Bush's opportunity

July 09, 2002

THE ANTIDOTE for what ails America's stock markets is earnings - that is, actual profits and honest corporate reporting on those profits. Sooner or later, America's fundamentally strong economy will deliver sufficient earnings to reignite Wall Street, but that won't wash if trust in those numbers' accuracy remains shaken.

This week, Congress and President Bush are set to attack the corporate abuses that have thoroughly undermined investors' confidence. Mr. Bush's speech today on Wall Street could be a watershed for his presidency, his party and the economy, one in which he has the opportunity to transcend the GOP's 20-year deregulation drive and his own history of questionable stock deals. His critics are skeptical, casting him as a fox proposing henhouse reforms.

Reports indicate the president will at least talk tough, proposing criminal penalties for corporate officers who falsify financial statements. This is a needed move but far from enough. The problem does not simply stem from a few corporate bad apples, but from systemic failures. It's time for Mr. Bush to use the weight of his office to come off less like Ronald Reagan, the father of modern deregulation, and more like Teddy Roosevelt, the last Republican to take on big business.

To do that, he should declare support for the following proposals, which essentially amount to a shareholder bill of rights:

Accounting: The Senate yesterday opened debate on Maryland Democrat Paul Sarbanes' bill to create an independent board to oversee accountants and force them to separate their consulting and accounting services. Mr. Bush should back it.

SEC: Securities and Exchange Commission enforcement needs to be greatly stepped up, which would require more funds; Congress wants to give the agency $776 million a year, but the president has approved only $487 million. Mr. Bush also should sack the SEC chairman, Harvey L. Pitt, who has close accounting industry ties.

Corporate boards: The president also should support a New York Stock Exchange proposal requiring that company boards be composed mostly of independent members, who would be held accountable for their auditing and oversight responsibilities.

Wall Street: New York state - in its recent settlement with Merrill Lynch - and other states are forcing financial firms to separate their research analysts from their investment banking services. The SEC should join in this pressure.

Stock options: Stock options are a drag on earnings per share and share values; they should be accurately counted as expenses. Also, executive options should not be exercisable for, say, five years, aligning managers and long-term shareholders.

Taxes: American companies have a striking ability to shift assets, income and losses to overseas' entities to evade taxes or hide failures. This must be curtailed.

Investors, small and large, share in the blame. In the giddy 1990s, too many threw cash at companies with little or no earnings, turning Wall Street into a Ponzi scheme in which those with inside information could more easily profit and retreat before those less well connected.

If confidence in U.S. markets is not restored by Mr. Bush and Congress - by failing to bring to life many of the above proposals - Wall Street in too many ways will remain a casino based on hope, not honest appraisals of earnings.

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