WASHINGTON, June 3 (UPI) -- "Greed is Good," chortled Gordon Gekko, villain/hero of Oliver Stone's 1987 morality play "Wall Street" -- and thereby defined the 1980s the "Decade of Greed." Yet on seeing the movie again, one is struck by how close Gekko's credo is to the way capitalism should work, and how far it is from the reality of the late '90s or the early '00s.
"Wall Street" is not an enjoyable movie, for lovers of the free market; with three out of its four main creators -- Michael Douglas, who plays Gekko, Martin Sheen, who plays union leader Carl Fox, and director Oliver Stone -- well-known leftists, it was never intended to be. Nevertheless, it is honest in two respects. The "hero," young stockbroker Bud Fox, is more corrupt than the "villain" Gordon Gekko -- he ends up betraying Gekko, animated by a misty-eyed sentimentality about his father's airline union that left me as a watcher entirely cold. Second, Gekko's defense of his activities, which itself was based on a famous 1985 speech by celebrated arbitrageur turned infamous insider trader Ivan Boesky, is difficult for a free market believer to refute.
Like most of the 1980s leveraged buyout artists, Gekko purchased most of his shares in the open market, driving up the share price for other holders in the process -- he did not use insider management contracts to award the shares to him for free by means of stock options. Gekko did not appear to depend significantly on funny accounting for his profits, and went for companies with hard assets that he could realize, rather than creating billions of dollars of phantom "goodwill." Gekko openly declared his intentions to other stockholders to solicit their support, rather than engaging in insider transactions with dummy companies to siphon off wealth. And he was wholly un-hypocritical about his beliefs, which were those of a capitalist and a patriot; as he said: "Greed in all its forms, greed for life, for money, for love, knowledge has marked the upward surge in mankind -- and greed, you mark my words, will not only save Teldar Paper but that other malfunctioning corporation called the USA."
Only Oliver Stone could consider this man a villain!
Greed has always been with us, of course, but one does not need to be a rabid disciple of Ayn Rand to regard it as one of the less sordid motivations for human activity. Adam Smith summed it up best, when he said: "By pursuing his own interest (a businessman) frequently promotes that of the society more effectually than when he really intends to promote it." Greed becomes malign only when it becomes dishonest. Capitalist systems with strong societal constraints, such as the 19th century City of London or J.P. Morgan's Wall Street, harness greed in a highly productive manner to the betterment of society as a whole.
It is thus, not greed itself, but greed combined with a loosening of restraints that is uniquely damaging. Here the '90s, not the '80s were the years in which things went wrong.
As in any period, the '80s had its share of crooks and scandals, but on the whole the legal system worked well to thwart abuses. The insider traders, Ivan Boesky and others, most of them tiny in scale, were rounded up by the zealous young prosecutor Rudy Giuliani. High yield "junk" bond czar Michael Milken was sentenced to ten years in jail, and his investment bank bankrupted, by fairly minor transgressions in the market he created -- yet the junk bond market is with us to this day, providing finance in immense profusion for economic restructuring and growth. The savings and loan debacle cost the U.S. taxpayer hundreds of billions of dollars -- yet the S&Ls were insolvent at the beginning of the '80s, owing to ham-fisted interest rate deregulation, and their further depredations during the decade, which were relatively modest, were greatly assisted by the 1980 enhancement of deposit insurance, not a triumph of the free market. Indeed, the year after the House Banking Committee "helped the small saver" by guaranteeing deposits up to $100,000, the free market produced the true solution to the S&L's problems, the interest rate swap, which allowed them to match short-term funding against long-term loans while hedging most of the interest rate risk inherent in that procedure. Thus the '80s were a period of vigorous capitalism, but also an astonishing period of financial creativity.
Whatever you think of President Clinton, and he had many good qualities, there can be no question that he presided over a severe relaxation of standards and safeguards in public life, in terms of personal sexual behavior, financial behavior, campaign financing, and trading political favors. Largely, no doubt, he was simply emblematic of his generation and times rather than a leader in laxity. Indeed, the absolution of Clinton from personal responsibility is made more plausible by the slippage in standards that, in retrospect, was all too apparent on Wall Street during the period.
