Enron scandal proves that some perspective, and more professionalism, is needed to make deregulation work
It's not only auditors and energy traders who are going to have to talk fast to get out of the corner Enron and Arthur Andersen have backed them into. So will those who advocate free, deregulated markets as the most efficient way to run the global economy.
In a few months time, most of us won't remember the details of which documents were shredded when or by whom. But we'll remember the particular taste of this dish long after we have forgotten the ingredients. And we may conclude that deregulated markets are little more than a playground for crooks, that the savings of ordinary people will be plundered, and whole industries turned into dustbowls by locust-style swarms of executives, traders and brokers.
That's the spin on the Enron story. Here are two examples, plucked from the acres of recent Enron commentary. One is American and one British, but it makes little difference. The same populist sentiments are playing well to audiences on either side of the Atlantic.
'If the deregulation zealots had their way, we'd be left with tainted food, unsafe cars, bridges collapsing into rivers, children's pajamas bursting into flames and a host of corporations far more rapacious and unscrupulous than they are now,'' wrote Bob Herbert in the New York Times. 'Some perspective is needed. Unchecked deregulation is an express route to chaos and tragedy.''
And: 'This is . . . an argument for smart regulation, an imperative if capitalism is not to degenerate into profiteering and economic cannibalism,'' wrote Will Hutton in The Observer. 'Smart and effective regulation is the handmaiden of well-run markets that serve the public interest. It is time our politicians started saying so ' and challenging the self-serving braying of our business lobbyists. Enron, and the philosophy that created it, stinks.''
These powerful opinions tap into a real mood of public unease over the values the financial markets live by. The Andersen scandal comes on the back of outrage over the way investment bankers and analysts pumped up the valuations of internet stocks and manipulated IPO allocations.
But those views are wrong. The real issue in these scandals is not deregulation, and what they prove is not that deregulation doesn't work. The real issue is professionalism, and what the scandals prove is that in deregulated markets, we need to find ways of maintaining higher professional standards. Without those standards, deregulation and globalisation won't work, and we will go back to an era of oppressive regulation by governments. We will all be poorer for that. There can be little question that professional standards have declined in the financial markets in the past decade or so.
Opinions that once carried weight are tossed around lightly, and words have been distorted so as to have lost their meaning.
Once, if a firm of the stature of Arthur Andersen said that a company's accounts were a 'true and fair'' reflection of its business, that view was worth something. Now, most of us laugh, and assume it was the reward for a juicy IT contract.
Once, if a firm of the stature of Morgan Stanley Dean Witter said that a company's shares were a 'buy,'' that was worth something. Now, most of us shrug, and assume it paved the way for a bond issue or an M&A deal.
The thread that connects those events is the degradation of professional standards. The test of a professional person is that what he says is true, regardless of immediate monetary advantage. For example, when your doctor says you have cancer, you can trust that you really do have cancer ' it's not just that he needs to flog some radiology to pay for a new kitchen. It is a test many people in the financial markets now fail.
Let's not kid ourselves ' financial firms exist to separate fools from their money. Still, there need to be some sort of self-imposed limits on how far they can go in that pursuit. Otherwise some financial firms will find themselves following the path of the buffalo hunters of the American West, who destroyed their market through their own greed.
Why the financial markets have abandoned traditional standards of professionalism is a complex question and I can no more than stab at the answer. There are three possible reasons. One is that hybrid, confused organisations have been created. Auditors mainly work for partnerships that make most of their money from consulting, and analysts work for companies that make money from bond and share issues.
Another is the arrival of the 'Me'' generation running things. Professional standards are a matter of self-regulation, in which people sacrifice their own interests for the good of a wider group, benefiting all over the long term. Some people these days have trouble recognising those wider claims or postponing gratification.
A third is the sheer strangeness of a speculative bubble, in which most of these excesses occurred. Put simply, too much money was on the table. It was hard to resist bending the rules.
Restoring professional standards to the financial markets will be difficult. It will involve changing the structure of companies, increasing peer review, finding ways to throw rule-breakers out of the club, and, perhaps most of all, instilling a higher standard of ethics among people working in the markets.
Micro-regulation by government is inefficient, wasteful, and destructive to innovation and entrepreneurship. But unless the financial markets can find ways of lifting their own standards, they can expect to see a lot more of it. That is why putting professionalism back on the agenda is so important ' it is the first step to defending the deregulation of the last decade.
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