Towards the precipice

Robert Brenner


At 6 am on 12 June 2002, four FBI agents barged into the SoHo loft of Samuel Waksal, the former CEO of the biotech company ImClone Systems Inc, and led him away in handcuffs: he was charged with insider trading. His father and daughter had dumped nearly 175,000 ImClone shares only days before the Food and Drug Administration announced that it had rejected Erbitux, the company's cancer drug, leading to a steep price fall. (Waksal himself had netted $US57 million on an ImClone share deal the previous September, and had made an additional $72 million in 2001 from his stock options.) On 25 July, John Rigas, the former head of Adelphia Communications, was arrested, along with his two sons, on corporate crime charges. They were accused of using the company 'as the Rigas family's personal piggy-bank', spending hundreds of millions of the corporation's dollars on private jets, personal loans, luxury condominiums in Colorado, Mexico and New York City - and on the construction of a $12.8 million golf course. On 12 September, Dennis Kozlowski, the former chief of Tyco International - and described by Business Week as 'perhaps the most aggressive dealmaker in corporate America' - was put under arrest, charged with fraudulently obtaining over $400 million by selling Tyco shares while concealing information from investors. Kozlowski had used the funds to buy a mansion in Florida, lavish properties in Boca Raton, Nantucket and New Hampshire, a $7 million apartment for his first wife, diamonds from Harry Winston and Tiffany's, and a fleet of fast cars and Harley Davidsons.

By August, the Wall Street Journal's list of more than two dozen major corporations subject to official investigation included such household names as AOL Time Warner, Bristol Meyers, Dynegy, Enron, Global Crossing, Kmart, Lucent Technologies, Merck, Qwest, Reliant Services, Rite Aid, Universal, Vivendi, WorldCom and Xerox. The two largest US banks, Citigroup and JP Morgan Chase, are also being investigated, as is Merrill Lynch. Meanwhile, the 'barons of bankruptcy', as the Financial Times describes them - corporate insiders from the biggest 25 companies to go bust last year - reaped $3.3 billion from stock sales and compensation in the three years before their companies went under.

When corporate scandals first hit the headlines early in 2002, the US Treasury Secretary Paul O'Neill attributed them to the immorality of a 'small number' of miscreants. Apparently he'd been misinformed. The rapacious practices of these executives and firms - whether or not technically illegal - are typical of, and endemic to, corporate America. The recent scandals bear witness, however, not just to the level of individual corruption characteristic of US crony capitalism but to systemic problems in the real economy. It is because the epidemic of fraud makes manifest the ill-health of the corporations themselves that it has taken such a heavy toll on investor confidence and the stock market.

The corporate account rigging now coming to light is the direct result of the economic boom of the late 1990s, driven by an almost unprecedented increase in equity prices. Its raison d'être has been entirely straightforward: to cover up the reality of an increasingly desperate corporate-profits picture. Between 1997 and 2000, just as the fabled economic expansion was reaching its apex, the rate of profit in the non-financial corporate sector was falling by a dramatic 20 per cent, initially as a consequence of overcapacity in international manufacturing. Under normal circumstances, this would have caused capital accumulation and economic growth to slow. As it was, however, stock prices soared, in information technology especially, even as corporate returns fell. Companies could thus access funds with unprecedented ease, either by issuing shares at highly inflated prices or by borrowing money from banks against the collateral of those overpriced equities. On the basis of this financial windfall, US corporations, especially in the IT industries, vastly stepped up their capital acc