so as to make the system or the school look better, even though the students themselves arent. Journalism. First, its clear that nearly all of us and in this case us certainly includes me suspended our own critical disbelief in covering the boom. At various points in the 1990s, every other editor and reporter wanted to make the jump to a Dot Com for the glamour and the money; many did. And if we didnt, we certainly pandered to the hot shots of the era, then turned on them after the bust the journalistic equivalent of what traders call, pump and dump. Still, its been a little worse than that. Why is it that in the last three years more journalists have been caught for plagiarism, or fabricating their stories altogether, than have been nailed in the last decade?

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Of all the checks and balances that give American democracy its special authority, an independent press is surely one of the most important. Yet in 2002 the nations most prominent newspaper, The New York Times, admitted that one of its most prolific reporters, Jayson Blair, had faked or copied dozens of stories during his relatively short tenure at the paper. So had Jack Kelley, USA Todays senior foreign correspondent for more than a decade. So had a columnist at the Boston Globe, the Chicago Tribune, and newspapers in Macon, Georgia.5 This was not just about lone writers making up spectacular tales it was also about editors who were under pressure from their publishers to run the kinds of stories that win prizes, which in turn help draw advertisers. Tough Competition. It meant that along the way more than one editor or writer swallowed their doubts and let the stories go to print. The list could continue, including a Connecticut governor and other local elected officials, Catholic priests who swindled their congregations, local bankers and doctors who shill for pharmaceutical companies dispensing certain drugs in exchange for price concessions. One of the most disturbing characteristics of so many of these cases is that so few of the people involved express any sense of shame after being caught. Ebbers insists that hes innocent of any role in the $12 billion fraud that wrecked the 25th largest company in the United States. New York Yankees slugger Jason Giambi sat in front of a Congressional Committee and effectively invoked his 5th amendment rights by refusing to confirm or deny that he has used steroids (should my son think of Giambi as a hero or a fraud?). The Times reporter, Jayson Blair, instead of apologizing, left the paper and landed a hefty book contract. His boss, Howell Raines, the top editor at the paper, who was also fired, wrote an article for The Atlantic Monthly blaming others for the Blair fiasco. And what about President George W. Bush and his administration, who used information they knew to be questionable in order to justify sending TK,000 U.S. troops to war in Iraq? Despite the evidence showing the Iraq invasion was unwarranted, there has been no accounting by the White House. Or Tom DeLay? But then, politicians have always been suspect. In some eras, the reprobates have the run of the place. This is one of those eras. Membership Has Its Privileges

SOURCES: Pew, Poynter, DBLCHECK

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After all, this is the land of checks and balances, due process and justice for all the place where the buck stops. Here. Except that with all respect to Harry Truman, it doesnt if it ever did. Now the buck moves electronically, faster than sound, and can be deleted, altered, forwarded, replied to, or all of the above. Reality never lasted more than a split second; yet now even its lifespan has shrunk. The United States was hewn from the hard work and risky progressive thinking that sprang from Europes 18th century Enlightenment. Back then, it was the beginning of the Modern World, and a frenzy of global commerce was laying bare the competing interests of men and nations. They were heady times, both in Europe and America, and despite the bloody revolutions on both continents not least the one that gave birth to the United States -- there was an emerging consensus that War was no way to resolve competition. Men the likes of John Locke and David Hume, Benjamin Franklin, Thomas Jefferson and Alexander Hamilton kept alive the heated debates that produced the principles enshrined in the Declaration of Independence and the Constitution. The underpinnings of many of the delicate compromises that form the basis of U.S. law were based on the conclusions of arguably the most influential economist and moral philosopher who ever lived, Adam Smith. Although best known for The Wealth of Nations, the Scotsmans groundbreaking philosophical work came a decade earlier, and it was more focused on a single question: if men were driven by self-interest, then what motivated them to subjugate their own objectives to those of the group? The Theory of Moral Sentiments, published in 1759, offered a simple answer with infinitely complex variables attached to it: incentives. In short, Smith suggested that pride came from honoring the demands of a society which also guaranteed certain individual rights and benefits. Give a man a working wage to support his family, tell him that robbery will land him in jail and the shame of failure would direct him accordingly. Reduced to its bare bones, Smiths exploration was all about the relationship between incentives, honor, and shame

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For generations of Americans, this nexus was taught from birth, reinforced in school, by grandparents, and ultimately, by serving some greater cause. It was an implicit deal, which in fact is explicitly laid out in the letters and notes that led to the Federalist Papers, not to mention the Declaration of Independence and the Federalist Papers. In exchange for their inalienable rights, every citizen owed an allegiance to some greater whole. In the 18the century it was the cause itself, the birth of a nation. It mattered as much if one belonged to the club, the company (William Whytes Organization Man)6, the town and to a different, but sometimes more important extent, the religious congregation. At the turn of the 20th century, German economist and sociologist Max Weber made the direct connection between the Calvinist ethic and capitalism, from which the concept of the Protestant Work Ethic was derived. Americans lived to work and worked to live. Moreover, the U.S. has always been about building things, whether log cabins or cathedrals, Unions or institutions from those tough early days in the Colonies, through the Revolution, the brutality and divisiveness of the Civil War and its aftermath, to the railroad boom and post-Depression era to the beginning of the Baby Boom, when after World War II all anybody really wanted was a sense of stability and community. Progress begat more elaborate rewards : bigger homes, more powerful companies, intricate highway systems. All this paved the way for us to enjoy Life, Liberty and the Pursuit of Happiness. When in 1940, Henry Luce declared in his own LIFE Magazine that the 20th was destined to become the American Century, it was already self-evident. The more successful we were, the more successful we thought we could become. And the more fearful the rest of the world.

