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March 2002 issued 5/31/02


Changing the Law to Create Stock Market Crashes

By Joan M. Veon, CFP


This newsletter, like all the others, is about CHANGE. Sometimes change can be goodùnew job, new baby, new house. Sometimes change can be painfulùdivorce, death or serious illness. The U.S. had excellent change when our Forefathers successfully broke from Great Britain and gave us the Constitution and the Bill of Rights.

Unfortunately the change in the last 60 years has been negativeùfrom the standpoint of upholding the Constitution. A growing global infrastructure that is political, economic, financial, trade and legal, has been set in place above the national level thus changing the structure of not only our governmental system but how the world works and is organized. Global organizations effecting changes worldwide include the Bank for International Settlements (begun in 1930), the International Monetary Fund/World Bank (1944), the United Nations (1945), the International Accounting Standards Committee (1973), the International Organization of Securities Commissions (1973), the World Trade Organization (1994), and the Financial Stability Forum (1999).

Congress has helped to build the strength of this global infrastructure by passing new laws to change the existing laws which used Congress to fix, monitor and supervise government and business actions in the U.S. The new laws are not using Congress to protect you and I but are now using private corporations. The new system opens wide our financial and economic system to foreign governance and business.

This letter discusses the (I) Global Financial Infrastructure, (II) The Repeal of the 1933 Glass-Steagall Act and (III) The Revision of the Securities Exchange Act of 1934. All of which CHANGE America: our government structure and how we will function in the future. The most unfortunate aspect is that you and I, as investors, WILL HAVE NO PROTECTION FROM MARKET SWINGS THAT NOW CAN BE CREATED BY VERY POWERFUL INDIVIDUALS WHO "BUY LOW AND SELL HIGH" while you and I end up in more NASDAQ-like situations after the repeal of the Securities Exchange Commission Act of 1934 is passed.

This economic newsletter has been anything but the run of the mill. As a result of my interest in the global dimensions of our world, in 1996, even before it was a household word, I began to reveal what globalization was to you. I have defined globalization as the "Blending together of economies, people, laws, politics monies and social ethics into one." I believe the next thing you will see is a harmonization of currencies to compliment a fully integrated world.

Complex as this may be to read, it is important that you read it two or three times in order to grasp the magnitude of what is happening. Many people can't understand Enron because they were not directly affected. However, after Senator Sarbanes proposed bill is passed, which is the focus of this newsletter, there will be more Enron's. Enron was either a planned, managed event which was "allowed to happen" or it was a very convenient excuse to tear down the last barriers separating our national financial sovereignty from a global one. In order to get the whole picture, let's review.


The Final Thrust

In December 1998, I wrote about "The Final Thrust." That newsletter dealt specifically with all of the changes on the international level that had to do with changing economic and financial sovereignty. I remember it well since the subject matter was very difficult and it took over 40 hours to write. The concepts that I study and write about are not easy. There is no textbook for me to specifically reference because I am tracking and trying to understanding NEW structures and players on the global economic level as they are coming into being.

During 1998, there was a lot of volatility in the U.S. stock market causing the Dow to drop over 1500 points. On the global level, the International Monetary Fund was given greater powers over the market. In addition, the Secretary of the Treasury agreed with other G7 Finance Ministers to adopt a host of complex recommendations, one of which included the adoption of international accounting rules. Obviously they did not spell out then the need to eliminate the Securities Act of 1934.

The move to change the international financial architecture was heralded by all as "needed, necessary and welcomed." In June 1999 then Treasury Secretary Robert Rubin, speaking at a G7 Finance Ministers meeting, said "Reforming international financial institutions, strengthening the international financial architecture, and maintaining open markets are not simply questions of economics but politics."

Financial Stability Forum-FSF

In 1998, as a result of the Asian Crisis, the Group of Seven Finance Ministers and Central Bank Governors issued this statement as to what was needed to fix the global system,
"We agreed on the importance of intensified cooperation among us to work together to strengthen the financial system." They asked Hans Tietmeyer, president of the German Bundesbank, to coordinate between the various national and international financial institutions and structures, and to recommend new structures and arrangements. Thus the Financial Stability Forum-FSF was birthed on February 22, 1999.

