At the 1998 Labour conference, Peter Mandelson, then the undisgraced trade secretary, prepared the ground for his assertion that “we are all Thatcherites now” with the bold prediction that “private enterprise is the only means for Britain to prosper in the knowledge economy of the future”. New “technology and product innovation” had taken us to the doorstep of nothing less than a “third industrial revolution”.
Mandelson’s delusions of an earth-shaking net-driven future were modest compared to the rapturous prophecies delivered to readers of the Wall Street Journal. Dotcom and telecommunications stocks were cheap at twice the price, shrieked George Gilder, a speechwriter for Ronald Reagan who became a demented evangeliser for the new economy. “We are witnessing the most productive, intelligent and optimistic example of youthful rebellion in the history of the world. The last five years have seen the overthrow of the tyranny of matter. In this economy, our ability to come up with new ideas is not bound by physical limits but by our ability to come up with new ideas. . . it’s unlimited.”
The Good Lord himself had ordained privatisation, continued Kenneth Lay, the chief executive of Enron in early 2000, just before his criminal corporation went bust in the greatest bankruptcy in the history of capitalism. “I believe in God and I believe in the free market,” he declared. Jesus had come among men because “he wanted people to have the freedom to make choices”. In these circumstances, regulation was not only the destruction of the brightest hopes of the future, but blasphemy. The great bubble of the 1990s was blown up by the geyser of techno-utopianism.
After the late, unfortunate events in the markets, it proved harder to predict that fantastically overvalued or frankly fraudulent high-tech stocks were steps on the stairway to heaven. Defenders of the status quo needed to open a second front. They accepted that the consequences of governments allowing shares to inflate were undoubtedly disastrous for employees, pensioners and investors. There may yet be a slump, they added. Nevertheless, nothing could be done to impose controls on capital. Trillions of dollars circumnavigated the globe in seconds. Who could control the uncontrollable? Regulation was no longer a mortal sin but, regrettably or not, an impossibility.
The British government’s acceptance of this wilful refusal to protect the public was brought home to me when a colleague returned from an interview with Tony Blair. My friend had pointed out to the Prime Minister that nearly all the business bankrollers of new Labour dodged taxes. Blair shrugged. What could he do? Nothing a mere government might attempt could stop the rich hiding their money in tax havens and leaving the simple-minded working and middle classes to pick up their bills. So ingrained has the fatalism become that the Inland Revenue, as Private Eye revealed, transferred ownership of its buildings to Mapeley Steps Ltd, a tax-dodging firm in Bermuda. (Why taxpayers should subsidise Mapeley’s tax-exempt profits was not a question that troubled the Revenue’s managers.) Gordon Brown has failed to honour his promise to close the egregious non-domicile loophole that allows 60,000 wealthy foreigners living in Britain to pay no tax on income and gains from the rest of the world. (They’d just leave. What’s the point of asking them to stand their round?) Meanwhile, Patricia Hewitt plods on as if the bubble hadn’t burst. As I reported in the New Statesman of 9 September, the Secretary of State for Trade and Industry and Blair are using up the credit British servicemen and women secured when they risked their lives in Afghanistan to persuade the Bush administration to exempt British companies registered in New York from the outrageous requirement that CEOs testify to the accuracy of accounts.
Can’t regulate. Won’t regulate. The line changes with the busts and booms of the market, but the conclusion is always the same: nothing can be done. The assaults on fraud in the US, which have so appalled Hewitt, offer an escape from this willed impotence. The technology that allows the globalised dealing is not, it turns out, always a willing accomplice of villainous speculators. It leaves evidence trails. The New York attorney-general, Eliot Spitzer, has used e-mails stored in the very computers that were meant to power the new economy to nick the pumpers and dumpers of dotcom shares on conned investors. Before I get going, I should say that, in a stock market mania, investors want to be conned. If insane demand is pushing prices ever higher, it isn’t profitable to ignore the insanity on the grounds that the pumped companies are never going to make a profit. It’s rational to be irrational as long as you sell on the stock to a greater fool willing to pay a higher price before the mania subsides. “When the rest of the world is mad we must imitate them in some measure,” sighed the London banker John Martin during the South Sea Bubble of 1720, as he dealt in the rocketing shares of a South Sea Company he knew to be a swindle.
