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Apparently, the two biggest bankruptcies in American history weren’t a sign of systemic rot but proof that the system worked. And while it is true that a shift in the business cycle was partially responsible for outing some of the more spectacular instances of corporate fraud, the greater share of the credit and blame belong to whistleblowers and sheer hubris on the part of the perpetrators. The market let all that shit happen for a long damn time before the genius of capitalism kicked in.

The suits also attempted to minimize the radius of corruption. The “one bad apple don’t spoil the whole bunch” cliché got a lot of play, as politicians, analysts, and commentators tried to ward off the creeping Enronitis. Most companies, we were told, were as honest and true as the family pooch. We needn’t get all worked up into a regulatory lather over the few bad apples. And please, pretty please, Mr. and Mrs. John Q. Public, keep those investment dollars flowing. No investor confidence crisis here, folks.

The bad apple cliché is off on a couple of counts. When we are talking about corporate scandals, we aren’t talking about a few piddly little Granny Smiths. Companies like WorldCom and Enron were among the planet’s hugest, most high-profile concerns, in big-deal fields like telecommunications and energy. The taint of scandal isn’t confined to a couple of excessively effusive companies, either. Executives at Tyco, Waste Management, Qwest Communications, Global Crossing, ImClone, Tenet Health, HealthSouth, and Vivendi have also been accused of various forms of malfeasance. Accounting firms such as Arthur Andersen were implicated in the divers scandals, as were major investment banks, such as Citigroup and Merrill Lynch. Major players in mutual fund and insurance industries are also under current investigation by the SEC and New York Attorney General Eliot Spitzer.

These corporate scandals are hardly proof that the system works. Rather, the failure of so many so-called checks and balances tells us that we have serious corporate governance issues. Corporations have long insisted that they be allowed to govern themselves as they see fit, and have been bridling under the yoke of government regulation. They are still perfectly happy to cash government checks, and hand bales of dough to politicians willing to push the deregulation agenda, but they don’t like it when the government gets bossy or nosy. The business community argues that they have their own self-regulating mechanisms, like auditors, accountants, analysts, credit bureaus, corporate boards, and the sainted market itself, à la the raptures of O’Neill. All of these self-regulating mechanisms failed in the case of the corporate crime wave.

The watchdogs were far too busy chewing on juicy steaks to bark. Auditors who were supposed to scrutinize the numbers were also busy consulting, which is to say, cooking up creative numbers and creating artful dodges for their clients. According to the Securities Exchange Commission, half of the accounting firms’ revenue in 2000 came from consulting, as opposed to a piffling 13 percent in 1981. At the banks, analysts who were supposed to recommend prudent buys instead recommended just about everything to a stock-crazed populace. The corporate board members, supposedly there to protect the interests of the shareholders, aided and abetted the fictions of the CEOs who, more likely than not, selected them to sit on the boards in the first place.

There is a delightful term for the latter phenomenon—incestuous affirmation. Incestuous affirmation sets in when one grows so powerful and wealthy that one is utterly isolated from anyone but the like-minded or toadying. Examples of the deleterious effects of incestuous affirmation include Donald Trump’s hair, Michael Jackson’s face, and the Bush war cabinet. Another prime example of this phenomenon is Conrad Black, who used his company, Hollinger International, as a personal piggy bank for years thanks to a board disinclined to notice, let alone censure him for it. The board finally snapped to and gave Black the boot in November 2003, and the SEC charged Black, his COO, and Hollinger with fraud in November of 2004.

Everyone knows that corporate crime is nice work if you can get it, much more lucrative and low-risk than other, more vulgar, forms of law-breaking. Forget all those right-wrong questions and do the cost-benefit analysis. Corporate crime pays. But those purloined millions didn’t come from some fantastic infinite market force. Corporate criminals made their millions the old-fashioned way: They stole them. They elided the public purse. Nothing washes down a little off-book profiteering like setting up dozens of offshore tax shelters. They milked and bilked the public purse, too, benefiting from sweetheart deals and custom-made legislation. They borrowed themselves blind, and then recorded the loans as though they were profits. They shafted millions of customers, as evidenced by California’s rolling blackouts, to name but one example of price-gouging and crappy service. The employees of corrupt concerns also got royally screwed. They weren’t just out of jobs when the company crashed and burned. Many also lost the savings they had invested.