For the first time in history, a diverse number of players from various levels of government were brought together, merging international bankers with federal bankers (U.S. Treasury Secretary, the Comptroller of the Currency and Federal Deposit Insurance Corporation). This by itself was "revolutionary" for up until that time national entities only met with other national entities in the same country to work on a problem. Now, as a result of global volatility, key U.S. financial agencies and officials are coming together as a part of a new global organization to COORDINATE monetary and financial affairs!

The U.S. Treasury Secretary meets with not only the other G7 Finance Ministers, but the G7 regulatory agencies (Comptroller of the Currency and Foreign Deposit Insurance Corporation in the U.S. but their counterparts in the G7 countries) as well as key officials from the International Monetary Fund, the World Bank, the Bank for International Settlements, and the International Organization of Security Commissions (IOSCO which is a global organization of stock exchanges where the U.S. Securities and Exchange Commission participates) and others.

If you did not catch the picture being painted in the above paragraphs, read them again. Together they are putting in place new global structures that are replacing national governmental functions of our government! In other words, the financial and economic functions of our government have been "globalized". They are no longer part of our government functions.

International Accounting Rules

While covering the IOSCO meeting in 1996, I became aware of the move towards a "global accounting standard". There I met Sir Bryan Carsberg (British) who at that time was head of the International Accounting Standards Committee (IASC) which had been working on harmonizing various accounting methods used throughout the world. Birthed in 1973, the IASC has been replaced by the new successor organization, the International Accounting Standards Board-IASB.

To understand how the total economic and financial system is being harmonized, let us consider the evolution of the corporation, since they have become more powerful than most governments.

The Corporate System

As a result of the Industrial Revolution, there was a massive shift from the farmùwhere people were independent of government and the business cycleùto the city where they could work for the corporation. As the world became more industrialized with more people moving from the farm to the city, the importance of the corporation to create jobs and maintain a certain standard of living became the hub for how we not only ordered our life, but "what we are". We are no longer self-sufficient but have become dependent on "the corporation" to determine where we live, what we will become and how much money we will make.

Many will remember the Carnegies (steel), Rockefellers (oil and gas), Vanderbilts (railroads), and Goulds (the "Wizard of Wall Street") who were also known as "The Robber Barons" because they were able to amass huge amounts of wealth by controlling an entire industry.

They used whatever devices they could think of such as trusts to solidify their financial hold. According to Chronicle of America, "Industrialists see in the trust a way to control the rabid competition that undercuts prices and destabilizes the business environment. For the titans of industry, business has been war. As corporations extend tentacles into all aspects of their business, control replaces competition" (Chronicle Publications, Inc., Mt. Kisco, NY, 476).

Corporations either manufacture a product or provide a service. As the corporation came into its own during the last half of the 20th century, it was the auto industry, followed by housing which sparked a postwar recovery, thus bringing America out of the depression and into a new and unparalleled era of growth.

The Corporation has a hierarchical structure with a president and Board of Directors, and is able to raise money three ways: borrow, issue bonds in which the corporation becomes a debtor to the lender and to float stock in which people who buy the stock become investors. In order to raise money by having people buy its stock, the company "goes public" by having its stock listed on an exchange. To do this, the company hires investment bankers.

Investment Bankers and Analysts

The purpose of the investment bankers is to bring the stock of a company public. Companies like Merrill Lynch, Credit Suisse First Boston, Salomon Smith Barney, Morgan Stanley and Goldman Sachs, make extremely large commissions and fees by bringing the stock of new companies public. They are then able to sell the newly created shares of stock through their network of stockbrokers who call their clients up to tell them about this new opportunity. These new shares are called "initial public offerings" or IPOs. How a company's stock is rated is by the "analysts" who tracks the stock and who tells the public how wonderful it is and why they should buy it. When you turn on CNBC, they will interview Wall Street analysts that follow certain stocks. I found it interesting that all during the 14 month Nasdaq drop, they were always positive. In fact, they were very bullish on Enron, even while its sins were being made public. Now they are on the hot seat for their part in the Enron cover-up.


In order to keep track of its various operations, the company has to adopt accounting rules and regulations. In the United States, they are provided by the Financial Accounting Standards Board that has issued the Generally Accepted Accounting Principles-GAAP which are the accounting rules all firms adhere to in the U.S. They also hire accountants and auditors to make sure their books are in order and in compliance with GAAP.

As a result of the 1994 passage of the World Trade Organization, all of the trade barriers between the nation-states are down. The countries of the world are in the process of harmonizing trade by determining which country will raise cattle or manufacturer bicycles, etc. As a result, the countries of the world now need a common accounting language to compliment the global harmonization.