The Organization Man William H. Whyte, 1956.

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No group has more thoroughly exhibited that collective aspiration than the Baby Boom generation. Yet there is a demographic split even within the cohort. Anyone born early in the cycle, during the post-war years and through the 1950s, was thrown a dollop of humility from birth. Our fathers had seen action in one World War, if not two. In most families, there were dinner table stories not just of fighting overseas, but of grappling with the war at home. With both her husband and only son off in the Pacific during World War II, for instance, my grandmother every day drove a delivery truck back and forth from Ridgefield CT to New York City, to scrounge for the supplies she needed to keep the family Inn and catering business alive. Every family had in some way grappled with the grim reversal of fortune brought on by the 1929 crash of Americas financial markets and institutions, and the Depression that followed. The blacklists and humiliating scourge of McCarthyism had left a residue of skepticism toward government. But the Cold War was very real; we felt it in the crawl under your desk nuclear attack drills in grade school. By the time John F. Kennedys Peace Corps was inaugurated, it was hailed with some relief as a constructive, humane response to that threat. The Civil Rights movement, for all its shortcomings, at least dramatized the inequities and conflict that were still testing the fundamental safeguards enshrined in the Declaration. An ignominious retreat from Vietnam and the stain of Watergate, however, began eroding both national pride and individual responsibility. Sensing a nation adrift, President Jimmy Carter in 1979 summoned a cross-section of America to Camp David, to listen and attempt to understand what had gone wrong. Despite the strength of his inner hero, Carters inability to project it doomed his effort to reverse Americas Great Malaise as he so unfortunately labeled it in a fireside radio address . And the malaise would have continued in any case, for there was a hole in the system where the charisma and enthusiasm had been, and the double oil shocks of 73 and 79 drained much of what was left of Americas resilience.

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Ironically, Jimmy Carters most enduring legacy, aside from his Nobel Prize-winning peace effort in the Middle East, was to unleash deregulation, the very process that eventually (after inflation and unemployment hit double-digit peaks in 1982) set the countrys economy back on course. It began with the unshackling of the airline industry in 1978, followed by oil and gas. In the three decades since, nearly all the financial systems regulatory safeguards Roosevelts legacy have been removed. Of course, at the same time, a series of Republican administrations would begin to unravel Roosevelts New Deal too. Richard Nixon was the last Republican leader to feel a Christian obligation toward the poor, wrote Garrison Keillor in a biting August 2004 essay on the presidential election. In the years [since] Nixonthe party migrated southward down the Twisting Trail of Rhetorica gang of pirates that diverted and fascinated the media by their sheer chutzpah, such as the misty-eyed flag-waving of Ronald Reagan, who, while George McGovern flew bombers in World War II, took a pass and made training films in Long Beach. When Reagan came along with that blinding twinkle of optimism in his eye, he brought tax cuts, more deregulation and lots of defense spending to prime the economy and, he hoped, win the Cold War. The rules of business have been steadily relaxed since then, in ways that have both promoted economic growth and artificially skirted its dangers. In the name of shareholder value, the corporate raiders of the mid-1980s demolished the tradition of the company as a paternal institution, which meant that in the interests of competitive advantage, companies and employees gradually unwound the mutual loyalty that had bound them. Michael Milkens junk bond revolution got its start here, and its legacy would prove to have far more impact than anyone has recognized: even before Milken emerged from his (brief) jail term in 1993, his ideas about leveraging undervalued companies, about how to acquire much larger entities, and thus take advantage of the new companys huge market value to underwrite yet other companies the concepts and the network of powerful men who owed him favors -- laid the very foundation for many of the scandals that would emerge at the end of the 1990s. Although it provoked heated debate, deregulation was an idea whose time had come. Removing barriers to investment, scrapping anti-trust rules and generally freeing business to do as they pleased within broad environmental and security parameters, was bound to make America more competitive. After all, this was a time when Sony televisions and Toyota Corollas were being bludgeoned into slivers of plastic and aluminum in labor union parking lots from New Jersey to Detroit.

