Blame (re: Dan Gillmore's Quattrone clique disgraced Silicon Valley)

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Barry Ritholtz <ritholtz () optonline net>
Date: Sun, 09 Mar 2003 17:53:06 -0500
To: dave () farber net
Cc: dgillmor () sjmercury com
Subject: Blame (re: Dan Gillmore's Quattrone clique disgraced Silicon
Valley)

Hi Dave (and Dan),

I've followed the Quattrone debate stimulated by Dan Gillmor's piece. I
have to reply to some of the commentary, which is a tad on the naive
side; Not not just about Wall St., but about where the blame lay for
all these infractions.


If we want to be honest about what happened (and to some degree, is
still happening), then we need to take a long hard look at how this
occurred and who is to blame; There is ALOT of blame to go around:

First, you can blame Fed Chief Alan Greenspan; His "Irrational
Exuberance" comment back in 1996 (!) tells you that he knew there was a
danger of a bubble; Not only did he fail to stop its inflation, he made
it worse in the last quarter of 1999. Fearing a Y2K induced run on the
banks, the Fed poured an enormous amount of cash (M3) into the economy.
As usually happens when money becomes too cheap, it found its way into
the most speculative aspects of the markets -- telecoms, technology and
dot coms. You can actually see it on a Nasdaq chart from October 22nd
1999 to March 2000, as the Nasdaq doubled. 12 years worth of growth in
6 months.

How much of this bubble was Greenspan's fault? A lot, if you believe
former Fed chairman William McChesney Martin. He defined his job as
"taking away the punch bowl just when the party starts to get good."
Not Bartender Al, however; He continued to pour drinks long after
people were dancing naked on the bar with lampshades on their heads.

The NASD gets its share of blame, too. The self regulating organization
turned a blind eye as its members raked in the "do-re-mi." Never forget
the intrinsic problem with SROs: they are managed and staffed with
foxes; Can it be any surprise what ultimately happens to the hens?

Neither is the SEC blameless; While the party was in full swing, they
feared doing anything to significant that might interrupt the fun. Lots
of very obvious infractions were occurring . . . the lack of political
will at the top is why the top regulators became spectators. Quite
frankly, I'm afraid to read (former SEC chair) Arthur Levitt's new
book. I respect the man, and fear that by the time I'm done with his
quasi-memoir, yet another political leader will be revealed as having
feet of clay.

Congress comes in for their fair share of the blame, too. First, with
incredibly bad legislation, like the "Litigation Reform Act of 1995."
That brilliant piece of draftsmanship gave a free pass to accountants
who defraud the public, ala Arthur Anderson and Enron. I'd like to see
every idiot who voted for the original legislation -- or the over ride
of the President Clinton's veto -- run out of town on a rail.

Second, Congress manages to fund every idiotic piece of pork they see,
but cannot find an appropriate level of funding for an essential office
like the SEC. They have starved it into its present condition: an
understaffed, under-budgeted, no-morale bureaucracy. Sure, there's
money for a "Museum of Peanut Butter" (really), but not enough for SEC
lawyers to keep our capital markets system running honestly. As Twain
said, [they are] "idiots and congressmen -- but I repeat myself."

How about the CEOs? These guys personally got IPO stock for steering
corporate business to underwriters; That business was with shareholder
money, therefore the shareholders -- NOT the individual CEOs -- should
have gotten the benefit of that as large clients of the Underwriters.
For the CEOs to pocket that cash was nothing short of legalized
bribery. Where were the mutual funds during this theft? They were
pocketing as many shares of fresh IPOs as they could.

Speaking of large institutions and Mutual Funds -- they have done their
clients a huge disservice over the years, sleeping at the wheel: Some
were merely ignorant, while others willfully did not want to rock the
boat, lest they not get "hot issues." Its been a problem for a long
time that Mutual Fund companies are almost pathetically uninvolved in
the governance issues, despite the fact that they are the largest
outside shareholders. A huge percentage of public stock ownership is
thru these massive funds; The big companies (Fidelity, Oppenheimer,
Janus, etc.) were not aggressively involved in governance issues -- and
should have been. They have the expertise, financial ability, the
incentive, the interest, and experience to force an intelligent
decision making process (or at least a public debate) on companies on
issues like Options, outside directorships, pro-forma (vs GAAP)
accounting, etc. Vanguard's Bogle was a notable exception, as his index
funds didn't need to curry favor -- so he was free to speak out more
than the rest.

The public investor does not get off blame free in this either. With
only a few exceptions, they were as greedy and foolish as Humans are
wont to be in these situations. Space does not permit me to detail what
I witnessed personally on the Street during the go-go years; The
laughable behaviors and absurd ideologies which passed for investment
planning in the late 90s were beyond ridiculous. This is not a matter
of 20-20 hindsight -- plenty of people had spoken out against much of
the excess, but were shouted down by the delirious throng of revelers.
("Buy bonds in 2000? Are you high?").

Much of the idiocy at the big Mutual Fund firms was at the behest of
the Investing Public -- A case of the blind being led by the dumb (and
I don't mean speaking impaired). The public pressured the big Funds for
instantaneous performance; Miss a quarter and they pulled out their
money and chased the hottest managers. Of course, these guys blew up,
so there was some degree of karmic payback there. But you can see how
insidious this cycle becomes when emotions rule the day, and the crowd
chants for more more more! and the funds are only too happy to comply,
touting 6 and 12 month performance. Its too bad that so many people who
were innocent of the worst aspects of this behavior still suffered when
whole house of cards came down.

Don' think the Clinton White House escapes blame; President Clinton,
SEC Chair Arthur Levitt, Attorney General Janet Reno were all fairly
inattentive to the brewing troubles. I do not believe this was out of
mere ignorance; That was a politically expedient decision -- "it ain't
broke (yet), so don't mess with the economy." There was a minimal of
investigations into widely known abuses; IPO laddering and spinning was
common knowledge on Wall Street. No one wanted to risk the ire of fat
and happy shareholders (aka: voters).

Lastly, save some blame for President Bush. He came in just as the
bubble popped, and escapes culpability for that. But the clean up is
his charge, and now that the party has ended, we expect him to sweep
up. He has not.

Every big Boom and Bust cycle ends with angst ridden hand wringing
about how to avoid these horrors in the future; We get a big clean up,
important new legislation, including prophylatic measures to avoid
making the same mess in the future. (Think Securities Act of 1933 and
1934, post 1929 crash).

Instead of introspection and intelligent legislation, he saddled us
with the most incredibly inappropriate SEC chair, the hapless Harvey
Pitt. His representation of both the Securities AND  Accounting
industry made him laughably unfit for the position . . . except no one
is laughing now. The SEC did finally get some increases in their
budget, but not nearly enough to be an effective counterbalance to
corporate legal departments and big law firms; It was an effective
strategy during the 90s when dealing with the SEC to bury them with
papers, motions, etc. This will remain effective until there is
sufficient funding and staffing.

Making matters even worse is the politically opportunistic economic and
tax policies. I'll  stop right there. I could go on (and on), but you
get the gist. There is so much blame to spread around that its hard to
really find any one group of thieves or rogues solely responsible. They
are all partly responsible -- and so are we. Perhaps we will learn from
our mistakes the next time this happens; I figure that will be around
2025. Save your notes . . .



Barry L. Ritholtz
Chief Market Strategist
Maxim Group
(516) 918-5529


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