A Financial History of the United States: From Enron-Era Scandals to the Subprime Crisis

427 Pages·2010·6.438 MB·English

by  Jerry W. Markham

(c)2011M.E.Sharpe,Inc.AllRightsReserved.
A
Financial
History

of the
United states
From
Enron-Era Scandals to
Subprime Crisis
the

(2004-2006)

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
Works by Jerry W. Markham
A Financial History of the United States
From Christopher Columbus to the Robber Barons (1492–1900)
A Financial History of the United States
From J.P. Morgan to the Institutional Investor (1900–1970)
A Financial History of the United States
From the Age of Derivatives into the New Millennium (1970–2001)
A Financial History of Modern U.S. Corporate Scandals
From Enron to Reform
A Financial History of the United States
From Enron-Era Scandals to the Subprime Crisis (2004–2006)
A Financial History of the United States
From the Subprime Crisis to the Great Recession (2006–2009)

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
A
Financial
History

of the
United states
From
Enron-Era Scandals to

Subprime Crisis
the

(2004-2006)
Jerry W. MarkHaM
M.E.Sharpe
Armonk, New York
London, England

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
Copyright © 2011 by M.E. Sharpe, Inc.
All rights reserved. No part of this book may be reproduced in any form
without written permission from the publisher, M.E. Sharpe, Inc.,
80 Business Park Drive, Armonk, New York 10504.
Library of Congress Cataloging-in-Publication Data
Markham, Jerry W.
A financial history of the United States : from Enron-era scandals to the subprime crisis (2004–
2006) : from the subprime crisis to the Great Recession (2006–2009) / Jerry W. Markham.
v. ; cm.
Includes bibliographical references and index.
Contents: Enron and its aftermath — Other Enron era scandals — Corporate governance
reforms — Securities, banking, and insurance — Commodity markets — The rise of the hedge
funds and private equity — The mortgage market — A critical look at the reformers.
ISBN 978-0-7656-2431-4 (cloth : alk. paper)
1. Financial crises—United States—History—21st century. 2. Corporations—Corrupt
practices—United States—History—21st century. 3. Enron Corp—Corrupt practices—History.
4. Investment banking—United States—21st century. 5. United States—Economic policy—21st
century. I. Title.
HB3722.M375 2010
332.0973’090511—dc22 2010007754
Printed in the United States of America
The paper used in this publication meets the minimum requirements of
American National Standard for Information Sciences
Permanence of Paper for Printed Library Materials,
ANSI Z 39.48-1984.
~
EB (c) 10 9 8 7 6 5 4 3 2 1

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
For the Markhams

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
I am opposed to millionaires,
but it would be dangerous to offer me the position.
—Mark Twain

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
Contents
From Enron-Era ScandalS
to thE SubprimE criSiS (2004–2006)
List of Abbreviations ...................................................................................xix
Preface .....................................................................................................xxiii
Acknowledgments ......................................................................................xxv
Introduction .............................................................................................xxvii
Photographs follow page 188.
Part I. Enron and Corporate Reforms .......................................................1
1. Enron and Its Aftermath ......................................................................3
The Enron Scandal ..................................................................................3
Background........................................................................................3
Government Response .......................................................................4
The Trials ................................................................................................7
The Arthur Andersen Fiasco..............................................................7
The Nigerian Barge Fiasco .............................................................10
Broadband Services Prosecutions ...................................................13
The NatWest Three...........................................................................15
The Lay and Skilling Criminal Trial ...............................................18
Lou Pai ............................................................................................32
Summing Up the Enron Litigation .......................................................33
The Prosecution’s Scorecard ...........................................................33
Enron Bankruptcy Proceedings .......................................................34
Class-Action Suits ...........................................................................35
Dynegy .............................................................................................36
2. Other Enron-Era Scandals ................................................................37
The Telecom Scandals—The Aftermath ...............................................37
Background......................................................................................37
Nortel ...............................................................................................41
Adelphia ..........................................................................................42
vii

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
viii Contents
Other Telecom Firms .......................................................................43
WorldCom ........................................................................................43
Other Scandals ......................................................................................47
HealthSouth .....................................................................................47
Tyco .................................................................................................51
Cendant and AOL ............................................................................53
Computer Associates .......................................................................55
Grocery Store Accounting ...............................................................56
Pharmaceutical Companies ............................................................57
Conrad Black ...................................................................................57
Kmart ...............................................................................................59
Tax Shelters: Another Enron-Era Scandal ......................................59
Other Accounting Scandals .............................................................65
The Wall Street Scandals ......................................................................66
The Financial Analyst Scandals ......................................................66
Other Financial Analyst Issues .......................................................68
Frank Quattrone ..............................................................................69
Spitzer’s Downfall ...........................................................................71
3. Corporate Governance Reforms .......................................................76
Sarbanes-Oxley .....................................................................................76
The Enron Reforms ..........................................................................76
Other Sarbanes-Oxley Reforms .......................................................78
Small Companies .............................................................................79
Loss of Competitive Advantage ...........................................................80
Competition from Abroad ................................................................80
Blue Ribbon Reviews .......................................................................80
Government Concerns .....................................................................83
The Executive Compensation Controversy ..........................................84
Background......................................................................................84
Fiduciary Duties ..............................................................................86
Ovitz’s Compensation......................................................................88
Confiscation Through Taxes ............................................................89
The Reagan and Bush Tax Cuts .......................................................91
Compensation Arrangements ................................................................93
Golden Parachutes ..........................................................................93
Class Warfare and the Criminalization of Executive Pay ...............95
Richard Grasso’s Retirement Package ............................................97
SEC Full Disclosure ...........................................................................100
Background....................................................................................100
Disclosure Fails .............................................................................101
The SEC Tries Again .....................................................................102
Compensation Concerns Grow ...........................................................103
Compensation as Politics ..............................................................103

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.
Contents ix
Incentive Compensation .....................................................................104
Options ..........................................................................................104
Option Effects ................................................................................106
More Scandals ....................................................................................107
Option Backdating .........................................................................107
Prosecutions ..................................................................................109
Other Abuses .................................................................................111
The War on Perks ...........................................................................112
Corporate Reforms—Shareholder Voting ...........................................117
Proxy Votes ....................................................................................117
Election Proposals ........................................................................120
Majority Votes................................................................................122
Staggered Boards ..........................................................................123
Political Correctness .....................................................................123
Broker Votes ...................................................................................124
Separation of Chairman and CEO ................................................124
Shareholder Bill of Rights .............................................................125
Other Reforms ....................................................................................126
Class-Action Lawsuits ...................................................................126
Some Corporate Pushback ............................................................130
Class-Action Lawyer Scandals ......................................................131
Part II. Financial Market Developments ...............................................137
4. Securities, Banking, and Insurance .................................................139
Securities Market Developments ........................................................139
Some History .................................................................................139
Regulation .....................................................................................141
National Market System ................................................................142
Specialists’ Problems .....................................................................143
Information Technology .................................................................144
More Automation ...........................................................................145
The ECNs Compete .......................................................................146
NASDAQ ........................................................................................149
Transformation of NYSE ...............................................................150
Broadening Markets ......................................................................154
Overlapping Regulation ................................................................155
The Options Exchanges ......................................................................156
Some History .................................................................................156
Competition ...................................................................................157
Subprime Crisis .............................................................................159
Clearing and Settlement ......................................................................159
Securities Industry .........................................................................159
Additional Developments ..............................................................162

(c) 2011 M.E. Sharpe, Inc. All Rights Reserved.