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Investors Eligible for Restitution (Post, April 30)
SEC Approves Wall Street Settlement (Post, April 29)
Post financial writer Ben White was online to talk about the settlement on April 29
Smith discussed "Bigger Than Enron" in June 2002
Special Report: Wall Street Probe
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Live Online Transcripts Live Online Transcripts

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'The Wall Street Fix'
With Hedrick Smith
Producer/Correspondent, FRONTLINE

Friday, May 9, 2003; 11 a.m. ET

How will the recent record $1.4 billion settlement for securities violations affect what New York Attorney General Eliot Spitzer calls Wall Street's "corrupt business model" that cost American investors trillions?

FRONTLINE'S "The Wall Street Fix," airing on Thursday, May 8, at 9 p.m. ET (check local listings), uncovers the ties that enabled superbanks and Wall Street insiders to shape and profit from the telecom boom while leaving ordinary investors holding worthless stock. Producer and correspondent Hedrick Smith was online to talk about the financial industry and the settlement on Friday, May 9.

The transcript follows.

Smith, a Pulitzer Prize-winning journalist and author, has created and hosted 15 award-winning PBS prime-time specials and mini-series on Washington's power game, Soviet perestroika, the global economy, education, health care, and teen violence. He founded his production company, Hedrick Smith Productions, in 1990. He discussed his FRONTLINE film, "Bigger Than Enron" online in June 2002.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Bridgewater, N.J.: How much did WorldCom's illegal and unethical activities affect the direction of the other major telecom industry players?

How much of the mess in the telecom industry should be attributed to WorldCom?

Hedrick Smith: WorldCom was a major force in telecom, because of Bernie Ebbers' aggressive strategy in acquiring other companies. Because of Ebbers's ability to acquire major other companies such as MFS, UUNet and finally, MCI, which was number two in size and importance in telecom, WorldCom's strategy was copied by other companies. WorldCom became a major threat to the regional Bell companies and to AT&T, although they all protected their own turf and stuck to their strategies -- and that has now paid off for them with the collapse of WorldCom. But it was a major force while it was on the rise -- that is, through the end of 1999.

San Antonio, Tex.: How can Elliot Spitzer or any other prosecutor justify sending someone to prison for stealing videos, food, or even a car and be satisfied to let Sandy Weil and company get away with such immoral, indecent, and what should be illegal behavior? And why don't we reinstate the law which was repealed in 1999 dealing with the separation of banking and stock brokers.

I found the show to be fascinating and infuriating. Such tremendous injustice -- in the land of the just.

Hedrick Smith: Both excellent questions that you pose. Unless there is strong popular pressure, directed especially to the Congressional committees concerned with banking, there is simply not going to be any action by Congress on restoring the separations between banking and securities. The appropriate committees are the Senate Banking Committee and the House Financial Services Committee. If you want to write someone, the chairman of the House Financial Services Committee is Rep. Mike Oxley (R-Ohio), and the Senate Banking Chairman is Richard Shelby (R-Ala.). Shelby is sympathetic to taking some action to tighten controls on the New York Stock Exchange and the NASDAQ, but Oxley has been dragging his feet.

As for the issue of criminal prosecution, you can see that I pressed Elliot Spitzer on that issue, and he made a judgment call, which many -- like you -- and me -- question. Frankly, Spitzer did not feel he had strong enough evidence to bring a case against Sandy Weil, because Weil was very clever about not putting anything in writing. He was deliberately vague about Grubman, but it sounded to me as though he had enough evidence to prosecute Grubman. But Spitzer's point was that the system was rotten, and that it was unfair to prosecute a few individuals when the misconduct was so widespread.

However, that does not prevent the Department of Justice, and specifically, the U.S. Attorney's office in the southern district of New York, from pursuing criminal investigation and indictment under federal securities laws, and it's my information that some investigation is underway, but the U.S. Attorney's office simply will not give any details.

But it's important that you and others who feel like you to let your congressmen know, and that you write Bill Donaldson, the new chairman of the Securities and Exchange Commission, who is inclined to take some action, but whose course of action will be significantly affected by public opinion.

washingtonpost.com: FYI, Eliot Spitzer was online with us on May 2.

