CURRENTS
In Review: Sliding on the Bubble
A few years ago I was sitting with a friend in a seedy German restaurant off Tenth Avenue in New York drinking giant steins of beer and talking about his job in investor relations for a Fortune 500 company. The company’s stock was flying high, but my friend was in the dumps. He had just spent a long day briefing analysts on corporate earnings that he himself thought were fishy. “You don’t understand,” he said, “You have to make your number.” And his company did — every single quarter, mostly by booking revenue from “sales” that many in management knew to be dubious. But what perplexed him most was that nobody — not even top analysts or major institutional shareholders — ever questioned the filings. I asked about the journalists who covered the company. “It’s a joke,” he said. “They never call.”
In the wake of the revelations of widespread accounting fraud at leading corporations, it’s been easy for journalists to strafe such targets as Kenneth Lay, Bernie Ebbers, and Dennis Kozlowski. But we shouldn’t move on from this sad period without pausing to consider our own failings. Allow me to go first.
During much of the boom of the late 1990s I wrote about corporate mergers and acquisitions and was familiar with the various tricks lawyers and bankers used to pretty up the numbers associated with the multibillion-dollar deals. The most common of these was something called “pooling of interests” accounting, a device based on the pleasant fiction that one company wasn’t really buying the other, they were merely “pooling” their assets and liabilities. At that time companies were paying billions over market price to acquire their targets. Without pooling, those huge premiums they paid would be charged against earnings that year. Ouch. With pooling they were allowed to spread the costs out over decades so that — presto, chango — earnings looked fine. It was all nonsense, of course; one company was invariably being acquired. After a long struggle, the tactic was finally disallowed last year.
I knew pooling was a driving force behind the wave of consolidations I was covering but I never attacked it expressly. Why? In part, because my readership — the lawyers and bankers managing these buyouts — knew all about it and I was co-opted by their “it’s no big deal” attitude. Besides, the market wasn’t punishing anyone for such gimmicks, and it had to know more than I did. Right?
It seems strange now to consider how easily a phrase as loaded as “managed earnings” slipped into the lexicon of business coverage, and how we brushed aside early accounting disasters (Waste Management, Cendant Corp.) as aberrations. One cringes at the memory of self-congratulatory ceos yukking it up on cable television with pliant journo-boosters, and the countless glossy business profiles where the tone was often more worthy of breathless teen magazines than financial journals.
The fact is that the sober business press got drunk on a potent mixture of ad revenue and newsstand sales. But now nobody remembers last night’s party. We moved from the numerology of success (seven best mutual funds) to the numerology of failure (seven sins of corporate America) without much pause for introspection in between.
Many commentators have noted the similarities between the current wave of corporate scandal and that of a century ago, wondering aloud if President Bush is headed for a “Teddy Roosevelt” moment. Not frequently mentioned is the role the press played in spurring on the trustbuster, especially muckrakers like Ida Tarbell, Upton Sinclair, and Edwin Markham. Perhaps the most vigorous corporate critic of all was also the earliest one, Henry Demarest Lloyd. He’s largely forgotten now, but during his thirty-year career, culminating in his seminal work, Wealth Against Commonwealth, Lloyd was the first to plow through reams of financial data, court records, and hearing transcripts to expose corporate skulduggery in the Gilded Age. Explaining why he pursued corporate power with such vigor, Lloyd wrote, “Liberty produces wealth and wealth destroys liberty.”
I’m not suggesting that we all need to run out and become crusading muckrakers. But our generation of journalists should bring more of the passion and skepticism that Lloyd and his colleagues brought to their coverage of corporate America. I know I wish I had.
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