In the last ten years or so, the Chief Executive Officer-CEO has become a very important figure both nationally and internationally. Their rise in power is commensurate with their salary increase as a result of perks. In many cases, third world countries are beholden to them because they are hoping a particular corporation will chose their country so that they can provide jobs and income for their people.


The excesses of an unchecked and unregulated stock market became central in 1929 when the market crashed. As a result, President F.D. Roosevelt put Joseph P. Kennedy in charge of finding solutions, commenting, "It takes a thief to catch a thief" (6/25 History Channel documentary). Much has been written about those who were able to "sell high" while others lost it all.

Congress, as a result of the stock market crash, commissioned a study to determine why it happened. They concluded that as a result of the broad range of services which banks could perform which included bringing stocks and bonds to market, selling them to depositors (on margin) as well as offering mortgages and savings accounts was to blame. Congress recommended that the activities of a commercial bank (your local bank that makes mortgages) be separated from investment banks (like Merrill Lynch which brings stocks and bonds to market and then sells them through their brokerage firms). Congress passed two bills, the Glass-Steagall Act in 1933 to protect investors and the Securities Exchange Act of 1934 to regulate the stock market (more about these laws later).

However, in a world where the barriers between the nation-states have been torn down economically and financially in the last 60 years, Glass-Steagall became a hindrance to the fulfillment of the World Trade Organization-WTO Financial Services Agreement that recommended that banks become "financial conglomerates." By making banks financial conglomerates, the WTO was effectively saying to the U.S., "Get rid of the protection between commercial and investments banks and allow them to sell insurance and bring stocks and bonds to market." As a result, there were proposals as early as 1997 from various Congressmen such as Jim Leach who supported the idea of financial conglomerates and the repeal of the Glass-Steagall Act.

Even before Congress could pass the a law, there was a flurry of activity to tear down Glass-Steagall. It was understood by the insiders that by the time a bill would be passed, all it would really do is "legalize" what already has been done. Between 1995 and 1999 when the Glass-Steagall Act was repealed there was a tremendous amount of activity generated by foreign banks buying American banks, brokerage firms and insurance companies in 1995. Then in December 1996, the Federal Reserve increased the amount of income a bank could earn from financial subsidiaries from 10% to 25%, leading to the purchase of brokerage firms by banks and visa versa. Mergers between banks and brokerage firms increased and included Salomon Brothers and Fidelity Investments; Holland's ABN Amro Bank that bought Michigan's Standard Federal; Morgan Stanley and Dean Witter, Discover & Company merged in 1997 to create the world's biggest securities company and First Union Corporation agreed to partner with Hartford Insurance. All of this activity was done without one peep from Congress who allowed it to happen. By the time the new 400-page Gramm-Rudman-Leach Bill, also known as HR10, was passed in 1999, the Glass-Steagall Act was already gone.

With the Glass-Steagall Act gone, the other law that has to be overturned in order to effectively rid our legal system of any national "bias" is the Securities Exchange Act of 1934. As a result of Enron, we are now told that the entire securities system is in sad shape with fraud, deceit, churning, falsifying statements, omissions by accounting and auditing firms, skimming off the top by CEO's, etc.


The fall of Enron was just a matter of time. Fraudulent manipulation of energy prices in California and a change in how goodwill is accounted for on corporate books led to its demise.

Several years ago, the electricity prices of a single state, California, skyrocketed. The problem was created as a result of Enron's energy price fixing techniques that were being perfected in California as a result of its energy de-regulation laws. First indicator was the court order by the California Attorney General to collect documents from Enron. What they found was equivalent to the attacks on the World Trade Center and the Pentagon: earth shattering. According to the Federal Energy Regulatory Commission, Enron created and then "relieved" phantom congestion on the energy transmission grid, getting paid for both transactions. They also engaged in other practices so that it received higher energy prices. For those of us who live on the other side of the country, we were mystified why California was paying just horrendous rates for energy. Now we know.

According to the May 16 2002 The Washington Post, in mid-August 2000, Federal regulators were tipped off and chose to ignore the fact that Enron was manipulating the California power market to boost its profits and that major energy companies like Southern California Edison was overcharged billions of dollars by Enron and other suppliers. They chose to do nothing. I guess it was as a result of all the financial "sweets" Enron bestowed on politicians of BOTH parties.

