Making politicians and media accountable to ordinary citizens since 2000.

Home | Unconservative Listening | Links | Contribute | About

Join the Mailing List | Contact Caro

3/30/02


 

WALL STREET TREACHERY

Part Two: DECEPTION, DELUSIONS, AND MADNESS

By David Podvin

The impressive recovery in the stock market since the September low has been attributed to the easing of interest rates by the Federal Reserve, and the stimulation of the economy brought about by increased government spending. In fact, stock prices have risen largely because of a con job perpetrated on investors by Corporate America and its wholly owned subsidiary, the Bush administration:  

As the chart above documents, during the first three quarters of 2001, the hundred largest NASDAQ companies reported to shareholders over $19 billion in profits using the pro forma method of creative accounting. During the same period, using classic Generally Accepted Accounting Principles, these companies reported to the Securities and Exchange Commission losses of over $82 billion. An unprecedented explosion of artificially high third quarter earnings that were reported during the latter part of 2001 coincided with the strong rally in NASDAQ stocks:

 

This fraud has been made possible by the presence of Wall Street lobbyist Harvey Pitt as Chairman of the Securities and Exchange Commission. Pitt, who was appointed by George W. Bush last year, told the New York Times, "I am very much in favor of a vigorous enforcement program, but I am not in favor of having investors barraged by conflicting statements and restatements." There have been reports from dissidents within the SEC that Pitt is much softer on corporations that lie about earnings than was his predecessor, Clinton appointee Arthur Levitt. 

Congressman Edward Markey (D-MA) is currently investigating whether Pitt transferred chief accountant Robert Bayless out of the SEC’s corporation finance division when Bayless demanded that a company tell investors the truth about its earnings. The SEC refuses to comment on the matter, but CFO.com reports that sources within the agency have confirmed that Pitt’s message to go easy on corporate brigands has definitely registered with his underlings who are responsible for enforcing the law.

Taking full advantage of Pitt’s permissive attitude, companies are aggressively deceiving the public. The profits that semiconductor leader Intel reported to shareholders were two hundred percent higher than the profits that the company reported to the SEC. Networking giant Cisco Systems has been even more outrageous in pushing the envelope of deceit. It triumphantly announced a profit of $700 million to shareholders, while discreetly reporting to the SEC a loss of $3 billion:  

 

 As a result of the widespread use of the pro forma deception, the NASDAQ Composite index currently has a higher price to earnings ratio based on GAAP than at any time in history. Amazingly, this is true despite the fact that the index is 64 percent below its all time high that was set in March 2000. 

Major brokerage firms like Merrill Lynch have access to all of these numbers and are well aware that they signify a spectacularly overvalued market. However, such disturbing facts are inconsistent with the firm’s stated objective to be “Bullish On America”. Merrill Lynch will make more money in retail commissions and investment banking if an outrageously overpriced market can be pushed higher, regardless of the ultimate peril to Merrill investors who are being lured into a pyramid scheme.  

While Wall Street brokerage firms are encouraging their clients to put three quarters of their liquid assets into equities, corporate insiders are hurriedly fleeing the scene of the pro forma crimes: 

Source: Crosscurrents.com 

As shown above, corporate insiders are urgently selling the blue chips. They are apparently unconvinced by the investment industry’s proclamation that the bear market is over. 

We have previously alleged that the pro forma scandal is endemic throughout Corporate America. Now, at least one major Wall Street player is publicly expressing concern about the scam.  William Gross, Managing Director of America’s largest bond trading company PIMCO, recently alleged that corporate superpower General Electric is playing cynical games with its financial statements. Gross said that GE’s impressive record of earnings growth is a mirage based on the clever manipulation of numbers. As a result, PIMCO will no longer be buying GE bonds because of the risk of severe losses when the House Of Cards That Jack Welch Built finally comes tumbling down.

Even IBM has been doctoring the numbers. The Wall Street Journal has revealed that, since 1999, the earnings gains reported by the company have actually just been the appreciation of assets in IBM’s pension fund.

Old Economy. New Economy. NASDAQ. Dow. Penny stocks. Bluest of the blue chips.

It doesn’t matter. America’s companies are lying about earnings to their shareholders.

The natural reaction to learning about the pro forma scam is to ask how such blatant corruption on such a mind-boggling scale could possibly exist. How is it that so many sophisticated investors respond to this amazing display of overt fraud with seeming indifference? Certainly everything must really be okay, or knowledgeable investors would be panicking for the exits.

In 1841, Charles MacKay wrote a seminal book on mass psychology, Extraordinary Popular Delusions And The Madness Of Crowds:  

“In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple, and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity. At an early age in the annals of Europe its population lost their wits about the Sepulchre of Jesus, and crowded in frenzied multitudes to the Holy Land: another age went mad for fear of the Devil, and offered up hundreds of thousands of victims to the delusion of witchcraft. At another time, the many became crazed on the subject of the Philosopher's Stone, and committed follies till then unheard of in the pursuit. It was once thought a venial offence in very many countries of Europe to destroy an enemy by slow poison. Persons who would have revolted at the idea of stabbing a man to the heart, drugged his pottage without scruple. Ladies of gentle birth and manners caught the contagion of murder, until poisoning, under their auspices, became quite fashionable. Some delusions, though notorious to all the world, have subsisted for ages, flourishing as widely among civilized and polished nations as among the early barbarians with whom they originated, -- that of duelling, for instance, and the belief in omens and divination of the future, which seem to defy the progress of knowledge to eradicate entirely from the popular mind. Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

MacKay’s analysis of the madness of crowds allowed for prolonged insanity, but he contended that reality ultimately returns. The normal historical GAAP valuation of the Standard and Poors 500 index is a price earnings ratio of fifteen. As a result of the dishonest accounting games that have been played by captains of industry, the current GAAP price earnings ratio on the S&P 500 is 44. By this traditional gauge of valuation, the S&P 500 is now overpriced by more than 65 percent.

When reality finally returns to the stock market, look out below.

The truth will not be allowed to resurface without a fight. Maintaining the status quo is essential to the survival of politically well-connected multinational corporate executives who desperately need counterfeit earnings to substitute for their inability to generate the real thing. Everything that George W. Bush has done since taking office has been designed to reward his Fortune 500 benefactors at the expense of the average citizen. The appointment of Harvey Pitt to head the SEC is just one more example of how big contributors are getting repaid many times over as reward for subsidizing the Bush campaign in 2000. The result is that the American people are being lured into treacherous investments with false information while the Bush regime defaults on its legal responsibility to insure the integrity of the stock market.

The corporate deceit that Pitt is enabling will continue to worsen until someone forces companies to tell the truth. No one in a position of authority wants to risk having the stock market collapse because America’s leading corporations are coerced to engage in a collective mea culpa, so the Ponzi scheme continues. It remains to be seen how long can this swindle can be kept going, and against whom the American people will lash out in rage when they are inevitably left holding the multi-trillion dollar bag.

SmartStockInvestor.com Commentary And Charts

CFO.com Calling Off The Dogs

CFO.com Lawmaker Looking Into SEC Shakeup

Corporate Insider Trading

Managing Director Of PIMCO Discusses General Electric

Wall Street Journal On IBM Earnings (middle of page)

Standard and Poors 500 GAAP  Price Earnings Ratio

Wall Street Treachery Series

Podvin, the Series

 


Last changed: December 13, 2009