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The process continued unabated through the 1990s in fact the Clinton administrations rolled back more regulation than any of his Republican predecessors. He freed up the Telecommunications business (See WorldCom) cut the capital gains tax and allowed for the broadest corporate accounting standards imaginable. Finally, in 1999, he repealed Glass Steagall, the 1934 act which kept investment banks, commercial banks and insurance companies separate. It was enacted to combat the kind of speculative chaos that had led to the Crash of 29. But throughout the 80s and 90s, there had been calls to get rid of it, not only to enable the U.S. to compete more effectively in foreign markets, but because in theory, modern market transparency made Glass Steagall unnecessary. The New World Order In the early 1990s, the world was transformed. Down went the Berlin Wall, out went the Cold War. In Japan, which as recently as 1989 had been flexing its economic muscle by acquiring Hollywood studios and large tracts of prime Manhattan office space, including Rockefeller Center, the bubble had burst, and the country was sinking into a slump that would last more than a decade. Meanwhile, corporate America was finally restructuring itself, under the leadership of men like Jack Welch at General Electric and Lew Gerstner, who cut 25,000 workers from IBMs payroll in 1992, and used the PC business to turn the company around. In fact, the PC business turned the whole world around: it had taken a decade to catch fire, but then the possibility that emanated from the desktop box and keyboard with the little television set on top the possibilities seemed endless. Especially when it was clear this thing could be hooked up to any computer anywhere via the Internet. In came Globalization and everywhere was the Internet. The combination of a cascade of technological advances and the mere fact that the United States went into the latter part of the 1990s as the worlds sole superpower were more than enough to ignite an economic boom. All of a sudden, ideas were more valuable than ever because they could be communicated so easily and dispersed around the world instantaneously. There was a rush to invest in Russia and Eastern Europe, not to mention China. After around 1995, there were investments to be made everywhere, in almost anything. And the returns were reflected handsomely in the soaring stock market indexes.

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For business leaders, Globalization and the Internet offered new horizons in every conceivable direction, and any number of Big Ideas upon which to grow a company or start one. Except for Enron, perhaps the most audacious idea of the decade, nearly all of them involved a merger or an acquisition and those just got bigger and bigger, if not better. Besides BP and Amoco and a host of others, there was the truly global auto company, created from the so-called merger of equals between Daimler Benz and Chrysler Corporation in 1998. (In fact, Chrysler CEO Robert Eaton simply sold the company to the Germans, and lied to both his colleagues and the Board of Directors. They were never equal, and the two companies undermined each other from the start, finally resulting in a complete top to bottom change of management, directed, of course, by the Germans.) Perhaps the biggest idea of them all involved the combination of Citibank and Travelers Insurance, which created the largest financial services conglomerate ever. This was the brainchild of Sanford J. Weill, who was gambling that the Clinton Administration would push through the repeal of Glass Steagall. Now, Citigroup was one big financial everything. And its new co-chairman was none other than Robert Rubin, just retired as Clintons Secretary of the Treasury7. By 2003, Citigroup would be embroiled in ethics controversies from New York to Tokyo. The most well-promoted big idea was convergence, or the marriage of old media like television, movies and music, with the new distribution power of the Internet. That, of course, is the story of the 2001 merger between America Online and Time Warner, which, when announced in January of 2000, was the biggest in history, at $156 billion. It was also, like Daimler Chrysler, engineered secretly by a handful of people, and presented as a fait accompli to top executives and the board of directors. Although the companies above became embroiled in allegations and indictments for fraud, that was not the fate of all big ideas of the era. Yet there was so much money chasing so few real ideas that it became impossible to know which companies did what. That made little difference to the enthusiastic investing public: In the latter part of the decade, 143 initial public stock offerings (IPO) made first-day gains of at least 100%. More striking was that 101 of those occurred in 1999. In the 1980s, there were five such market debuts. Prior to that, there were none.

I cant suggest that Rubin agreed beforehand to join Citi. But the coincidence is too important to ignore.
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The combination of all these factors fed a yearning in the U.S. to be number One again just like we were at the end of World War II, back at the beginning of the Baby Boom. There we were at the end of the 20th century, sole superpower and general purveyor of everything to everyone. Depending on what you were reading, it was The End of History, or The Borderless World. American companies, American organizations, the American System, once again held out promise for all this time a bountiful new order in which all countries would get online, become free market democracies and develop a middle class. That vaunted state of equilibrium that was supposed to have occurred after the Marshall Plan was now finally coming of age, like a good wine. Here it was now for everyone and this time a for-profit investment, not just a carpet-bombing of donations and food drops to win allies and strengthen the bulwark of Democracy against the Soviets. Drink now. It was impossible to avoid the intoxicating fumes of possibility. American scholars8 had tried since the 1970s to take Immanuel Kants notion of Perpetual Peace and pin it on the more concrete thesis that Democracies do not go to war with each other. New York Times columnist Thomas Friedman made the important link between political and economic gain when he offered a somewhat cruder but certainly more current and popular metaphor in his 1999 book The Lexus and The Olive Tree. It would be the proliferation of McDonalds fast food franchises around the world, he said, that in fact would contribute to a new global peace, for as of his books publication, no two countries selling Big Macs had gone to war with each other. Soon, terrorism would destroy that simple prospect, for even Osama Bin Ladens less religiously orthodox followers have been known to enjoy a Big Mac or a Quarter Pounder with Cheese particularly while sitting in a van staking out a potential target. But at the peak of the game, in 1999, it was just about being best. The pride had resurfaced, but not the humility.

names and academic affiliation, etc. for Doyle and Russet and others.

