PAUL SOLMAN: Thank you all for coming.
PAUL SOLMAN: First question: Has American business hit some kind of ethical ebb?
ADAM SMITH: Where is the sound of the tumbrels rolling through the cobblestone streets to the guillotines? Of course it has!
PAUL SOLMAN: Loyal PBS viewers will recognize the first journalist as the eponymous host of Adam Smith's Money World.
ADAM SMITH: Now we've seen famous firms eager to sell themselves out just to make this year's numbers.
ALLAN SLOAN: There's an old line that the four most dangerous words on Wall Street are, "This time it's different."
PAUL SOLMAN: Next, Allan Sloan, financial writer for Newsweek.
ALLAN SLOAN: We're not at an ethical ebb. What you're seeing now is what's been going on for years. Now it's only surfaced. It's not that things are worse now than they were, it's that you're seeing how bad they were.
JAMES GRANT: Yeah, but the question is: What is the quality of our miscreants versus the miscreants of yesteryear, and I submit to you that ours are ever so much worse.
PAUL SOLMAN: Jim Grant was with Barron's in the 1970s and now writes and edits Grant's Interest Rate Observer.
JAMES GRANT: I'm not sure that people were nobler or more honest in the past. I daresay they were not. But I think the standards of behavior were - were better on Wall Street and in finance.
ANDREW TOBIAS: One of my readers has suggested the wheel of misfortune …
PAUL SOLMAN: Andrew Tobias, personal finance writer since 1970.
ANDREW TOBIAS: --white collar criminals would get the trials that they now get and every so often someone is convicted. But then they go to the wheel of misfortune, and if you're unlucky and you're the 10th or the 22nd or whatever number is it - you get the death penalty. Now I - or let's say to make it actually - a little bit less silly - you get some serious prison where you don't get to play tennis and you don't have a phone in your room and you don't have a double bed.
CAROL LOOMIS: I want to take it more back to executive compensation and stock options and that kind of thing --
PAUL SOLMAN: Carol Loomis started covering business for Fortune Magazine in 1954.
CAROL LOOMIS: But I believe much of this bad behavior is tied to what I have called in the past "the madness of executive compensation" and to the arrogance that sort of comes out of that where the guys think they can do anything! And I say "guys" advisedly because there aren't many of my sex in this.
PAUL SOLMAN: The sense I get is that many people are outraged but, "everybody was doing it." Am I wrong?
ADAM SMITH: What I'm wondering is how -- why aren't the American people angrier?! Will we see some of this anger in the months to come? Where-
CAROL LOOMIS: How do they exhibit the anger -- if they are angry? They can withdraw from the market, and I think we are indeed seeing some of that, but I don't think we have seen the kind of withdrawal from the market that yet says that the -- that we're going to burn everybody who's involved here at the guillotine or…
ADAM SMITH: I think the anger is going to come from people who thought they had paid for their retirement! After all we had a big move to the 401Ks, we - and we had-- in order to get the pension obligations off the companies' expense sheet! So we moved the people in, and if you're in your own company's stock and the company is Enron, you've lost your pension. And even in those companies that are not Enron, many of them have very desiccated-looking 401Ks.
ANDREW TOBIAS: Well, but I mean people - on the up side - no one was complaining when things got so un--unrealistic and people thought they could retire young because the market was going to go up 15 percent a year.
Maybe one of the reasons the outrage isn't quite what it will be if things keep going is that to a certain extent people somehow know that some of this wasn't real; that they knew some of this wasn't real. But I think, I think people will go to jail. I think people should go to jail. And I think a certain number of people-- are outraged enough that they would - they'd like to see that.
CAROL LOOMIS: I'm not quite as convinced that sending a few of these people to jail will kill the wrongdoing out there. We saw Michael Milken go to jail, and that doesn't seem to have done much at all.
ALLAN SLOAN: The question is -- well you don't have to shoot them -you have to scare the others! It takes a long time for people to go to jail. It takes a long time to get indictments. Look at this fellow Koslowski from Tyco. The company goes offshore a few years ago - ducks out on probably by now a billion dollars of federal income tax and nobody cares. New York State gets him for a million dollars of sales tax personally and he's criminally indicted!
JAMES GRANT: The likes of Koslowski are reminders that there, in any capital society there is, there is an implicit social contract between the rich and the others, and the idea is that the rich can get as rich as they like as long as the poor can also try to get rich.
But when there is a breach of the contract, when the rich take what is not theirs-- there is-- there is a sense that something is wrong, and, and the result is that, that envy and avarice meet head on -- and that is what I think we're looking at socially with the current -with the contemporary crop of bad guys, it's, it's -- one wishes one had lived in the Coolidge boom. (laughter)
ALLAN SLOAN: Yeah, well it's, it's a lot easier to cheat now than it used to be I think. It used to be if you wanted to make up phony numbers, you had to sit - the numbers had to add up across and down. You needed imagination. Now with the spreadsheet you just push in your conclusions; you work backwards to your assumptions; you get the accountants to sign anything; and then it all gets disseminated in about three seconds, and what we're seeing now is not what's happening now -- we're seeing now what happened three and five and seven years ago-
GUEST: A surface economy.