Rockville, Md.: In light of the catastrophic events following the repeal of the Glass-Steagall Act of 1933, has anyone discussed reenacting it? If no, why not? It seems the "settlement" has no teeth to prevent the same problems. Great job on the show, BTW. I'm still at MCI (WorldCom) and found the show excellent but depressing, considering how many stock options we all had. Thanks.

Hedrick Smith: You may want to take a look at the op-ed piece that I wrote on this topic or the Frontline Web page for "The Wall Street Fix." As I said to the previous questioner, the people to contact are in Congress, and it will make a difference if they hear from folks like you. So I encourage you to write, and to do it quickly, and to encourage others of a like mind to do so.

Also, be sure to write your own representative and senator, as well as the committee chairman. There is a very close balance of power in the Senate and the House, and so those who want to take action are strengthened by public opinion.

Laguna Niguel, Calif.: Why is Mr. Greenspan still in charge of the Federal Reserve? Since it was he himself which gave the approval of Citicorp and Solomon to merge? Isn't this in violation of an anti-trust act or two? Can the WorldCom shareholders take him to task?

Hedrick Smith: Mr. Greenspan is still in office because President Clinton appointed him, and President Bush has just asked him to serve another term. He and the Federal Reserve Board were sued by the Community Bankers Association after the Federal Reserve gave its approval for the merger of Travelers and Citicorp. A three-judge panel in Washington determined that Greenspan and the Federal Reserve Board had the legal authority to interpret the banking laws. But what really settled the matter was that Congress repealed Glass-Steagall 18 months after Greenspan gave the OK to Citigroup. If Congress had not passed the repeal, then Sandy Weil would have had to sell off the Travelers Insurance Company, and perhaps some smaller elements of Citigroup, under the law even as it was interpreted by Greenspan.

Chester, N.J.: Why does no one point a finger at the Telecom Act of 1996 and the governments inability to decrease the power of the baby bells? The failed business models of companies like WorldCom, Enron and others were predicated on open and competitive access. It is clear that MANY people were "forced" into making questionable decisions and going against their better long-term judgments to survive in the short-term. I am by no means looking to support outright illegal and immoral decisions and feel (having been an analyst covering the industry) that the ones whose hands were slapped were the worst of the lot to begin with. Anyway, a lot of blame lies with the government and I see little redress on this (the monopoly access) front. Can you comment?

Hedrick Smith: The passage of the Telecom Act of 1996, and particularly the subsequent decisions of the Federal Communications Commission under Reed Hun, helped to throw open the competitive market in local, as well as long-distance, telecommunications. But the real change came with the judicial decision in the early 1980s ordering the breakup of AT&T, and the subsequent court decisions granting MCI and Sprint open access and a competitive position with AT&T.

So there's no question that the decisions of the judiciary and the Congress had a major impact on the environment -- and the environment was one of deregulation. But that does not inherently and inevitably lead the market to dishonest practices by investment banks and their analysts. The real problem there is that deregulation had taken place a long time ago, and that self-regulation by the New York Stock Exchange, the NASDAQ, and the leadership of the banks themselves, simply did not crack down on outrageous practices. I don't think that can be laid off on deregulation of the telecom industry by Congress, though the general environment of deregulation certainly encouraged the permissive attitude that you can get away with just about anything in business, and no one is watching. Which, unfortunately, for millions of investors, turned out to be right. The banks and analysts did get away with it, and even those who have been penalized are far richer today than they were before they committed their fraudulent acts.

McLean, Va.: Do the provisions of the settlement preclude federal prosecution for criminal fraud or only criminal prosecution in New York State?

Hedrick Smith: The answer is no, the settlement does not preclude federal prosecution. Eliot Spitzer has decided, as Attorney General of New York, that he is not going to prosecute under the Martin Act, which is New York State's law, outlawing fraud in the securities industry.

Glenelg, Md.: Just some comments. Excellent program. I just hope Americans watched it. I had to chuckle at quote in Pearlstein column this morning of Levitt. He said "The system works." How gutsy is this. A lot of it occurred on his watch. I think it doesn't work if the perpetrators walk away with $25 million.

The small investor in your video will be back. This time to get tax free dividends. Wall Street will get to whack him again with a two by four.

Especially liked the part about Greenspan and Glass Steagall. Unfortunately Congress and the country have bought in to the Maestro role he has cultivated.

washingtonpost.com: Gamesmanship On Wall Street And the Hill (Post, May 9)

Hedrick Smith: Glad you liked the program, and particularly that the line of reporting and reasoning was so clear to you. The only way the little investors and the ordinary folks are going to change things is to put the heat on Bill Donaldson at the SEC and key committees in Congress, which I mentioned earlier.