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Almost overnight, it seemed that being American was no longer just about how you played the game, but whether or not you won. All that mattered was me my stock options, my bonus package, the size of my house, the horsepower under my hood. If we didnt have it, we wanted it new cars, the latest cell phones, the best laptop computer. And when it came to work, the idea that you be paid according to your performance gave way to a betting game among all these new tech companies. Startups dont have much cash, so you gambled, accepting a below market salary in exchange for below market options to buy company stock. This was very simple, really. Say your companys stock was trading at $10 per share. You would be given the option to buy 5,000 shares at $10, no matter what price the stock climbed to. Work for a hot company where the stock goes from $10 to $120 in a year, and youve grossed a half million. In theory, stock options have been around forever, but in the 1990s, they became a new currency of success, the very fiber of the New Economys secret: paper. The perfect one-way bet because of course, stock options only have value if the stock goes up. If it goes down, you havent lost a cent and certainly, neither has the company. Bernie Ebbers had lots of stock options. And he got rich because a Wall Street analyst named Jack Grubman touted WorldCom as the greatest telecommunications company ever. Grubman worked for Solomon Smith Barney, a brokerage conglomerate owned by Citigroup. Citi was in the business of underwriting hot companies so that when they expanded further and became even more successful, Citi would get a nice cut of the returns. Grubman the analyst touts WorldCom the company; WorldCom stock goes up, Ebberss options increase in value. As WorldCom stock inflates, Citi lines up a nice underwriting deal with the company, which, when properly publicized, sends the stock even higher. Grubman looks smart, so his bonus gets bigger in 1999 he was paid $20 million, mainly for serving the needs of a couple of clients. As long as WorldCom stock kept rising, anybody at the top of the management pyramid could convert their options for a huge profit. If you were in middle management, well, the opportunities werent quite as lucrative. One of the terrific selling points of stock options in those days was that the company didnt have to pay for them, at all. Unlike salaries or cash bonuses, they were not reflected on the bottom line because of course, there is no real value attached to them until the stock starts to soar. And then, they are underwritten by the market, not the company. Sound like a free lunch? Almost.

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Despite a vigorous effort by the Financial Accounting Standards Board and SEC chairman Arthur Leavitt to get companies to account for stock options as an expense, the corporate lobby in Washington successfully blocked legislation. The result was that instead of paying competitive salaries, companies like America Online used the rising value of their stock to issue millions of options to employees. It wasnt exactly a something-for-nothing exchange, but it certainly fed the illusion that the New Economy would make millionaires of us all and fed the hubris that was disassociating so many executives from economic reality. The Business of America is Business9 This book focuses mostly on the decline of accountability in the business world because business has permeated every corner of American society. Calvin Coolidge was right in December 1928, when in his ill-timed outgoing State of the Union address he proclaimed that the country could not be any healthier, thanks to business. Everything in America is about business now, from our self-proclaimed CEO President who, in spite of his Harvard MBA has never run a successful business on his own to the The Apprentice. There are even plans to start a chain of theme parks for children, in which the principal focus is on attractions which help teach business concepts, from running a grocery store to building an office complex. Back in the middle-class 1950s and early 60s, business was just something Dad did. Americans wanted stability and simplicity, a home and a job. Families were discovering the newfound luxury of shutting out most everything beyond the tidy new peace of the suburbs, where the grass had only just begun to fill in. Near the corporate bastions of New York and Chicago, Dad commuted to Wall Street or Michigan Avenue. For the rest of the family, business was not just a train ride, but a world away. Housewives had Tupperware parties, not day-trading seminars. College grads went to engineering, not business school. If anything, there was a cynicism about business, as reflected in Sinclair Lewis Babbit or the brilliant performance of Gregory Peck as a disaffected advertising executive in 1957s The Man in the Gray Flannel Suit. People saved money first, and then spent within their budget.

President Calvin Coolidge State of the Union Address, December 1928.

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Baby Boomers at least those who consider themselves middle class or above (is there even a middle class left?) grew up without worrying too much about where their next nickel was coming from. Our parents worried about that, and if anything wanted to shield us from the uncertainty that they and their parents had faced. In doing that, however, they may indeed have made us feel too secure, too certain that if something went wrong, someone would bail us out. Subsequent generations have incorporated the same dynamic. The theoretical conclusion is disturbing: the further removed you are from the exigencies of the early and mid 20th century, the less self-reliant, or principled, you are likely to be. So consider the possibility that Americas accountability crisis is not a matter of regulatory regimes, but an organic, generational problem: whether in terms of the corporate world, the White House, Congress or the Academy, the men and women who dominate the establishment today lack their forebears broader understanding of their heritage, or how todays political and social reality connect to history. In the throes of the new-company-a-day 1990s it was popular, for instance, to invoke Joseph A. Schumpeters phrase Creative Destruction as a way of explaining why old companies had to downsize or expire, to allow for the rise of new ones. One man who liked to quote Schumpeter was Robert Pittman, the marketing wizard behind MTV in the 80s and AOL in the 90s. Asked about Schumpeter one day, Pittman didnt have a clue who he was. Most of these guys (running companies in the 90s) barely knew who Schumpeter was, let alone read a word he had written, says James L. Cochrane, former chief economist for the New York Stock Exchange. Its unlikely, therefore, that most top executives would have known that what Schumpeter was referring to in Capitalism, Socialism and Democracy10 was the eventual self-destruction of capitalism. Certainly, most of the Baby Boom leadership have little if any experience in a collective crisis whether it be war or a devastating storm like Hurricane Katrina, which demolished New Orleans and much of the Mississippi Gulf Coast in 2005. And being unfamiliar with crisis, but all too familiar with success, mans instinctive reaction is to point the finger of blame elsewhere. Well coddled Boomers were more likely to complain to their shrinks. As New York Times columnist Nicholas Kristof put it in 2005, were not the Greatest Generation but the Greediest Generation.