Then to compound its fraudulent ways, new rules on how corporations treat goodwill were put into operation. These rules required corporations to take all of the write-offs from past acquisitions all at once. Goodwill represents the amount paid for a company by another that was over and above the book value of the company being purchased. Under old rules, that excess amount could be written off over 40 years, but under the new rules, it has to be taken all at once. Many corporations have been affected by this rule change. AOL/Time Warner took a $54B charge in the first quarter of this year with six other companies announcing goodwill charges of at least $1B.

In looking to understand what went wrong at Enron, Business Week-BW pointed to "the fast moving 1990s with intensified pressure to produce higher earnings and stock prices with Corporate America pushing the accounting boundaries like never before. Auditors were thrust into a new role of enabler. The accounting industry which largely regulates itself has steadfastly resisted change, even in the face of repeated audit failures and scandals." The following is a list of "what went wrong" or "what is wrong" with Corporate America. While they are not listed in any particular order, they all point to a "broken system." There have been excesses, fraudulent practices and a lack of oversight at every turn in the capitalistic system.

  1. Executive Pay

  2. Stock options have been "free" income under accounting rules. Stock options allow companies to grant them to key employees without treating the value of the stock as a compensation expense on their income statements. Options, unlike cash, have no impact on earnings. They are basically a license to print money. Stock options are a bonus for the executive who has the right to sell the stock at a future increased price. The increased use of stock options has created numerous problems as the pay packages of CEOs has skyrocketed. In 1950, the highest-paid executive was General Motors Corp. President Charles E. Wilson whose $652,156 paycheck has an equivalent value of $4.4M in today's dollars. In 2001, the highest paid executives were: Lawrence Ellison who received a total pay package of $706 million, Jozef Straus of JDS Uniphase with $150M, Citigroup Chairman Sanford Weill earned $42.6 million while former Treasury Secretary Robert Rubin earned $16M, Lehman Brothers R.S. Fuld earned $105.2M, IBM's Lou Gerstner earned $127.4M and Coca-Cola Chairman Daft earned $55M. According to Business Week, May 6 2002, CEO's of large corporations made 411 times as much as the average factory worker. In the last 10 years, CEO pay has climbed 340% to $11M while rank and file wages increased 36%.

    Furthermore, when executives retire they pocket fees. Ross Stores paid former CEO Norman Ferber $1.1M annually for consulting since 1996 while John Bryan, former CEO for Sara Lee has a multi-year consulting arrangement of $5 million through June 09 (USA Today, 4/25/02, B1).

    Depending on how a corporation is set up, an executive may draw compensation from different firms. The CEO of Applera, Tony White, pocketed $671.9 million by drawing compensation from a company he created to be a "tracking stock" and from the main business. This is known more formally as "double dipping."

  3. Executive Payoff's

  4. The influence of Enron was nationwide. Ken Lay, who I saw up close at the World Economic Forum where he was a star, spread money all around. He knew where and how to spread it. According to The Financial Times, "With Houston's 'king-maker' Kenneth Lay at its head, Enron secured that loyalty through a potent combination of money, lobbying and a revolving door through which employees went in and out of government, says Andrew Wheat of the advocacy group Texans for Public Justice. Enron spent $10.2M influencing Washington politicians. During that 1997-2000 period, the company also gave $1M to Texas political action committees and state candidates, while spending up to $4.8M more on 89 Texas lobby contracts. Furthermore, Enron gave $132,058 to Texas Supreme Court justices. It was Governor Bush who de-regulated the states electric markets in 1999, going light on corporate air polluters and supporting laws protecting businesses from lawsuits. Lastly, Enron put on its payroll former government officials who would have [an] insider's advantage" (Financial Times-FT, 2/9-10/02, 4). It should also be mentioned that lobbyists spent $30 million between January and October 1999 on political contributions to both parties.

  5. Board of Directors

  6. The National Association of Corporate Directors estimates that directors spend about 200 hours a year on board matters. Serving on multiple boards used to be a badge of honor for executives, at 5 or six board meetings a year, the chance to hobnob with other executives was desirable and so was the compensation--$153,000 per year (BW, 3/25/02, 72-82). When was the last time you heard of a member of the Board of Directors suing the CEO for fraud?

    In the case of Enron, Wendy Gramm, wife of Texas Senator Phil Gramm earned $50,000 a year to sit on its board of directors. She started in 1993, weeks after she left the top job at the Commodity Futures Trading Commission where she implemented the deregulation of energy futures markets (FT, 2/9-10/02, 4). Was it a payoff?

