SCALPING ON WALL STREET EXPOSED: HOW BROKERS & INVESTMENT BANKERS PULLED ONE OFF
. . . "Where are the junkyard-dog class-action attorneys when you really need them?" asks retired banker David A. Hartman in the December, 2002 Chronicles. He means those who would get restitution for investors who lost in the stock market because of investment-banking-and-broker flim-flam.
The flim-flam took this form: Once there was a profit-earnings ratio (the famous P/E) based on actual profits. Then, since 1997, there was P/E based on projected profits and after that projected profits BEFORE interest, depreciation, and income tax, "as if," says Hartman, "these charges to earnings are of no consequence."
Well. Once you had things pumped up that way, there was opening for "20-20 vision" by which a really good company forecast (predicted) 20% growth and 20% return on equity -- a couple of categories I think I understand adequately to know they are equivalent to runs and runs batted in -- very good stuff indeed.
This 20-20 vision was enuntiated by analysts, who routinely condemned to "performance-oriented" status (yuck) those stocks that fell short of 20-20 and thus sent a message to CEOs: make 20-20 or die, or if you don't make it, "fake it," as Hartman says. It was the academic publish-or-perish concept applied to corporate success.
The rest is recent business history, complete with "fictitious" earnings by Enron, WorldCom and the like, leading to "unconscionably bloated values" and consequest loss of trillions.
It happened under the watchful (!) gaze of the SEC and its state counterparts, which were "supposed to be the investors' cavalry, riding to the rescue," but arrived "long after the investors [had] been scalped."
Hartman heads the board of Rockford (Ill.) Institute, which publishes Chronicles, a conservative journal of the old kind ("paleo," vs. "neo"). (12/20/02)