Employees, pension fund administrators, institutional investors, and shareholders freaked out with each new crest in the corporate crime wave, and rightly so. Why, it got so bad that Bush had to stage a crackdown on this sort of thing, particularly with the press speculating about the admin’s very cozy relationship with persons of interest such as Ken “Kenny-Boy” Lay. In July of 2002, shortly after WorldCom began to implode, Bush announced the creation of the Corporate Responsibility Task Force, a “financial-crime SWAT team,” wholly and solely devoted to the pursuit of white-collar evildoers. He furrowed his brow, chastised the chiselers and book-cookers, blustered about trust and transparency, and swore he would bring the crooked businesspeople to justice.

Larry Thompson, a Department of Justice official, headed up the task force. Before Thompson joined the Department of Justice in 2001, he spent a few years on the board at Providian, a credit card company that paid hundreds of millions of dollars to settle suits for allegations of securities and consumer fraud, while, of course, denying all wrongdoing. They paid up, but would not confirm or deny the allegations. Thompson supporters insisted that he had been a force for rectitude when dealing with the fraud fallout at Providian, but it became a moot point, anyway, since Larry didn’t last that long. The most recent update of the Corporate Responsibility Web page on the White House site is a one-year anniversary press release, from July of 2003, boasting of a couple of hundred charges filed. Larry decamped in August of 2003, and I haven’t heard or read thing one about his replacement in the mainstream press.

The task force did issue one other press release, celebrating their second anniversary in 2004, but I had to go to LexisNexis to dig it up. This press release claims the SWAT team was responsible for more than five hundred convictions or guilty pleas, including thirty-one charges for those involved in the Enron scandal. The task force is also proud of the part it played in the corporate cases that have come to trial thus far, like the Adelphia, Martha Stewart, and Frank Quattrone trials. Of course, in the case of both Martha Stewart, the SEC’s conveniently famous scapegoat, and venture capitalist Quattrone, the charges were actually obstruction of justice charges. And even though it is easier to prosecute a cover-up than a complex fraud scheme, which is precisely why they were charged with obstruction instead of insider trading or fraud, Martha got a piffling five months in the hoosegow and Quattrone’s first trial ended in a hung jury. The Adelphia case was also declared a mistrial.

It should also be noted that the tasking of the force did not involve much in the way of new funds, or new personnel, and was instead a coordination of existing resources in the FBI, SEC, IRS, and DOJ. Some involved in the corporate crime investigations have complained that the demands of the War on Terror have siphoned away resources and experienced agents. The most vigorous pursuer of corporate criminals, in terms of high-profile settlements and suits, is not the Corporate Responsibility Task Force, but New York State Attorney General Eliot Spitzer, who has successfully taken on megabanks, mutual funds, and insurers. I am quite sure you have heard of the tenacious Mr. Spitzer. I am equally sure you have not heard of James B. Comey, the head of the Corporate Responsibility Task Force as of that 2004 press release.

Even though there are some corporate crooks who have already been sentenced, like Enron’s Andrew Fastow, the really huge trials, the Ken Lay trial, and the HealthSouth trial, wait in the wings, and will take place over the course of 2005. Bernie Ebbers of WorldCom was convicted in March 2005. His “aw-shucks” defense didn’t work. The Tyco and Adelphia retrials are in the pipe, too, following a go-round of mistrials. It seems that juries do not particularly enjoy parsing sophisticated accounting schemes, and they are not especially adept in the arcane fiscal arts. It remains to be seen how severely the justice system will punish these alleged malefactors of great wealth, but most of them are marching into court under the banner of Not Guilty.