    According to New York Securities and Commission Executive Dick Grasso, "Enron is a wake-up call that the independent director doesn't serve for the protection of management." Furthermore, Enron's board failed to understand and oversee the web of financial partnerships and conflicts of interest that led to the company's collapse. Six outside board members have since resigned while all 12 are named in lawsuits by former employees, retirees and shareholders.

  7. Off Balance Sheet Partnerships

  8. Years ago, I remarked to one of my clients who was in the Executive Office of Alcoa that I would never buy Mellon Bank stock given its high debt. She looked at me and said, "You are wrong, Mellon is an excellent buy. They transferred all their debt to a holding company." I was shocked. Corporations were "cleaning up their balance sheets" by transferring their debt to various types of holding companies. I know that I could never get away with that!

    According to a report by Business Week, 1/28/02, "Hundreds of respected U.S. companies are ferreting away trillions of dollars of debt in off-balance sheet subsidiaries, partnerships and assorted obligations, including leases and pension plans and take or leave contracts with suppliers. Because of gaping loopholes in accounting practices, companies create arcane legal structures, often called special-purpose entities (SPEs). Then the parent corporation can bankroll up to 97% of the initial investment in an SPE without having to consolidate it into its own accounts. Once a company owns 50% or more of another, it must consolidate it under the 1959 rules.

    "To get debt off its books, a company typically sells the debt to an SPE, funding the purchase by borrowing cash from institutional investors. As a sweetener and to protect investors, many SPEs incorporate triggers that require the parent to repay loans or give them new securities if its stock falls below a certain price or credit-rating agencies will down grade its debt."

    The 2/23/02 Washington Post reported that "JP Morgan helped Enron line up $1B in bank financing with the money traveling to Enron through a chain of "special purposes entities" named Sequoia, Choctaw, Cherokee and Cheyene. The structure was designed to reduce the debt on Enron's books which was a critical factor in determining its credit ratings." Needless to say, there are endless ways in which corporations have cooked the books to keep investors from knowing the real financial situation of the company. Enron created more than 3,000 off-balance-sheet partnerships but just used three of them to transfer $2.6B in debt from its books.

    In 2000, the company's revenues soared from $9.2B in 1996 to $100.8B in 2000 while its stock was returning 500%. Almost a year later, in October 2001, Enron revealed a $35 million charge to earnings to reflect losses on those partnerships and was forced to knock $1.2B off its shareholders' equity. The company's stock plunged 60%. You know what they say about something being "too good to be true." It should be noted that governments also "cook their books" in order to keep their currency high.

  9. Aggressive Accounting Games

  10. Enron is not alone in playing aggressive accounting games. While Enron cooked California energy prices, Coke during the 1990s, banked hundreds of millions in profits from buying and reselling assets to its bottlers. This allowed Coke to boost sales volumes while keeping debt from the capital-intensive, low-margin bottling business off its books (BW, 5/13/02).

    Most recently PanCanadian Energy Services, Inc. inflated their volume of deals by selling and then buying back some 90 billion cubic feet of natural gas. These trades made it appear that the company had $732 million more in revenue than it really had. The CEO has resigned (WP, 6/29/02,E1).

    Boeing is another example. In 1996 they purchased McDonnell Douglas and became the world's largest aerospace companyùthe first manufacturer ever with the ability to build everything that flies from helicopters and fighter jets to space stations. In August of that year, Boeing purchased Rockwell Aerospace & Defense. Then because of a booming economy, they suffered a manufacturing nervous breakdown that resulted from a surge of orders. Workers worked around the clock using outdated production methods which exacerbated its accounting problems.

    Boeing was in a bind. In order to keep the McDonnell Douglas purchase, they had to maintain a high share price. They used the flexibility that is built into Program Accounting that allows huge upfront expenses of building a plane to be spread out over several years to hid problems. Boeing then shifted profits from their successful 777 model to help cover up its problems.

    We are told that Boeing was able to get away with their games because the Security and Exchange Commission did not file charges and because the Board of Directors said nothing. NO oversight by SEC or Boards of Directors. No checks and balances.