ALLAN SLOAN: A surface economy. Right! It's a new economy of frauds! ADAM SMITH: And another factor is the multiplier in this - in the bubble economy was so much greater - that is everything went up so much more you could have a company - there are always little companies coming out that weren't worth very much - but you couldn't have them be worth 5 billion, 10 billion dollars the day they came out when they still had no earnings and no earning power. That didn't happen-
GUEST: Or revenues.
ADAM SMITH: Or revenues! Or anything! You know. In other words there was - this was the biggest boom in fiction since-- Dickens and Thackeray in the mid 19th Century.
JAMES GRANT: The legacy of a boom is excess in all forms. During the Great Bubble Years - in the late 90s - capital was virtually free to takers-- you signed up - investment bank and, and basically you funded your enterprise. People availed themselves of it. They built stuff. They built to excess. And the excess weighs on an economy. It, it -when there's too much investment-- people produce too much.
They produce too much at, at uneconomic margins. They drive out competitors who haven't got free capital behind them. The result is a kind of a chronic low-level virus in the economy and people talk about -- you know stagnation. Japan has been sitting in the soup for about a decade. It too had a bubble. It refused to clear the debris. It wouldn't let markets work. It wouldn't mark things down. And lo and behold it's still struggling.
PAUL SOLMAN: But do you explain it the same way Jim does that is, that a bubble, a period of euphoria that brings with it weird, aberrant behavior?
ADAM SMITH: You don't see the bones on the beach till the tide goes out. And what you're seeing now is the bones on the beach. There's more, more to come.
CAROL LOOMIS: I've always heard that you never know who's swimming naked till the tide goes out which I like much better than the bones. (Laughter) Ever since the SEC came into being, we've had an expectation that the markets supposedly are working well under a strong regulatory scheme.
And so you don't expect the kind of thing that is happening today. And also, I think it's very broad. To borrow a line from Warren Buffett, the people who are engaging in bad behavior today are the, the people - are people that you would be willing to have marry your daughter. Or be a trustee of your trust. But there is a - these people are accepting that it's okay to do this managing the books and doing anything to produce the kind of earnings that- is desired.
ADAM SMITH: My question is: here are great firms like Morgan Stanley and Merrill Lynch, and they are paying people 15 million dollars a year for a product that they know is not really first class, and if they have any sense of history, is going to lose a lot of people a lot of money. But it will make money this quarter and so that's why they do it. It's a kind of myopia that is terrifying.
ANDREW TOBIAS: I don't know what the repercussions to some-- should be for someone like that, but--a lifelong of happy repercussion free retirement - I don't think so.
ALLAN SLOAN: Would, would, would you feel the same if they were making 200,000 dollars a year instead of 15 million?
ANDREW TOBIAS: Well, no. But if they're not being paid much you figure they're - maybe they're doing it to preserve their job or to try to somehow pay for their child's bad leg, you know, but, but, but for 15 million dollars you figure that they're doing it because they want to be rich beyond imagining.
PAUL SOLMAN: So it was just a question of a screwed up set of incentives?
ALLAN SLOAN: Well it - Wall Street has never been a holy place. Wall Street is always greedy. It's the nature of the beast. What happened was there was far more money around than ever; the boom was greater than ever, and largely because of the Internet and partly because certain members of my profession fell for this nonsense and promoted some of these people who shouldn't have been allowed out without keepers -- you, you had this irrational boom -this idea that everybody could get rich -- all of us here - all of us panelists knew this wasn't true. You'd raise your voice. It didn't make any difference. The -- it was like madness, and it burned out about 2000 and now the hunt is on for villains!
ADAM SMITH: I don't want to, I don't want to step on your toes as the interrogator, but I wonder if there is the Calvinist notion that there has to be a certain amount of suffering before good times can come back.
JAMES GRANT: Yeah, there has to be a period, but not so much of chastisement or affliction but there has to be a period of, of marking to market -of, of, of recognizing values. And I submit to you that we are not there by any means; you know the, the, the stock market is, is, is this rarest bird of plumage. What we have is an overvalued bear market! You don't see those much.
PAUL SOLMAN: Do you think that we have an over-valued bear market?
ANDREW TOBIAS: Yes.
PAUL SOLMAN: Do you think we have an overvalued
CAROL LOOMIS: Absolutely! I just can't find what they are out there to buy!
PAUL SOLMAN: I didn't pick you guys because of any bias -
ALLAN SLOAN: Except that we're old.
ADAM SMITH: Allan has a point -- that is, this particular panel has seen several cycles. Bubbles always float higher than you think they will and they always last longer than you think they will--and they always take longer to recover from than you think they do, and that makes us sound very old.
PAUL SOLMAN: Well, thank you all very much.