10

Capitalism, Socialism and Democracy Schumpeter, 1942.

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To have first hand memories of World War II and the tail end of the Depression, youd have to be at least 80. The Korean War, 73. In fact, with a few exceptions, most Fortune 500 chief executives did not even fight in Vietnam11. Those who did include retired State Street Bank CEO Marshall Carter, former IBMs Lew Gerstner, Rhode Island Senator Jack Reed and Federal Express founder Fred Smith. Most others were either too old, caught between the wars, managed to get a deferment, or conscientiously object, or something. President George W. Bush, our first president with an MBA, managed to avoid active duty in fact by most accounts 12he seems to have managed to use his family connections even to duck most of his service in the National Guard. (One particularly interesting statistic: most of the Republican political leadership did not serve in Vietnam or Korea unlike most of their Democrat counterparts.) Religion also plays a role here. Among the business men who top the scandal sheets, only Worldcoms Bernie Ebbers and HealthSouths Richard Scrushy claim to be devout Christians. Yet they, like George W. Bush, are of a far different faith than the Calvinists who Max Weber was talking about. The religious right in America today are a broad community with a wide range of beliefs, but a fundamental sense that they share a special place in history, and that that place transcends the law and common exercise of the Constitution. The notion that Church and State should remain separate, whether the Lords Prayer ought to be in curriculum. has become a matter of debate. However, the fact is that the same graphic (SEE GRAPHIC) crossection of companies in 1935

Too Big To Fail No matter what the shortcomings of corporate America, it would be irresponsible not to underscore the point that most of the public continue to be willing participants in any venture that looks as if it might save us a buck, if not make us millionaires. The public placed plenty of one way bets during the soaring 90s. At one point, as much as 50% of the population was somehow invested in the stock market, and counting on double digit returns. Having placed those bets, Americans spent, and spent, and spent. In 2000, when the Internet bubble burst, stock values began to decline. By the summer of 2002, when they hit their collective low, countless households were left overextended.
11 12

Sources: Fortune, NYT, CEO Magazine, etc. New York Times, TK Wash Post TK, LA Times TK.

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That was okay, though, because the Alan Greenspans Federal Reserve Bank lowered interest rates, and lowered them and lowered them again, which encouraged anyone with a mortgage to refinance at low rates, or take out a home equity loan to pay off their credit card debt if they didnt just use it to spend more, figuring the stock market would bounce back, or the housing market would soar, or both. Bailed out, again. Anybody who had feared losing their savings because of WorldCom or AOL Time Warner simply had to answer one or two of the 0% interest credit card applications that poured through the mail slot each day. Liquidity problem solved. Better to get a few new lines of credit than to worry about those pesky stock market losses. Proportionately, consumers had an easier time covering their losses than did a CEO like Bernie Ebbers. (Although instead of putting credit cards in their sock drawers, CEOs generally just arranged to give themselves multi-million dollar raises.) But the goal was the same to maintain the illiusion of success. Again, here was a profound cultural transformation at work. Until the 1970s and certainly by tradition bankruptcy was a shameful end for any American. It didnt prompt as many suicides as it has over the years in countries like Japan. But (TK LITERARY REFERENCE) it ran counter to the spirit of the country, all the way back to the Founding Fathers. By 2004, the number of personal bankruptcies in the United States had reached an all time high and was still rising. There was no shame anymore in abrogating ones responsibility to pay off a debt. Seek protection. Start all over. No problem. Thats why when Congress announced a tightening of the bankruptcy requirements beginning in October 2005, there was a rush, by companies and individuals alike, to declare Chapter 7 or Chapter 11. Anything but to get left holding the bag.

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Postponing the inevitable or enabling people to avoid accountability would not have been possible without the help of Greenspan and the Fed. The U.S. central bank was created on December 23, 1913, so that the country would never again be dependent on individuals to arrange a national financial bailout as J.P. Morgan did in 1901. For decades, the Fed has simply opened the sluicegates at any hint of disaster. Whether the Savings and Loan industry in the 1980s, or the banking implosions in 1991, the Fed has bailed out many an institution. In this case, a precipitous drop in consumer spending would have been a threat to the economy that was already in recession, and in the wake of the September 11 terrorist attacks, the Bush Administration feared that any sign of economic weakness would have global political implications which Washington could not afford. So Federal Reserve Bank Chairman Alan Greenspan, the acknowledged maestro of the system, began reducing interest rates thereby keeping cheap money available to all. The philosophy behind some of these broad changes was to invite broader public participation, thus democratizing the markets. In turn, broader public ownership would help socialize market risk throughout America. In theory this made sense. But in conjunction with other deregulatory moves, it yielded a virtual oligopoly in finance, almost completely undermining any accountability in the system. In 1980 there were dozens of accounting firms, dominated by the Big Eight. There were seven large commercial banks and a myriad of smaller regional banks. Insurance was a realm to itself. Investment banking and brokerage operations a limited business in those days were conducted by private partnerships headquartered mainly in New York, mostly within walking distance of each other and the New York Stock Exchange on Wall Street. The one exception to this was Merrill Lynch, which in keeping with its founders wishes to serve a broad base of consumers, went public in 1971. Finally, the walls between banking, investment banking and insurance, were torn down. Now, after a steady succession of mergers and acquisitions, we have just a handful of financial mega-houses Citigroup, JP Morgan Chase, Bank of America which control the lions share of our wealth, either directly or through powerful relationships with smaller institutions.