  11. Accounting and Auditing Firms

  12. According to the 1/28/02 Business Week, "Anderson has been Enron's outside auditor since the 1980s but in the mid-1990s the firm was given another assignment: to conduct Enron's internal audits as well. The ties even went deeper since Enron's own in-house financial team was dominated by former Andersen partners." Anderson's 89-year history is in the process of dying as a result of continual publicity over its Enron dealings. There were no accounting and auditing checks and balances since the same firm was both inside and outside auditor.

  13. Credit Agencies

  14. When looking at a stock, there are two standards of reporting which I have used and which are standard in the industry: the ratings by Standard and Poor and Moody's and the opinion of analysts. Again, the collapse of Enron points to the important of honest ratings agencies. Currently both of our ratings agencies been criticized for not being aggressive enough in downgrading Enron's stock or in spotting the hidden mountain of debt that they had. Enron was rated as having a relatively low chance of default.

    Enron was finally downgraded to junk status just days before the company filed for Chapter 11 bankruptcy protection in December" (Financial Times-FT, 5/28/02, c). You can see the sensitive position these companies are in for if they report that a particular firm had too much debt, everyone would rush to sell the stock which might depress it more seriously than what the situation warrants. On the other hand, you have what happened to Enron. Who do they owe their living to? Wall Street of course.

  15. Investment Bankers and Analysts

  16. As a result of fraudulent analyst recommendations, Merrill Lynch was recently fined $100M in a historic settlement reached with New York Attorney-General Eliot Spitzer who accused Merrill Lynch of conflicts of interest in their stock research. Using 10 months of research, Spitzer based his case on emails that showed how Merrill Lynch issued biased stock picks to gain investment banking fees. "Some emails infer the firm put the interest of corporate clients ahead of retail customers, 'We are losing money and I don't like it. John and Mary are losing their retirement because we don't want Todd to be mad at us.' From December 1999 to November 2000, Merrill's Internet research group was involved in investment banking deals that produced about $115M in revenue. Analysts participated in investment bankers' sales pitches, marketing transactions for institutional investors and 'follow-on' research coverage" (FT, 5/22/02, 18). Some analysts dumped Enron as they were busy telling television viewers to buy it because it was a good stock!

    At the World Economic Forum in 2001, stock analysts from Salomon Brothers (Abby Joseph Cohen) and Lehman Brothers (Tomas A. Russo) were on a panel with Calpers (William Crist) discussing the crash of the Nasdaq. As they blamed everyone but themselves, I formulated the following question: "I would like to go back and visit the death of the dot.coms. It is not true that you have to do due diligence to see if a company is strong enough to go public? Does not some of the risk inherent in the death of the dot.coms go back to the underwriting firms and investment bankers who brought them public? Exactly where does the accountability lie? Perhaps we need standards for Wall Street." As the whole room gasped, Wall Street Analyst Abby Joseph Cohen said with clenched teeth, "If someone wants to buy it, that's their business." What a great defense for such a genius. Now I see why she was so bullishùshe was raking in fees for the activity her opinion generated. I guess I have been too naive to have even thought of this!

  17. Pension Reform and Enron

  18. The glue holding Enron's stock together as long as it could was the 401(k) program that they offered employees. Enron employees received company stock as a matching contribution to their accounts with workers barred from selling it until they reached 50. The company also encouraged workers to invest their own contributions in Enron stock, which many did. As the stock started to collapse last fall, the company barred all sales in the 401k plan for a period of time as it shifted operations of the plan to a new outside administrator. The result was devastating for many Enron workers and retirees as they lost their ENTIRE retirement savings (Washington Post-WP, 3/20/02, E1). These people probably were extremely happy that during the Nasdaq crash they had Enron stock.

  19. Securities Exchange Commission

  20. I personally find it to be tremendously interesting that the 1934 SEC law is "broke" and needs to be fixed. We now are told that the SEC does not have the resources or authority to police public companies and that it lacks a comprehensive strategy for dealing with the problem according to the GAO. Staff shortages and high turnover at the SEC have weakened the regulatory process. Furthermore since the SEC does not have sufficient staff, it has not been able to process filings or investigate fraud in the timely manner that it needs. From 1991-2000, the number of cases opened by the SEC's enforcement division increased by 65% from 338 cases to 558 while its staff increased 16%.

