In his recent book about ousted Treasury Secretary Paul O'Neill, Ron Suskind describes a February 2002 meeting of the White House task force charged with responding to a wave of corporate accounting scandals. Among those attending was Federal Reserve Chairman Alan Greenspan, who complained bitterly of how misdeeds by corporate executives had undermined the system by which free markets allocate capital to the highest and best use.
"There has been too much gaming of the system," Greenspan is reported to have shouted, slapping the table with his hand and lifting his voice like King Lear. "Capitalism is not working. There has been a corrupting of the system."
In a follow-up memo to the group, Greenspan acknowledged that Wall Street was implicated in the accounting shenanigans. Wall Street analysts and money managers, he wrote, put executives under increasing pressure to meet elevated and unrealistic earnings expectations. And it was Wall Street bankers who lent their good names to misleading corporate bond offerings while structuring complex financial transactions whose purpose could only have been to inflate their clients' reported income while camouflaging liabilities.
Given that biting critique and passionate concern about the future of capitalism, it came as something of a surprise last week when I managed to catch up with the Greenspan Fed's unanimous decision approving J.P. Morgan Chase's purchase of Bank One.
Nowhere in the 63-page opinion is there even a footnote taking note of the $135 million J.P. Morgan had agreed to pay to settle with the Fed and other regulators for its involvement in the Enron Corp. scandal, along with its billions of dollars in additional exposure from a civil suit brought by Enron shareholders and creditors.
Nor would you have any idea from reading the opinion that this was the same bank that led the way in creating the telecom bubble of the late '90s, only later to be forced to write off several billion dollars in loans and investments in companies such as Global Crossing, Genuity and WorldCom.
For some reason, the Fed watchdogs also neglected to take any note of the $80 million in fines and restitution J.P. Morgan agreed to pay as part of an industry-wide settlement of state and federal charges that stock analysts misled investors with over-optimistic research to win investment banking business. Ditto the $25 million to settle civil charges that it conspired to manipulate markets in IPO shares that it had helped to underwrite.
In fact, just about the only vague reference to Morgan's recent troubles could be found in these two sentences:
"The Board has consulted with the SEC and other relevant agencies on J.P. Morgan's management and compliance efforts. The Board also has taken account of publicly reported issues raised about the past practices of J.P. Morgan and the efforts and successes of their management to address these matters when they were raised." All in all, the Fed concluded, J.P. Morgan and its subsidiaries "are considered well managed overall."
The sophistry here is truly breathtaking. Even if you conclude -- as the six Fed governors apparently did -- that Morgan has put in new systems and procedures to prevent future abuse, and that the merger will strengthen the overall banking system, the board's refusal to even try to explain its decision in light of recent events reveals a deep and abiding disrespect for the public. Nor is there any attempt to explain why a management team that demonstrated it couldn't adequately supervise what was already on its plate ought to be given the chance to manage a bigger and more complex organization.
The Senate blew a golden opportunity last week to challenge Greenspan on this anything-goes attitude toward bank mega-mergers. At a hearing on his renomination as Fed chairman, members of the Banking Committee failed to ask a single question on the subject, treating the event more like a coronation. Like Greenspan, they like to rail against those who "game" and "corrupt" the system, but in the end undercut the reform effort by allowing some of the worst offenders to keep their jobs, build their empires and collect their obscene pay packages.