Finance: Anyone who has money invested in world stock markets has been contaminated to some degree by the "infectious greed" epidemic diagnosed by Alan Greenspan, the chairman of the US Federal Reserve in July 2001. According to Frank Partnoy, its symptoms were first spotted in 1987 on the set of the movie Wall Street when Gordon Gecko pronounced "greed is good". Reviewed by Siobhán Creaton.
Since then, the virus has infected millions of people across the globe.
Sadly, Partnoy is not optimistic that it will be eradicated any time soon, but his observations and masterful descriptions of the environments and individuals who are at most risk may help to prevent any further deterioration in this condition.
The author is a professor of law at the University of San Diego, and teaches courses on white-collar crime and corporate finance. Last year, he was widely acclaimed for his testimony and commentary on the Enron scandal before the US Senate. Infectious Greed is an entertaining account of how the rules and regulations designed to protect investors were bent and circumvented in the relentless pursuit of wealth.
Through a series of anecdotes and a smattering of colourful quotes, he chronicles how the web of deceit was woven at companies such as Enron, Worldcom and Global Crossing, and of how rogue traders such as Nick Leeson and John Rusnak used complex financial instruments to gamble away hundreds of millions of dollars without anyone noticing until it was too late. And he warns tha, for all the regulation and increased vigilance that has ensued, investors should brace themselves for further shockwaves.
His tale begins with Andy Krieger, a whiz kid at Bankers Trust who developed complicated derivatives that few of his colleagues or supervisors understood. These complex derivatives were sold to equally confused clients, including the Jefferson Smurfit group and Proctor & Gamble, earning enormous commissions for traders and their employer. In a training video developed within Bankers Trust, an employee described a hypothetical derivative transaction among Sony, IBM and Bankers Trust: "What Bankers Trust can do for Sony and IBM is get in the middle and rip them off - take a little money."
Bankers Trust was notorious for always pushing out the boundaries. Even when traders had met or surpassed their targets, they were asked "what's next?". Krieger was the bank's star trader, and in 1987 had earned close to $300 million, or half of the company's annual profits, and he was expecting a $15 million bonus. Instead, the bank, worried about setting a precedent, paid him a derisory $3 million. He quit, and soon after his departure, Bankers Trust discovered his profits had been overstated by about $80 million. Things were not what they seemed.
The bug spread rapidly beyond Wall Street to the chief executives running companies on behalf of shareholders. In 1984, Dean Buntrock took over as CEO of Waste Management, and over the next 12 years, the company earned the reputation that "no job was too dirty" for the firm. During the 1980s, executives were charged with crimes ranging from bribing local officials to violating environmental regulations. By the 1990s, the business had become less profitable, and Buntrock aggressively managed to inflate earnings through devious accounting tricks. Partnoy says its auditors, Arthur Anderson, colluded with the executives for years, signing off the accounts and assuring investors that their money was safe.
In 1997, a year after Buntrock's departure, the awful truth was revealed. Waste Management had overstated its earnings by $1.43 billion. The share price plunged and the Securities and Exchange Commission (SEC) fined Arthur Andersen, but Buntrock went unpunished.
The SEC devoted much of its resources to the highest-profile cases, such as Bankers Trust, leaving others to be tackled through civil law suits. No-one from the firm served any time in jail, the major protagonists were never charged with crimes and most of the people involved still work on Wall Street.
Partnoy says that, as the various scandals unfolded, regulators attempted to tidy things up; but by 1995 they had sent three messages to CEOs: "You are not likely to be punished for massaging your firm's accounting numbers; you should use new financial instruments, and you don't need to worry about whether accountants or securities analysts will tell investors about any hidden losses or excessive pay options."
And so things just got worse.
The author contends that the dot.com era was not some bizarre anomaly in which investors simply went insane. "Investors, Wall Street and corporate executives were all participants, but given the incentives facing each group, their behaviour - if not excusable - should not have been surprising either," he writes.
As for Enron, he believes it couldn't have happened 15 years earlier. The spectacular collapse of the premier US energy trading company was made possible by the spread of financial innovation, loss of control, and deregulation of financial markets.
The credit rating agencies - Moody, Standard & Poor and Fitch - also come in for sharp criticism. They were the ultimate barometers of the financial strength of publicly quoted companies for investors and regulators. But they tended to downgrade companies only after the bad news had already filtered out and usually a few days before they filed for bankruptcy.
Partnoy believes investors now nursing huge losses must also share some of the blame for their woes. Investors should always read company annual reports carefully, should understand how companies make money, and should always resist tips on hot stocks. "You have one more person to blame," he writes, "in addition to the accountants, bankers, lawyers, credit raters, corporate executives, directors and regulators who failed to spot the various financial schemes of recent years. You."
Siobhán Creaton is Finance Correspondent of The Irish Times. She is co-author of Panic at the Bank: How John Rusnak Lost AIB €691 Million
Infectious Greed - How Deceit and Risk Corrupted the Financial
Markets. By Frank Partnoy, Profile Books, 464pp, £20