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The best example of this consolidation is Citigroup. As recently as 1990 Citi was just a bank, its stock trading at a measly $7 reflecting the public perception of banks as little more than vaults (safe vaults!). The Savings and Loan crisis, bad loans to South America, and a range of factors had brought what was then known as Citibank to its knees. But the U.S government stepped in and bailed out the S&Ls, and Brazil. By 2001 Citi had become the biggest financial services conglomerate in the world, assembled by Sanford J. Weill from a commercial bank (Citibank), insurance companies (Travelers), brokerage houses (Smith Barney) and investment banks (Salomon Bros). During the speculative chaos of 1999, Citi was at the heart of the action. Stock analysts from Solomon Smith Barney touted a natural gas company which had retained SSB investment bankers to acquire other companies, even as it was borrowing billions through Citibanks commercial banking arm, for everything from a huge power plant in India to a complicated private investment partnership that was not even explained in the companys Securities and Exchange filings. That was essentially the relationship between Citicorp and a company called Enron, before the gas trading giant went bankrupt in late 2001. Because it has become so easy to pass the buck between huge global financial institutions, there are no gatekeepers to capital risk anymore. And because the public is now so heavily invested in the markets, the men who run public companies whether banks or media giants are now effectively playing with our money. Given what CEOs have their Directors pay them, its hard to imagine they care. The average chief executives pay package in 2004 was $10 million without bonuses and stock options, which represent more than half the package. The reason all this is so scary is that if an outfit like Citigroup ever really oversteps its bounds say, with enough bad loans to companies or countries to sink it the entire global economy will feel it.. For a bankrupt Citigroup, by the reasonable estimation of any economist, would cause a devastating shock to global markets. Why doesnt anyone seem to worry, then, when Citigroup announces it will pay plaintiffs several billion to settle a lawsuit over its loans to bankrupt WorldCom, as it did in May, 2004, or when news reports suggest that Time Warner, which faces several hundred billion dollars in shareholder suits, would be happy to settle those too? Citigroup, for one, is Too Big To Fail.

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This is called or rather, for the sake of argument, lets call this risk socialization. In theory it sounds good distribution of wealth ought to be accompanied by distribution of risk, right? But in fact it just encouraged a generation of top executives to gamble other peoples money so they could make morebut never less. By the mid 1990s, this was accepted in business. If the 90s was the decade for deal-making, you need look no further than the immediate payout to top management, in some cases before the ink had dried on the contracts. In Time Warners case with AOL, for instance, the deal was arranged to that any Time Warner employee who had been granted options was free to exercise them the day after the deal was announced. If only Id been paying attention, instead of doing my job covering the car business. The point: you didnt need to think through a deal. The executives involved simply moved on. And more often than not, the same executive would end up at another company in short order. We reached a point where no single deal, not even ten deals, could break an investment bank or even a career, says Ken Jacobs, U.S. vice chairman of investment bank Lazard Freres. Its heads I win, tails you lose.

If Only it Were Over. In fact, the excesses of the last several years suggest that Americas unique combination of democracy and free-market capitalism now face their biggest challenge since the founding of the Republic. The best way to understand why is to look beyond the headlines of recent years past the people who were caught to the people who werent; past the companies that went bankrupt, like Enron and WorldCom and HealthSouth, to the financial institutions that actually funded their outrageous deals in the first place. Think, for instance, about the very nature of a settlement. In effect, it is an agreement that the company will pay a certain amount of money to the plaintiffs be they shareholders, customers or the government. In return, said plaintiffs agree to seal the details of the alleged fraud from becoming public. In most cases, a settlement explicitly avoids any statement of culpability on the companys part. So, for example, although Citigroup and JP Morgan Chase coughed up the lions share of restitution in the Enron and WorldCom bankruptcies, well never know which high ranking executives from either company were involved in these deals.