Hedrick Smith: I appreciate your comments particularly, because it is so hard to make complex subjects like banking, investment analysis, the Glass-Steagall Act, and the rise and fall of a company, both intelligible and interesting on television. These are not topics made for TV, which is one reason you see so little of this kind of television on your set at home. So your words of encouragement are important to all of us who made that program.

Newington, Conn.: Hi Mr. Smith,

I really liked your program last night. The ease with which CEOs and corporate executives manipulate the system to feather their own nests makes me question our system's structural infrastructure. It also suggests the incestuous relationship between the makers of the laws, the regulators, and corporate leaders. Democracy without checks and balances tends to gravitate towards a plutocracy and oligarchy. I would appreciate your thoughts on the link between the corporate CEO excesses, plutocracy and oligarchy.

Thank you very much.

Hedrick Smith: Well obviously, the power of the financial services lobby and its campaign donations and high-level access to decision makers to the Clinton administration, now the Bush administration, and key committees in Congress, enables Wall Street to get its way with Congress. Certainly, the prime example was Sandy Weil's ability to go back channel to Fed Chairman Alan Greenspan, and work out a deal privately about 10 days before Weil and John Reed of Citibank announced the merger of their corporations.

You may be interested to know that one reason that Weil was able to do that so quickly was that he'd gone to Greenspan previously, when he'd hoped to merge Travelers with J.P. Morgan Bank, and Greenspan had given him the OK on that merger. But the then-chairman of J.P. Morgan saw better than John Reed did at Citibank, that Weil was not about to share power within the new corporation with anybody. He did not want Weil to take over his bank, so he backed out of the merger. But the point is, Weil had already greased the skids, and he knew how Greenspan would respond to the merger of Travelers and Citicorp.

There was a chorus of complaints at the time that the Fed approval of the Citigroup merger was a deal cooked on the inside before it was made public -- complaints from people like Ralph Nader and the Community Bankers Association. But the opponents had nowhere near the political clout, influence or access to the powers that be to seriously challenge the Fed.

San Francisco, Calif.: I was an employee at MCI before the merger with WorldCom. My colleagues and I felt like Bernie Ebbers was the Borg, the Star Trek characters bent on swallowing all foreign cultures and incorporating those denizens into the hive mind. For a company that owned UUnet it was shocking employees didn't have intranet access. Functional islands were rampant throughout the corporation. MCI went from a great employer that one was proud to work for, to a white collar sweatshop.

After watching last night's show my question is this. Is there anyway Bernie Ebbers and Jack Grubman can be made to forfeit all their money (similar to when a drug dealer is busted and all assets are forfeited as the ill-gotten goods of crime) and receive a life sentence of community service to the indigent?

Hedrick Smith: Your comments about MCI before and after the merger with WorldCom have been echoed by many people with whom we talked. In fact, part of the story that we would like to have gotten into, and didn't have time for, was the failure of Bernie Ebbers to effectively integrate any of the larger companies that he bought out in the second half of the '90s. Ebbers was known by rival CEOs, by top people who worked for him in the late '90s and by sharp industry analysts, as a deal maker, a serial acquirer, but not a manager or an effective corporate chief who knew how to run a company. He just kept buying more companies with WorldCom stock. So the special accounting rules allowed after mergers enabled WorldCom to keep its growth picture looking good -- and many charge, far better than reality -- even before the alleged fraud began. So your experience sounds fairly typical.

In terms of getting money back from Ebbers and Grubman, efforts are already underway in scores of lawsuits filed against WorldCom and against Solomon-SmithBarney, as well as individuals like Grubman and Ebbers. The release of documents by Spitzer is likely to help the lawsuits against the Wall Street banks and people like Grubman. But so far there has not been an equal disclosure of WorldCom documents by the special bankruptcy monitors for WorldCom established by the courts. That is a team headed by former attorney general Richard Thornburgh. They made an initial report last December, which exposed some of the wrongdoing and the symbiotic relationship between Grubman and Ebbers. They have another interim report, which is supposed to come out in late May or June, and they expect a final report in November. Those reports should be watched very closely by anyone seeking to recover lost funds.