For all that, when the market self-destructs, the fools left with valueless pieces of paper want justice. Spitzer has found that new technology can be a profitable seam of evidence for investigators taking up their cause. The cynicism he found on the hard disks of investment banks would have made the directors of the South Sea Company give an approving, complicit wink. In January 2001, Henry Blodget, the star analyst of Merrill Lynch, was asked by a friend why his bank was commending the stock of an obscure internet company called GoTo.com.
“What’s so interesting about GoTo except banking fees?” he wrote, under what he thought were the lobby terms of Wall Street insiders.
“Nothing,” replied Blodget.
Merrill wanted GoTo’s business and a “buy” rating would help usher it through the bank’s door. “GoTo was a paradigm of what was wrong at Merrill Lynch,” Spitzer’s spokesman Darren Dopp says. “Not only did they use ratings to solicit investment banking business, they used negative ratings to punish those who took their business elsewhere.” The analysts, who were supposedly independent of the firm’s banking business, knew perfectly well what was going on. One such, a Kirsten Campbell, complained to Blodget in an e-mail about the pressure to make GoTo look like a good share to take a punt on. “I don’t want to be a whore for fucking management . . . We are losing people money and I don’t like it. John and Mary Smith are losing their retirement because we don’t want Todd [GoTo’s chief financial officer] to be mad at us . . . The whole idea that we are independent from banking is a big lie.”
The records gave Spitzer more than enough evidence to force Merrill to pay a $100m fine. The e-mails he collected will be the basis of a billion-dollar claim against Merrill from investors.
Salomon Smith Barney, the banking arm of Citigroup, was fined by US regulators after its “independent analyst” Jack Grubman told investors to buy shares in Winstar, a stock he predicted would rise to $50 a share just as it fell to 14 cents. In an e-mail Grubman wrote: “The record shows we support our banking clients too well and too long.” Meanwhile, at Credit Suisse First Boston, an analyst who worried about telling the truth about two semi-conductor firms that paid his bank well for handling their accounts was told to do the “two-step”: to give a “buy rating” to investors but also make sure “verbally everyone [inside CSFB] knows your position”. The shares were dumped on dupes.
There is no obvious connection between new technology and regulatory inertia. Given the will to act, the cops can find that accessing the records on hard disks is the easiest way to wrap up a case before the pubs open. Doubters should consider why the bubble companies were so anxious to get close to the governments they usually denounced as archaic and unnecessary restraints on the glorious future. Enron funded the campaigns of Bill Clinton and George Bush Sr, Al Gore and George Bush Jr, Tony Blair and William Hague. Enron’s accountants, Arthur Andersen, were all over new Labour until their crookery forced them into near-ruin; and, along with the other four firms in the accountancy cartel, funded US senators who, by a strange coincidence, then lobbied against controls on conflicts of interest. Enron and Andersen put themselves about because they knew that it was all too possible for governments to stop them ripping off the punters, whatever the free-market ideologues said.
In Britain, the bursting of the bubble has led to the stock market plummeting, pensions and endowments being slashed, and insurance companies teetering on the edge of disaster. Yet Hewitt has sat on her hands. The shaming of her old workmates at Arthur Andersen hasn’t forced her to take the most elementary steps to restore confidence in company accounts by imposing an independent regulator on accountants and banning auditors from supplying additional financial services to clients. Merrill Lynch, Citigroup and Credit Suisse First Boston all have London divisions. But instead of sending in the cops to find out if investment bankers’ analysts treated their British clients as fraudulently as they cozened their American clients, Howard Davies, the Financial Services Authority’s Pollyannaish head, sweetly sings about the need for a “light regulatory touch”.
To be fair, Davies isn’t quite the witless relic of the 1990s he appears. He did find the courage in July to note there was some evidence that “analysts’ recommendations have been systematically more positive than market performance would justify and, more seriously, that their recommendations in relation to companies with which their parent house has a relationship are systematically more positive than the average”.
But that was as far as he went. He didn’t imitate Spitzer and demand powers of subpoena to discover which analysts in the City had done the pumping and dumping. Instead, he bravely issued a consultation paper. Even in Bush’s America, Kenneth Lay may be heading for the dock but, in Britain, Davies and Hewitt ensure that Lay’s vision of a world ruled by a deregulating God survives like North Korea: the last ditch of a failed ideology, which might almost be quaint, if we didn’t have to live with it.
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