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Take the case of Time Warner, which has never been close to insolvency, but whose board of directors approved its disastrous acquisition in 2001 by America Online. Wall Street analysts welcomed the media giants August 2005 announcement that it would set aside a stunning $3 billion to settle shareholder lawsuits. Earlier in the year, Chairman and Chief Executive Richard Parsons also announced it would offer at least $500 million to settle allegations of fraud and improper accounting with both the Securities and Exchange Commission and the Department of Justice. In return, the lawsuits are being dropped, and the discovery process halted. The company neither admitted nor denied culpability. And the government has agreed to keep its investigation results sealed although they have reserved the right to continue the investigation itself. Yet there is plenty of evidence some of which will be aired for the first time in this book that former and current executives at both companies had a hand in committing the fraud which both shareholders and the government allege. One example is the contents of the loose leaf Black Book that was given to directors of both companies at an Atlanta retreat in mid-2000. The merger had already been approved by both boards. Yet in all the documentation given to both the Directors and the Securities and Exchange Commission, there are no references to a series of deals by AOL that would ultimately cost the combined company more than $10 billion. Had the information been made public at the time, the merger almost certainly would have been protested and scotched. But who knew except the folks at AOL and a couple of men at Time Warner who decided to keep their mouths shut. The information is still being withheld with such vigor that Time Warner has spent tens of millions of dollars fighting a private lawsuit over an employees claim to his bonus. Why? One reason is that the employee in question has a copy of the Black Book. Is this good value for shareholders? And by the way, if the company is fighting so hard, doesnt that alone suggest that certain top executives would be in trouble if the truth came out? In terms of Enron or WorldCom, Tyco or HealthSouth, the missteps were aired publicly because they were caught. But there are many other cases which have not been resolved, except that the companies in question have agreed to pay large settlements. The list of companies includes Merrill Lynch, Citigroup, J.P. Morgan Chase and Time Warner. Whether because the authorities lacked the resources or the companies have the political clout to make the government back down (note campaign contributions), we may never know just which charges against the company in question were wellfounded or who was responsible for the fraud.

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At the same time, the current chairmen or at least several of the highest ranking executives at three of these companies were in positions to approve the decisions that led to investigations in the first place. What did they know and when? Enron, WorldCom and HealthSouth frauds were uncovered only because there were whistleblowers all of whom were women. Why didnt any of the men or anyone else at all speak up at other companies? Why didnt anyone quit over the AOL Time Warner merger? Where was the top management at Citigroup when its brokers and analysts were conspiring to influence the value of certain stocks? And what does the Board of Directors do anyway, if they never seem to know how it is their top executives are given such exorbitant pay packages? Behind the headlines lurk an array of disturbing questions which only a handful of journalists and academics have been willing to address. One of the most fascinating characteristics of the so-called Enron Era is the extent to which these companies, their schemes and their principal actors were intertwined. Enrons activities, for example, involved a half dozen financial institutions, including Merrill Lynch, JP Morgan Chase and Citigroup. Yet Enron was also partners with America Online in a Stamford, CT. based venture called NuPower, which was supposed to enable consumers to pick and choose their home gas supplier over the Internet. Behind NuPower was an AOL joint venture with Sun Microsystems (which sold Enron most of their high speed computing power) called iPlanet, which was intended to enable both companies to get into the market for business computing services. There is also a remarkable matrix of connections among directors and management at various companies, which suggests a watch my back code at work. Citigroup, Time Warner, Xerox, WorldCom, MCI, Cendant, AOL (whose original board included the likes of Colin Powell and Alexander Haig), and several other companies all share certain directors. The New York Stock Exchange approved a controversial $160 million pay package for its former chairman, Richard Grasso. The head of the Board of Directors compensation committee was a close friend of Grassos. Indeed, the NYSE was run like a mens club, by Grassos pal, Kenneth Langone, Merrill Lynch former CEO David Komansky, and a collection of executives who had nothing to lose and everything to gain by keeping Grasso happy. The committee also included Gerald Levin, who was ousted from Time Warner in 2001.

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One character who managed to insert himself into the inner workings of four of the above companies, among others, is none other than Michael Milken. For one thing, the principles he espoused in the 1980s had a legacy that continued right into the 1990s. More pointedly and this is not taken lightly by many who have dealt with him even after he got out of jail in 1993, he took on a shadowy role as Godfather, particularly among the media and telecommunications establishment. A lot of people owed him favors when he got out of jail because his junk bonds had saved their companies in the early 1990s. So Milken quietly called them in. He wormed his way into any number of deals, from the Time Warner acquisition of Turner Broadcasting in 1996 to Bernie Ebbers successful bid for MCI the following year. The Justice Department tried and failed to put him back in jail in 2000 for violating the terms of his parole. Yet five years later, he had reinvented himself yet again as a global thinker and cancer advocate, and there he was again on the cover of Fortune Magazine, as an entrepreneur, cancer fighter and president of an influential strategic think tank in his name. Which begs mention of of the most important elements of this book which is the degree to which companies and politicians now use Spin Doctors so expertly to convey whatever message it is they want conveyed to the public. Until the mid-1990s, the business of corporate PR was largely a matter of issuing press releases. Since then, however, an entire industry has been built around the idea that companies images should be managed constantly, as a political campaign would. Where did the idea come from? A collection of former political spin doctors and Reagan Revolution devotees who became disillusioned during the Clinton years and decided to use their skills to take the image revolution to corporate America. Not surprisingly, a few of the characters worked, at different times, for both AOL and Mike Milken, Time Warner and Microsoft, American Express and NBC. None of them have been called to account yet, but they will be in this book. Finally, there is clearly a transparency problem with our financial system, which all but guarantees that well keep repeating these cycles of scandal. Take WorldCom, for instance. despite declaring bankruptcy, its not as if the company simply vanished. In fact, today it is still in business, known simply as MCI, and ultimately to be just a division of Verizon, which acquired it in 2005 for $TK. Its headquarters has been moved out of Clinton, so the local economy and thousands of employees there are still without jobs. But otherwise, the company is healthier than ever. Why? Because under bankruptcy protection, it was able to magically reduce its debt to $5 billion from $41 billion. Its stock price, which had fallen to nothing, was re-listed in 2004 at $23 per share.