    In 1980, there were just over 8000 publicly traded companies filing annual reports and there were 710 new registration statements filed. In 2001, the SEC was able to complete "full or full financial reviews of about 16% or 2,280 of the 14,060 annual reports filed last year according to the GAO. Last year, Congress cut the budget of the SEC. I find this kind of stupidity in America intolerable in light of the fact that we can put men on the moon and drop a bomb down a heating shaft from 40,000 feet above and yet we don't have enough common sense to ask Congress for more money in order to carry out vital functions? I guess I should mention that the former SEC Chairman, Arthur Levitt, is working with the International Accounting Standards Commission that is now supposed to be how to fix our problem. Does the name Arnold Benedict ring a bell?

    Summary of the Situation

    Let's review what Enron was able to "get away with." A $50B bankruptcy, $32B lost in market capitalization, employee retirement accounts drained of more than $1B, hidden partnerships, shredded documents and conflicts of interest on the part of Enron and their auditor, Arthur Anderson. Furthermore, The New York Times reported that Enron received $3.9B in bank loans between 1992 and 2001 that was never reported on its books as debt. By using swap transactions that mimicked loans, Enron publicly claimed them to be hedges for commodities trades so that they were able to misrepresent an increase in debt as a reduction in risk.

    Former Senator Howard Metzenbaum who is now Chairman of the Consumer Federation of America, told members of a Senate committee on March 20 that "all the safeguards designed to protect investors failed and failed miserably. Rules that dictate what information companies have to disclose and how they have to disclose failed to produce an accurate picture of Enron's finances. The corporate board that is supposed to supervise management failed to ask the tough questions. The auditors whose job it is to certify that financial disclosures are not only prepared according to the rules but present an accurate picture of company finances failed. The SEC which has responsibility for reviewing corporate disclosures had not reviewed the energy giant's complex financial statements since 1997 and The credit ratings agencies and securities analystsùoutside experts that investors rely on to analyze all the information did not provide any advance warning of possible trouble."

    In a Business Week editorial entitled, "Can you Trust Anybody Anymore?" by Bruce Nussbaum, he wrote on January 28 of this year, "There are business scandals that are so vast and so penetrating that they profoundly shock our most deeply held beliefs about the honesty and integrity of our corporate culture. Enron is one of them. This financial disaster goes far beyond the failure of one big company. This is corruption on a massive scale. It is difficult not to contrast the professionalism of modestly paid fire-fighters and police doing their duty on September 11 with the secretive and squirrelly behavior of six and seven-figure accountants, lawyers, CEOs, bankers and financial analysts who failed at their duty with Enron. Businesses are not failing because of the business cycle but because of losses and sleazy practices. Financial complexity made it easy to mask the truth and play financial games. Off-balance-sheet financial engineering became the requisite way to boost earnings and stock prices. On the road to deregulation, basic building blocks of capitalismùclarity, transparency, fairness, opennessùwere sacrificed. Everything the public needs to evaluate risk, value stocks and participate in an equity culture was undermined. The Glass-Steagall Act was passed in 1933 to stop those conflicts. Its repeal in 1999 has ushered in their return."

    In other words, as a result of corruption and greed and the tearing down of walls between the nation-states, the ENTIRE U.S. CAPITALISTIC SYSTEM IS BROKE BECAUSE OF CRONY CAPITALISM AND PAYOFFS ALL THE WAY UP TO CONGRESS AND BACK. So what is "The Fix"? Unfortunately, it is not one which includes our government but one that excludes the government by using private corporations and foundations!

    This represents a MAJOR FUNDAMENTAL SHIFT as government will no longer be the same as what our Constitution provided. No where does it say to give power to private individuals and foundations. Do you not see that the bear has its paws in the honey jar and there is no one to protect the honey jar?



    Having covered over 45 global meetings around the world, I have been an eye-witness to the evolution of individual nation-states being merged into one new global entity. When Enron "popped", I had the premonition that something was wrong but I could not put my finger on it until I saw former Federal Reserve Chairman Paul Volcker testifying before the House Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee on June 7.

    In his testimony, Mr. Volcker, who is now the Chairman of the Board of the Trustees for the International Accounting Standards Committee (IASC) that is located in London said, "I appreciate having this opportunity to brief you on the harmonization and convergence of international accounting principles." The IASC is the organization that replaced the International Accounting Standards Committee and Sir Bryan Carsberg whom I met in 1996. Volcker went on to explain the history and purpose of the IASC which he said has "reached an agreement with IOSCO to develop a core set of standards that IOSCO could endorse for the use of publicly traded entities." Furthermore he explained that IASC has adopted a structure similar to the U.S. Financial Accounting Standards Board-FASB. The FASB sets accounting standards and practices in the United States. He also said that there was a move away from the traditional cost basis accounting that America has used to a new standard that uses "fair value" accounting.

