WALL STREET REFORM

August 2002
		How can the Bush administration and Congress clean up Wall Street and restore investor confidence in the wake of corporate scandals?

Forum Introduction Do stock options act as invitations for corporate fraud and misleading financial statements? Did Enron's trading of energy futures on the Commodity Futures Exchange enable it to mislead investors? How much should people with mutual funds worry about corporate corruption and accounting scandals? What is the role of a corporate board of directors? Will the conviction of corporate executives have any real influence on the markets? What would have happened if legislation to privatize a portion of Social Security had been approved? What happened to all the money that people lost -- was it ever 'real'? Why not limit the amount of time an accounting firm can serve as a company's independent auditors?

Vandra Thorburn of New York, NY asks: ________________________________ What has happened to all the money that people lost? Are the billions really lost, or was it just "fictitious" capital? Ronald Berenbeim responds: ________________________________ Until you sell you haven't made or lost a dime. The problem is that given the U.S. demographic profile, within the next few years an increasing number of people will need to sell because they will be retiring. If stock prices don't go up when the "baby boomers" have to redeem their shares those billions will really be "lost." Frank Torres responds: ________________________________ The monetary losses suffered because of the collapse of companies like Enron and WorldCom are real. Pension funds, including those used by teachers, policemen and firefighters, suffered hundreds of billions in losses because of the corporate scandals. Likewise, those invested directly in those companies, or invested in mutual funds or 401(k) plans, have also seen significant losses. Olivia Kirtley responds: ________________________________ To answer this question, you have to look at how much the stock investment cost as opposed to how much the investment increased and decreased in market value. Many of the losses are certainly very real and painful losses -- someone bought the stock at a high price and the stock can now only be sold at a small percentage of that cost. However, many of the losses are what are commonly referred to as "paper" losses -- for instance, it someone paid $10 for a stock and it increased to $50 a year later, but is now selling for only $15, the value of their stock holding has lost $35 a share from what it was worth at one time, but they still have a $5 gain on the stock based on the actual cash invested. Since the media and investors only seem to compare it to its highest value when talking about how much has been lost, it can be quite misleading. Further complicating the issue is identifying the reasons for the losses. The market collapse initially occurred for reasons other than earnings restatements and a loss of confidence in the reported financial statements of companies. Over the last several months, the collapse has been significantly fueled by accounting issues and lack of confidence. However, the economy and poor earnings of companies that have no accounting problems are also significant factors in the decrease of overall stock values.