The Earth Times | Posted February 22, 2002

The U.S. has come a long way since the time when the only source of capital for budding entrepreneurs was a handful of rich capitalists. In the U.S. today more people own stocks in one way or another than don't. Ordinary Americans entrust their retirement funds, their kids' college money, their nest eggs to the stock market. In general they feel good about owning a piece, however small, of American industry. The society generates vast amounts of equity capital.

And that is one of the unique strengths of the American system: The breadth and depth of its capital markets. It is advantage we have even over most other developed societies.

It was not always so and that's why the Enron case is so important. When I first entered business journalism in the mid-1950's most Americans wouldn't touch common stocks. Millions of middle class families had lost their savings and sometimes their homes and businesses in the stock market debacle of 1929 1933.There followed nasty revelations about what went on during the boom: manipulation of stock prices, insider trading, selfdealing.

A popular jingle in the 1930's was Ogden Nash's "Song of the Love Children." The refrain went like this:

I invested, I deposited,
I voted every fall
And if I ever saved a cent,
The bastards took it all.

Of course, many of the "bastard's" got wiped out, too. But that was scant comfort. From 1930 on, Americans who had spare money put it into fixed income savings accounts. Little of that money was available for investing in industry.

It took nearly 35 years before ordinary Americans began to tiptoe back into the equity market. Pension funds, which were growing rapidly, slowly switched from bonds to quality common stocks. Mutual funds made investing easier for the average person. Brokerages like Merrill Lynch applied modern marketing and advertising techniques to selling securities. The Securities & Exchange Commission was started and at least gave people the comforting feeling that the Federal government was on the case of swindlers and cheaters.

Slowly confidence returned and Americans again became investors. In the 1990's they became extremely enthusiastic investors, the stock market vying for sports in media attention. Only people of my age remembered that rhyme, Song of the Love Children, and the sour, cynical attitude it represented. But the world turns. Bastards are what their bosses must seem to the tens of thousands who lost their jobs and life savings in the Enron bankruptcy. Worse, the increasingly shocking revelations about Enron are spreading disillusion beyond the ranks of those directly burned.

This worries me. It should worry every business person in the world. For so far as business is concerned, social responsibility starts at home. Companies that abuse the confidence of investors and employees are failing in their responsibility to society. They pollute the equity markets upon which growth and prosperity depend.

American investors are reasonably sophisticated. They know stocks fluctuate. They know one can lose money in equities. But they have come to expect a fairly level playing field. They have come to expect honest information from managements and genuine monitoring by corporate boards, by analysts, and, yes, by the media.

They got none of these in Enron.

The good news is that even as many stocks and many companies are collapsing and the media is filled with discouraging financial news, the system is starting to heal itself. Standards are being raised. Enron's board of directors was either asleep or culpable. I am certain that the knowledge of that board's disgrace will shake many other boards from their lethargy. Security analysts who trade favorable recommendations for underwriting fees are being exposed and embarrassed.

Across the corporate landscape I see companies trying to de-lever their balance sheets and improve their liquidity. A few years back, liquidity was out of fashion and high debt ratios were thought a sign of entrepreneurial boldness.

Here's a straw in the wind: in a recent much talked-about magazine article, Warren Buffett twitted his fellow capitalists. He showed how they were padding their reported numbers with unrealistic pension assumptions He named some of the most prominent and esteemed corporations. When the highly respected Buffett speaks, people listen. I will be very surprised if these assumptions don't get closer scrutiny from here on.

Then, there is the media: For some reason reporters forgot their normal skepticism as Enron seemingly soared to the heavens. They forgot to ask hard questions. Yes, Enron was reporting great numbers. But what was the reality behind those numbers? Apparently no one thought to ask. But now the media is doing a splendid job of deciphering the Enron mess and I miss my guess if iconoclasm doesn't return to favor among business journalists.

No, Enron won't bring the system down. The net reaction is healthy and we will come out of this recession with better corporate reporting and better corporate governance. In the end, the whole mess offers a valuable lesson for societies who want to create vibrant capital markets. The lesson can be summed up in three words: Transparency, transparency, transparency.