On the legislative side, the Sarbanes-Oxley Act became law shortly after Bush announced his corporate crime crackdown. Democratic senator Paul Sarbanes initially floated the bill, to furious objections from Republicans. Republican senator Michael Oxley, a beneficiary of donations from the investment community, was against the bill before he co-sponsored it. Both sides haggled their way to a compromise when they saw something needed to be done, or—to be perfectly cynical—when they realized they could get more political capital from a crackdown than from the appearance of condoning these shenanigans to the point of complicity. A defanged version of the original bill eventually passed the House and the Senate by resounding majorities. Provisions of the bipartisan bill include the creation of an accounting oversight board, the requirement that top company officers sign off on all financial statements, and stricter penalties and longer sentences for white-collar crimes.

These measures are steps in the right direction, but I have to admit the signing rules come as something of a surprise. I have to sign the back of a $40 Christmas check from my grandma, but the head of an enormous multimillion-dollar concern
doesn’t
need to sign off on company financial statements? Suffice it to say that I’m glad they got around to fixing that. However, the legislation does have a few notable omissions. There is nothing in the legislation about off-book bonus expensing, for example, which was one of the problems common to most corporate scandals. Republican Phil Gramm even went so far as to say that government messing with this kind of accounting would be “very dangerous and very counterproductive.” It may come as no surprise that Gramm and his wife have been members of a number of corporate boards, including Enron’s. Furthermore, the first choice to lead the oversight board, pension administrator John H. Biggs, was scuttled by the Republicans, and Harvey Pitt at the SEC, because they thought he was too tough on business. The corporate community is none too pleased about the costs and paperwork involved with Sarbanes-Oxley compliance, which has become a multimillion-dollar growth industry in itself. The Web teems with Sarbanes-Oxley software and consultation services. It has been a super-sweet couple of years for accounting firms, particularly the big ones, which is pretty funny when you consider their culpability in creating the problem in the first place. It’s the genius of capitalism!

Measures like longer jail terms for corporate crime, or securing executive autographs, salutary though they may be, are like Band-Aids on cancer. They fail to address the more fundamental problems with crony capitalism, and its major institution, the corporation.

Let us start with the fallacy that serves as the foundation for over a century of corporate law. In the eyes of the law, corporations are people, legally no different from you or your grandma. You can’t kick or kiss or kill one of these artificial people, but they nevertheless enjoy people-style blandishments, like free speech rights, property rights, protection from search and seizure, and access to credit, with few of the attendant hassles of being human, like disease and hunger. You see, corporations are magical, mystical things, people and not-people, deathless and everywhere. It’s enough to make a gal burst into Seussian song! Oh, the things you could do, if you were a corporation! The places you’d go! The money you’d make! Being horribly real and terribly fake!

Corporations sprung up in Europe in the fifteenth century as a way of gathering funds for colonial forays to the New Worlds. The first companies—like the British and Dutch East India Companies and the still-going Hudson’s Bay Company—were formed in the 1600s and 1700s to raise enough capital to found colonies and expand international trade. Chartered by monarchs, they were the precursors to today’s multinationals. Some of the American colonies themselves, like the settlements in Virginia and New England, started as just this kind of corporate endeavor. The Boston Tea Party, one of the great set pieces of America’s fight for independence, was as much a cri de coeur against corporate as colonial rule. The rebels didn’t like the king and his stinking taxes, but they had no kind words for the unfair market practices of the East India Company, either. The caffeinated beverages hurled, the rebellion against the Man—it was like the battle in Seattle before there, like, was a Seattle, man.

There were no provisions in the founding American documents about granting charters to corporations. Thomas Jefferson feared that national chartering would encourage the growth of monopolies, which he saw as one of the great threats to human liberty. Consequently, only one federal charter was granted, to the Bank of North America, in 1781. This charter was revoked in the 1800s, due to charges of corruption, and a Second Bank formed. This bank and its sequel were the exception to the rule. The vast majority of corporations were chartered by individual states, which pursued this task with varying zeal. Some states put it to a vote in their legislatures, and others, particularly if the organization in question was a bank, put it to their voters.