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Bernie Ebbers may be in jail for the rest of his life, but billions of dollars were borrowed and never paid back. MCI emerged from bankruptcy reorganization more competitive than ever. But what happened to all that cash? Where did it come from in the first place (hint: banks like Citigroup) and who ultimately accounts for it? Although toughened by a new law that went into effect in October 2005, U.S. bankruptcy requirements effectively afford both corporations and individuals lifelong protection from creditors. Why not spend wildly on corporate jets and villas in Acapulco when you know youll never really be called to account? These questions are at the very heart of this book.

CONCLUSION Nothing is more constant in the history of American business than the conflict between our historic ideals and, as Henry Luce suggested, our craving for more of anything, but mostly money and status. Its tempting to hope that if whopper settlements and prison sentences dont correct our urge to break the rules, then all it will take are new rules, like the Sarbanes Oxley legislation. Maybe if Glass Steagall had not been repealed But this is wishful thinking. For while capitalism and free markets need a framework, the same ingenuity drives both rule makers and rule breakers. Although they have different historic triggers, the spores that burst into todays contagion are little different than those which have produced similar results since the great philosophers of the Enlightenment13 laid down the intellectual cornerstones of the United States.

13

brief description tk

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Indeed, here we are on the verge of another year and investigators are still uncovering cases of inflated earnings, kickbacks, and evidence of all kinds of audacious fraud, not just at big name companies, but obscure operations with names like Bayou Capital. One can argue that we wouldnt be here had Alan Greenspan and others properly cleaned up after the Savings & Loan crisis, or if someone had connected a few dots and Uncle when Robert Rubin left government and joined Citigroup in 1999, the same year deregulation ran its course with the repeal of Glass Steagall, which in effect authorized the unlimited growth by almost any means of financial institutions. Will we just bail them out if they fail? You bet. But maybe thats ok. After all, the Japanese are learning from disastrous earthquakes how to construct skyscrapers that literally roll with the shifting tectonic plates. Perhaps the financial system needs to fail before we can understand how to rebuild it with the right safeguards against chicanery. Those are questions for a different book. This one has the more modest, but I hope useful, goal of offering a narrative of a descent into chaos. Just a few weeks before he stepped down as Dean of The Yale University School of Management, Jeffrey Garten conceded that almost everything has been thrown into question, from the nexus of power between business and government to the very question of how and what to teach business school students. We all drank the Kool-Aid, he likes to say14. Formerly a global investment banker as well as a trade and commerce official for both Republican and Democratic presidents, Garten has seen enough to know, and he is at a loss as to what to teach. When I got here ten years ago there was no question in my mind what the foundation of an American business school should be. Now, everything I believed has been shattered, the foundation has been broken up, and I dont have any idea what should replace it.

14

interviews with author.

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Perhaps the best way to think of this most recent scourge is as a culmination an era in which the cumulative effects of fifty years of post-World War prosperity got the better of our collective sense of responsibility. More worrisome is the prospect that this era is far from over. For although much damage has been done, there remains the hint of more scandal to come. Contrary to the orderly divides of the Cold War, this worlds fissures are constantly in flux, its threats unpredictable. For the United States to hold its own let alone remain the worlds sole superpower its political and business leaders will have to act according to at least a similar set of principles. That may mean reaching back to Western history or discovering solid ground behind Chinese claims that governments can be at once authoritarian in some areas and laissez faire in others. Unfortunately -- whether in its decision to wage wars in Iraq and Afghanistan or its priorities in response to a national disaster like Hurricane Katrina the current American political leadership is well and truly lost. We know how the last party ended with the Crash of 29 and the depravities of the Great Depression, which was still taking its toll until Franklin D. Roosevelt committed the U.S. fully to World War II. We dont know how this party will end. The era has been significant not only for its technological leaps and bounds, but for the sweeping political and economic change that have come along at the same time. Ironically, the most dramatic technological advances and the most extensive transfer of wealth have occurred in the United States yet the benefits have mostly accrued to the individuals who were either wealthy in the first place or smart enough, scrappy enough, to push their own causes. There has been an increase in poverty. And the gap between rich and poor has widened to the point where, as economist Paul Krugman pointed out in a New York Times column, The Middle Class has disappeared. Is there a connection between the increasing importance of individual accomplishment and the decline of accountability? Think about it. Were as far as weve ever been from the events that shaped modern America. Since the 60s despite the oil shocks and a couple of stock market crashes rising prosperity has been taken for granted. This book is to suggest that our success, or the perception of success, have been sapping the very forces behind it. And that the biggest threat the United States faces is not China or India, but ourselves, and the end of our inherent link to the traditions of accountability and personal responsibility on which the country was founded. In the meantime, a new bubble and the consequences of its dissolution loom. Real estate markets are so overblown in certain parts of the country Boston, San Francisco, New York --- that some economists think it will be their collapse that signals the crash to come. Which may be soon.

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Or as Nobel prize-winning economist Joseph Stiglitz warned in his 2003 book, The Roaring Nineties, Americans should face up to the fact that in the very boom were planted some of the seeds of destruction, seeds which would not yield their noxious fruits for several years. This book is an attempt to explain how we lost our sense of accountability, and what it will take to get it back. # # #

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