Giant insurance brokers are accused of taking kickbacks from insurance companies. Mutual fund managers allow preferred clients to trade after hours. Stockbrokers hype a stock to win underwriting business.
Every time New York’s attorney general, Eliot Spitzer, turns over a rock, he seems to find another corporate scam, reinforcing the view that something has gone terribly wrong with ethics in American commercial life. From Enron to Martha Stewart, a three-year tattoo of headlines has convinced many Americans that businesses in general are just out to fleece the unwary. Mr. Spitzer’s investigation of Marsh & McLennan, the insurance broker, is the latest installment.
“I believe we are in a period with more of this gamesmanship,” Mr. Spitzer said. “Maybe the rewards just got so big that the temptations are bigger.”
But is the flood tide of scandals evidence of a flood tide of malfeasance?
Economists have their doubts. Chicanery does tend to flourish when the economy is booming and regulation is weakening, they say, but the last few years have hardly been boom times. More likely, they say, is that bad business behavior is about as common now as it ever was, but that it has attracted more notice because Americans are tolerating it less.
For even as the incentives for companies to cheat are especially great in periods of economic and financial abundance, the desire to catch the crooks grows most intense after prosperous times go bust.
“It is exaggerated to say that there is much more corporate malfeasance than in the past,” said Luigi Zingales, a professor of economics at the University of Chicago. “Malfeasance is just more likely to be revealed in recessions.”
Indeed, revelations of fraud seem to be highly cyclical. So far this year (through last Friday), some 726 business articles containing the word fraud have appeared in The New York Times, almost three times as many as in all of 2000, the year when the technology-stock bubble burst.
From 1987, when the stock market peaked and plunged, to 1989, when the infamous savings and loan scandal culminated with the government takeover of Charles H. Keating Jr.’s Lincoln Savings, the incidence of “fraud” in Times business articles also jumped, from 280 a year to 587.
Enforcers tend to be much more zealous during recessions than before them, and fighting corporate crime becomes a very popular cause when profits are scarce. The Securities and Exchange Commission engaged in 679 enforcement actions against firms of various sorts in the 2003 fiscal year; in 2000, the figure was just 503.
“Prosecutors are going after white-collar crime with an eagerness we hadn’t seen before,” said James D. Cox, a professor of law at Duke University. “The state attorneys general realized that the governor-in-waiting, otherwise known as the attorney general, can get a lot of headlines.”
Boom times leverage the incentives to deceive. Investors pay close attention to the ratio of stock prices to company earnings, a ratio that soared during the 1990’s bull market; the higher the ratio went, the greater the bump a corporate executive could produce in the stock price by cooking up an extra dollar of earnings to report. This incentive became irresistible as companies gave their executives more and more of their pay in stock and stock options.