Community service sounds like a very good idea -- one that seems largely to have been forgotten, though you may recall that Michael Milken was required to do community service as part of his sentence when he was found guilty of insider trading in the 1980s. So there are precedents, and the subject is worth pursuing.

Hamilton, Mass.: Mr. Smith:

Beginning in late 2000 I began to provide to the SEC what I believed to be incontrovertible evidence of illegal collusive trading on Wall Street for proprietary trading profit. I spoke to Mr. Cutler, now head of the enforcement division, on a number of occasions, about the matter. It is my strong conviction that the SEC never looked into the matter seriously because they have never been there to protect the individual investor, despite what Mr. Levitt would have you believe, but are there solely to protect the sanctity of the system which is completely corrupt and favors a few powerful trading houses. Why haven't any of you reporters focused on the trading mechanism itself. How is it that companies, with virtually no revenues, no hope of profits, really just concept stocks, could be priced at $10 a share and open for trading at 50 or 60 or higher. Why aren't you asking that kind of question.

Hedrick Smith: Those are good questions. They're really properly addressed to people who write about the financial markets on a regular basis, since they're the ones who can follow individual stocks or the way sectors of stocks are treated on the market. There are some excellent reporters, such as Gretchen Morganson at the New York Times, who are interested in the kinds of issues that you raise. I have little doubt that she would be interested in receiving the kind of information that you have shared with Steve Cutler at the SEC. I would be interested in it too. Not having followed the trading mechanisms per se, I am not familiar with what you are talking about. But if you have a summary, or a modest amount of material summarizing your points, I welcome receiving it at Hedrick Smith Productions, 6935 Wisconsin Ave., Chevy Chase, MD 20815.

San Antonio, Tex.: If Arthur Levitt was the chairman of the SEC for so long, why didn't he do something, instead of just criticize now. And is it true that Harvey Pitt put into place the only good reforms which are presently in place? Was he given a fair chance to reform an institution the failings with which he was intimately familiar?

Hedrick Smith: Arthur Levitt is fairly open about feeling that all regulators failed to be tough enough in the 1990s. There were a number of reforms that he tried to push that were blocked by Congress, the New York Stock Exchange and the accounting industry. He fought on some of them, but was outgunned when conservatives in Congress threatened to cut off or reduce funding to the SEC, as we reported in a previous Frontline, "Bigger Than Enron," which was broadcast in June of 2002. (Editor's Note: Smith was online to discuss "Bigger Than Enron.")

To suggest that Harvey Pitt promoted major reforms seems to me a wild inaccuracy. Mr. Pitt fought and stalled the reforms embodied in the Sarbanes-Oxley Bill until it became clear that there was no way of stopping that bill. His plan of setting up an accounting oversight board was so vague and full of contradictions that it was unworkable. Many of the experts with whom I have spoken contend that Mr. Pitt used his long experience as a securities lawyer to foil rather than promoted reforms. But he does deserve credit for his civil prosecution of a large number of cases in response to the breaking scandals of 2001 and 2002. But he certainly wasn't a reformer, as most people understand the word.

Annapolis, Md.: I keep thinking about the S&L industry and how the Reagan administration reduced oversight by creating a de-regulated environment where the executives could implement almost any scheme they desired to pull money from the institutions into their pockets.

Bank robbers they really were. They destroyed an entire industry. The taxpayers bill on that under the RTC was nearly trillion if my memory serves me. Yet the ones who became millionaires by "robbing the bank" have never been held fully accountable.

Hedrick Smith: Without going into the details of the Savings & Loan scandals, I think that you've raised a very important point -- namely, that it seems every decade we have a horrendous financial scandal in one sector or another of the financial world, without ever seeming to fix the problem. Depositors lose billions in the Savings & Loan scandal, and the taxpayers have to bail them out, and very few S&L bigwigs go to jail or pay what for them are seriously costly fines. Now we have a scandal on Wall Street. Last year, we had a scandal in the accounting industry. But what each of these industries learn is that the public quickly forgets, and the mode in Washington is to "trust the market" to do its own correcting.

