Another big scandal exposes business flaws

Allfirst: Like Enron, it has the potential to rattle consumer confidence in the business world.

February 08, 2002

FAITH PLAYS an important role in the stability of this country's investment-driven economy.

Faith that institutional controls prevent companies from misleading investors. Faith that mistakes in money management are caught early, and fixed promptly. And faith that buying stock in a huge corporation or stashing your cash in a reputable bank is a more prudent choice than letting all your assets ride on a blackjack table in Vegas.

That faith has been shaken to its very foundations lately, and no one should underestimate the potential for devastating long-term effects.

First, Enron taught us that big companies can lie for years about their profits (with the help of auditors who are supposed to keep them honest) and then fold up shop, leaving investors and employees holding the bag.

Now, we learn that Allfirst, a huge local bank with international backing, may not be minding the store as closely as you'd think. A trader may have hidden from the bank and its parent, Allied Irish, more than $750 million in losses he incurred over a year's time. It's not the kind of mishap that suggests a tightly run operation.

Certainly, there are important differences between Enron and Allfirst.

The Houston-based energy company collapsed under the weight of its misdealings, sending reverberations up and down the economic ladder and leaving thousands either out of work or stuck holding worthless stock. Allfirst, we are assured, is in no such jeopardy, and people who bank there won't be affected.

Enron seems the product of almost willful deceit in the name of personal gain for its executives. The Allfirst debacle looks to be more about one desperate man's attempts to cover his own mistakes.

But here's where the two scandals meet: They suggest a dereliction on the part of corporate America that could make people think hard about putting their money in places that should be relatively safe.

If companies are not truthful about how they make their money or how much they take in, why should people buy stock? If banks can't tell until they're $750 million in the hole that some trader is taking huge, unsupported risks, why not just keep your bills in a mattress?

It may not even matter whether Enron's phony profits were an isolated incident or whether Allfirst's rogue trader found a loophole that doesn't indicate a potential industry-wide problem.

The mere perception of great investment risk is as potentially harmful to the economy as an actual danger. It could cause a run on banks and damaging mass sell-offs in the stock markets. That was the lesson of October 1929, and the country learned it well. No need for a 2002 redux.

The good news here (yes, there's good news) is that Allfirst, despite the embarrassment, seems to be handling things quite well. Its executives are out front explaining what happened and assuring customers that although the bank lost a fortune here, individual accounts did not. Five employees have been suspended, pending an investigation.

The company will need to continue that forthright and activist behavior to stave off legitimate consumer worries. Whatever accounted for the obvious breakdown in checks and supervision that led to this enormous loss must obviously be corrected and publicized.

Addressing the larger issue of trust in corporate America will require more than just Allfirst's efforts, though. Congress must revisit the safeguards that exist to prevent shareholders, other investors and employees from getting shafted.

Corporations themselves must look at their own practices, and determine whether the economic boom of the 1990s -- which fundamentally changed the way productivity and profit are valued -- perhaps went too far in bending the mores of good business sense and reasonable prudence.

There's no less at stake than the faith that drives America's economy.

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