    Testifying after Mr. Volcker was a British citizen, Sir David Tweedie who is Chairman of the International Accounting Standards Board. He discussed the need for convergence with the IASB Foundation identifying the best standards from around the world and building a body of [new] accounting standards that constitute the "highest common denominator" of reporting. Furthermore, he said that the "international financial markets clearly want a single set of accounting standards that apply worldwide."

    Summing up what is at stake, Andrew Crockett, President of the Bank for International Settlements said in a US-EU Symposium earlier this year, "Advances in information technology [have created] the transformation from a government [controlled financial system] to a market-led [corporate and foundations] global financial system." Here we have it. Government is not needed in a global system where the markets set the pace.

    Mr. Crockett also said that the Bank for International Settlements, a private corporation and the Financial Stability Forum played a significant role in changing and setting up the new global financial system.

    The Repeal of the Securities Exchange Act of 1934

    This new proposed bill by Senator Sarbanes (D-MD) fulfills all of the recommendations by various international organizations to switch to international accounting rules. Sarbanes wants to create a "Public Company Accounting Oversight Board" which "shall be a body corporate [and] operate as a nonprofit corporation. This Board shall not be an agency or establishment of the United States Government" (emphasis added). Furthermore this bill will completely rewrite the Securities Exchange Act of 1934. As mentioned above, the 1933 Glass-Steagall Act has been repealed. Furthermore, Bruce Nussbaum discussed the fact that the extreme volatility that we are now enduring in the stock market is as a result of the repeal of this Act!

    Our members of Congress are ready to sign over their authority to a non-profit organization that will exercise complete control over our accounting and auditing firms. The entire SEC Act of 1934 which was part of how Congress fixed the 1929 stock market crash is being re-written and will now give authority to a non-elected group of people who will change our accounting and auditing rules, thus creating an open season for those in control to seize control.

    Almost 70 years ago, the fix that Congress came up with included them, now the fix EXCLUDES them! All public accounting firmsùsole proprietorships, partnerships and corporationsùthat engage in the practice of accounting or preparing or issuing audit reports will come under their jurisdiction. They will have to register with the Public Company Accounting Oversight Board and pay dues to it. The Oversight Board will have the power to establish auditing quality control, ethics and other standards, conduct inspections of registered public-accounting firms and enforce compliance.

    In addition, they "may recognize as 'generally accepted' for purposes of the securities laws, any accounting principles established by a standard setting body that considers the need to keep standards current in order to reflect changes in the business environment, the extent to which convergence on high quality accounting standards that is necessary or appropriate in the public interest and for the protection of investors." This basically describes international accounting rules. Lastly, the Oversight Board will accept reports of foreign pubic-accounting firms that comply with their rules. This is not the first time the solution has excluded Congress. Consider the Federal Reserve Act.

    The Federal Reserve Act

    In 1913, the Federal Reserve Act was passed which provided a major "restructuring" of the nation's monetary and banking system. The Federal Reserve Act created a private corporation that was given control over our entire banking system. Every private bank in the United States was required to become a member of this new system since it now controlled the supply of money in the economy, thus being able to create market highs and lows by the amount of money it pumped into the economy. While there was a vicious fight in Congress to keep Congressional control over our monetary system in accordance with our Constitution, through high-handed maneuvers, a group of powerful individuals hoodwinked their counter-parts and held the vote at 11:00 p.m. on December 24, 1913 after the opposition had left for Christmas vacation. The people of the United States were told that the reason for wanting a private group to manage our monetary system was to "prevent any more financial panics such as the one in 1907." Do you see the "pattern"?


    What is there to say? If you think the volatility has increased, wait. Now that all the borders are down between the nation-states, every time the rich and powerful international bankers and insiders see an opportunity to "cash in" on the stock market as it reaches a high, it will be the little guyùyou and Iùwho gets squeezed. Where will you and I go for justice? Not to Congress for they are in the process of voting all of their power to independent committees, boards, foundations and non-profit organizations.

    All of the laws which were put in place to protect you and I have been torn down and replaced by new global laws which open Pandora's Box to the rich and powerful. This has not been a pleasant report to write. What should be a core holding in our portfolios? Gold and silver. Our next newsletter will review the war economy.