Setting Up Pigeons

Article excerpt

PERSPECTIVE

The anti-free-market crowd is cackling over Enron. But who's really entitled to say, "I told you so"? Is this the result of unbridled robber barons? Or the predictable outcome of the regulatory regime?

There is only one sure consequence of pervasive regulation: a blunted wariness born of a false sense that government watchdogs are on the job. Regulators require corporations to make myriad disclosures and to be audited every year. Severe penalties are threatened for failure to comply. Under those circumstances, no potential investor could be as cautious about corporate wrongdoing as he would be if no such requirements existed.

But any regulation can be gotten around. Those without scruples or honor will always manage to spin their schemes. So we're left with something far worse than the socialist's nightmare: unbridled and unscrupulous businessmen and unwary investors, employees, and consumers.

Put bluntly, the regulatory environment indirectly sets up pigeons.

It can do so directly also, as IOL managing editor Beth Hoffman points out. Consider the "Chinese wall." The New York Times explained, "Wall Street firms are supposed to maintain a so-called Chinese wall to ensure that customers of their brokerage operations are not made privy to inside information gleaned by their investment bankers."

The law prohibiting that communication didn't work out so well in the Enron case. Discrepancies in the company's various statements could long go undetected because it is illegal for one department of a financial firm to compare notes with another.

The Times provides an example: Merrill Lynch, the underwriter for one of Enron's partnership offerings (called LJM2), "was aware of the off-balance-sheet figures for Enron. . . . But because the numbers were confidential, that information could not be shared with Merrill brokerage clients who were investing in Enron stock."

The Times story continued: "In this case, securities experts said, the intent of those laws was undermined. The transactions `followed the legal norms to produce a perverse result,' said John C. Coffee Jr., a securities law expert at Columbia University. `It's a case where the Chinese wall is working to injure public investors, rather than benefit them."' (Emphasis added.)

Free-market advocates call such perverse results "unintended consequences." Protector became accomplice. Would Enron's investors (including its employees) have been worse off without such "protection"?

After September 11, pundits and politicians have been heralding the return of Big Government. When did it ever leave? Joseph Stromberg wants to know.

And speaking of Big Government, it got that way because it has devices to keep the people who foot the bill from detecting what's going on. In an excerpt from her important new book, Dependent on D. …