I have a problem with that philosophy. Because if the market did the self-correcting, then the people who were punished were the depositors and the investors who did nothing wrong. But the people who did something wrong -- that is, the people inside the industry -- by and large remain in place and go back to business as usual after the public has forgotten the problem. Congress has moved toward another tax cut, and the press is diverted to another story. From my reporting and the interviews I've done in connection with the last two Frontline programs on Enron, WorldCom, accounting and Wall Street, there is a whole mass of ordinary Americans out there who feel cheated, duped and lied to, and they're angry about it. But they don't know what to do with their anger. And they don't know to whom they can turn.

What is odd is that that kind of public grievance and sense of protest cannot be tapped and is not being tapped effectively by political leaders, especially by the new flock of candidates in the Democratic Party who want to run for president. Frankly, I'm baffled. As a reporter who spent the last 27 years reporting in and around Washington, this doesn't make sense. The only politician whom I've met in the last couple of years who sees both civic virtue and political advantage in confronting at least some of these problems, is Eliot Spitzer, the elected attorney general in New York State, who wants to run for governor in a few years.

This issue has put Spitzer on the map. You would think some other politicians would notice that fact. But so far, they haven't. But politicians do listen to the public mood, and the groundswell on the issues of corruption in the financial services industry will eventually attract some candidate for major office -- that is provided that investors don't just give up and quietly go back into the market and hope to make some gains before they take their next licking.

Washington, D.C.: Yesterday, washingtonpost.com featured the top FBI agent for their white collar crime unit and he spoke about the successes of the bureau and included a few knocks against WorldCom. My view is that the FBI was non-existent in its law enforcement role because there's just no way a company could cook the books to the tune of $7 or $8 BILLION and not have it leak. With WorldCom's many contracts to federal services, including DoD contracts for voice and data, when do you think word first made back to the FBI that something was amiss with the company?

washingtonpost.com: Chief Keith Slotter of the FBI's White Collar Crime Program (washingtonpost.com, May 8)

Hedrick Smith: Of course, I have no idea whether anyone at the FBI heard of or thought about the idea that WorldCom could be seriously cooking its books before Sept. 11, 2001. The allegations from the SEC are that the major fraud within WorldCom began within 2001, though I've received other information that indicates that it probably goes back to 1999, or even before. But this comes from people who had access to internal WorldCom months after the fraud was exposed. And that's a lot easier than catching on while it is going on.

So I'm doubtful that the FBI was looking at WorldCom's accounting practices prior to Sept. 11, and I'm fairly certain that after Sept. 11, WorldCom was a pretty small bump in the road. So I don't think that's where the problem is.

The real problem is that the SEC is dramatically understaffed and underfinanced to do the kind of detailed examination of corporate financial reports in a timely fashion until after something sensational has already happened, or someone else -- clients, employees, whistleblowers, the press -- has sounded the alarm.

It's not clear to me why we should have bank examiners going around regularly doing internal checks on the way banks operate, hired and paid for by the federal government and working for the Federal Reserve Board or the controller of the currency, and why we don't have similar auditors checking on the books of corporations and SEC inspectors checking on the operations of investment banks and securities firms. Why is it sound practice in the commercial banking field and not in these other fields? There's no difference in terms of regulatory philosophy, but there's a radical difference in terms of Congressional regulation or established practice.

Talk to any member, past or present, of the Federal Reserve Board about banking and banking practices today, and they will immediately and proudly point out to you that during the market collapse of 2000-2003, no major U.S. bank has gone under financially. Their focus and concern is with the safety and soundness of the banks. But neither the SEC nor any of the other securities regulators can say the same thing about the practices in their industry, because they do not have the investigatory power, the funding, or the clearly stated oversight responsibility that the banking examiners have. You can't expect the FBI or the Department of Justice to know about these things if the financial regulators don't know about them.

In the era of super banks and mega banks, where commercial banking, the securities business and the insurance business, can all be united under one roof (or one umbrella, to use the symbol of Citigroup), the financial services industry has become so diverse and so powerful and capable of operating in so many different lines of business that the regulators can't begin to keep up with their activities or effectively monitor against wrongdoing. The system is busted. It isn't properly set up. It'll take new laws to fix it. The action is up to Congress, and there has to be a will on Capitol Hill, and in the Bush administration, to actually see that these problems are solved. But the predominant mood in Washington today, especially within the administration, but also among the majorities in both houses of Congress, is to shout loudly when the scandals appear, raise voices and fists in the air, look good to the voters and not really do very much seriously to address the problem.


That wraps up today's show. Thanks to everyone who joined the discussion.

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