Notoriously, the level of stock options that company management awarded to themselves rocketed upwards during the period, while business lobbied the Financial Accounting Standards Board successfully to prevent it from showing the true cost of the awards in company income statements. Gekko expected to pay for his share stakes.
In the Enron case, company officers, owners of minimal amounts of stock, siphoned assets off into "shell" companies, rewarding themselves with large fees in the process of doing so. Gekko expected to have to buy a controlling interest in a company before he could engage in this kind of activity.
Following the Netscape Initial Public Offering in 1995, the dot-coms floated on Wall Street in the late '90s announced that they were subject to a new metric; no longer did they have to make a profit, or even see any near-term likelihood of making a profit, to raise money from public share issues. Gekko didn't sell watered stock to the public, he took companies private; Teldar Paper stockholders were being asked to be greedy, take cash from Gekko, and fire a complacent management, the opposite of the '90s ethos. In Gekko's day, the Securities and Exchange Commission was expected to police securities issues and prevent him from relieving the public of its money directly.
In the case of Adelphia Communications, delisted by Nasdaq Monday, a company that at its peak had market capitalization of $15 billion turned out to have been looted by its controlling stockholders, the Rigas family, to the tune of $3.1 billion in guaranteed loans. Gekko might well have looted companies he controlled, but he would have avoided doing so to the extent that it pushed them into bankruptcy -- that would have made future deals too difficult.
Dennis Kozlowski, chairman and chief executive officer of Tyco Management, an icon of '90s growth stocks, resigned Monday as it was announced he faced a criminal investigation for tax evasion. Tyco's accounts have come under increasing scrutiny because of Kozlowski's creative accounting for the company's blizzard of acquisitions, which led him through Tyco stock price appreciation and option grants to a net worth over $1 billion at the peak. Gekko didn't create dozy, opaque conglomerates -- he broke them up.
Finally, even "Neutron Jack" Welch, CEO of General Electric from 1982-2001, changed his management style during the period. In the '80s, he acted as Gekko, firing workers and closing divisions, to create value for stockholders. In the '90s he found an easier way, indulging in creative accounting and awarding himself massive stock option grants. Stockholder value was no longer created, but stock price appreciation, NOT the same thing, still was. Finally, after his 2001 retirement, he morphed from Gekko into Bill Clinton, leaving his wife for a well-publicized liaison with a younger woman, in this case the editor of the staid Harvard Business Review who had sought to profile him.
The '90s then were the true Decade of Greed, or at least of that useless greed that impoverishes and does not enrich. But what of the '00s?
It's too early to tell, but the '00s appear likely to become the decade of government handouts accompanied by hypocrisy. The airlines seized the opportunity of the Sept. 11 tragedy to gain themselves a $15 billion handout from the taxpayer. Larry Silverstein, leaseholder of the World Trade Center, is seeking to parlay his New York court connections and emotion over the tragedy to get paid twice by his -- largely foreign -- insurers. The steel, lumber and agriculture interests have all used the recession to gain protection from foreign competition, at huge cost to both the U.S. taxpayer and the world economy. Meanwhile the Bush administration is enormously grateful to Pakistan for its help in the fight against terrorism -- but not grateful enough to lift quotas, not just tariffs, against Pakistan's textile industry, the principal export sector of that impoverished country's large population.
Of course, in 2004, with a presidential election, the trend of the '00s may change. The electorate may for example elect the rising Democratic presidential candidate John Edwards -- a trial lawyer. At that point, the principal scourge of U.S. business for the past two decades will be not merely the principal donor to one of the two main parties, it will actually be running the country. Naturally, with a trial lawyer in charge, greed for personal gain will be banished forever from the halls of U.S. business. Naturally.
The creative greed of the 1980s revitalized the U.S. economy and produced an 18-year stock market boom and unprecedented economic growth. The greed accompanied by creativity only in accounting of the 1990s produced a bubble, that has already proved hideously difficult and expensive to deflate, and will be more so. The greed accompanied by creativity in new regulations, government handouts and protectionist restrictions of the early '00s will certainly not prove economically productive, and may lead to trial lawyer hell in the late '00s.
By 2010, Gordon Gekko may be looked upon as a symbol of lost innocence.
(The Bear's Lair is a weekly column which is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the last 10 years, the proportion of "sell" recommendations put out by Wall Street houses has declined from 9 percent of all research reports to 1 percent. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)