Personal Finance > Investing

The blame game
The economy is looking sketchier and the market is still sliding. Who's most at fault?
September 13, 2002: 1:26 PM EDT
By Peter Carbonara and Jon Gertner, MONEY Magazine

NEW YORK (MONEY Magazine) - If you're like us, the only thing you want more than your money back right now is a chance to see the people responsible for losing (or stealing) it tarred and feathered. The main thing is: Whose fault is it? Somebody's got to pay for the market's swoon -- but who?

Herewith a highly opinionated guide to the leading suspects and a summary of the cases against them. You may quibble with the way we've apportioned the blame, and can use our tool to decide for yourself who's responsible.. But this much is irrefutable: There are no innocent bystanders here. See you at the hangings.

Corporate executives

We've seen a few executives led off in handcuffs lately -- ImClone's Sam Waksal, the Rigas boys, WorldCom's ex-CFO Scott Sullivan -- and we're not saying it hasn't been fun.

Who's to blame?
Here's how the editors of MONEY Magazine assign fault. Click on any "culprit" to go straight to a discussion.
The culpritsShare of blame
Corporate Executives17%
Wall Street14%
Individual Investors14%
Mutual Fund Industry8%
The media7%
Osama bin Laden2%
Source: MONEY Magazine

With luck and good lawyering (and with proof, of course), corporate performance artists like Enron's Ken Lay and Jeff Skilling, Tyco's Dennis Kozlowski and Sullivan's old boss, Bernie Ebbers, will also get carted off to the big house. But these bad boys are merely the worst-behaved members of a corporate class whose arrogance and greed destroyed the value of countless companies and portfolios.

What about those baby-faced M.B.A.s who insisted that their profitless dot.coms required different valuation measures? What about the media industry titans who declared that their megamergers would usher in the age of synergy and convergence? And what about the superhero CEOs who took (and in some cases still take) outlandish compensation packages? You can respect Jack Welch and still wonder what he could possibly have done to deserve $144 million in 2000 and $16 million in 2001. If you're a GE shareholder, that's your money -- plus you've guaranteed him a $10 million annual pension for the rest of his life. -- back to top

Stock options

Huge options grants by supine boards of directors to overpaid captains of industry like Bernie Ebbers and Ken Lay epitomize the "take the money and run" hubris of the past few years. Options were supposed to make executives act like owners; instead they became speculators, fixated on quarterly numbers and the short-term stock price.

Global Crossing's Gary Winnick made $735 million on options. His company is now in Chapter 11 and shareholders are out $47 billion. Wasn't the idea to reward people for success? Champions of options argue that they motivate employees.

OK, but according to compensation consultants, some 75 percent of options go to senior management; that leaves 25 percent to motivate you, me and the guys on the loading dock. Proponents also claim that big options packages are necessary as a lure for high-priced executive talent -- like the geniuses at Enron, Tyco and WorldCom -- and fuel for technological innovation.

Just imagine some latter-day Edison shelving a billion-dollar idea because he doesn't have stock options. Can't see it? Neither can we. Reforms miss the point by focusing on expensing options. It's true that most companies tell shareholders as little as possible about options. (Public companies do estimate their effect on earnings in 10-K filings, but the figures are buried in the footnotes.) But the real problem is not the accounting; it's that boards treated CEOs as demigods entitled to as much of the shareholders' money as they could cart off. -- back to top

Wall Street

Of course, the Street's optimism about "strong buys" like should have been taken with a big rock of salt. Wall Street is supposed to be optimistic; Wall Street is supposed to sell.

Above all, Wall Street has its own greedy interests -- not yours -- at heart. If you were convinced that 10,000 shares of WorldCom were going to fund your retirement at Rancho Mirage, well then, heck, former Salomon Smith Barney analyst Jack Grubman wasn't going to tell you otherwise.

And yet, the stench coming from lower Manhattan is unmistakable. Investment banks took useless companies public to collect big fees and loads of stock to flip after a big debut; some, like J.P. Morgan Chase, made deals to help companies like Enron cloak all kinds of accounting shenanigans.

On one side of Wall Street, legions of fast-talking brokers were pushing dreck on eager investors. On the other the oracular analysts were falling over themselves to praise the latest paradigm-shifting business models. Did they really believe it?

Consider the case of former Merrill Lynch analyst Henry Blodget. Publicly, he touted a like Lifeminders as "attractive." But those incriminating e-mails tell us what he knew it really was: "sh*t." -- back to top

Individual investors

Look in the mirror. You bought stocks you didn't understand, kidded yourself that you could outsmart the market and got reckless with allocations. (Putting all the college money for your teenagers into biotechnology stocks! What were you thinking?) You ignored all that good advice about staying diversified and keeping some money in bonds. Some of the desperately foolish among you actually day-traded.

We'd chastise you, but you've probably called yourself a lot of bad names already. And for those who haven't, it's worth noting that the level of responsibility out there in investor land is not encouraging.

A recent study of individual investors by Insight Express, an online polling outfit, showed that less than half of those surveyed got any professional investment advice before buying or selling stock, only 25 percent bothered to read the annual reports of companies they invested in and just 16 percent analyzed financial statements.

Somehow, though, nearly three-quarters of the respondents blamed CEOs, accountants and boards of directors for the mess; only one in six were willing to accept any responsibility themselves. How can you be guilty when you were exploited by striving politicians, rapacious CEOs, compromised analysts, shady accountants, murderous terrorists and deluded journalists? You can try that line out on your spouse, but it won't work here. Take your lumps. And take your 14 percent of the blame. -- back to top


The nation's top accounting firms violated the prime directive of their profession, namely to make sure the numbers add up and reflect financial reality. Far from their traditional role of corporate conscience, Arthur Andersen and others became short-order cooks of financial legerdemain.

Off-balance-sheet special entities? No problem, boss. Treat debts like assets? You got it. Incorporate in an offshore tax haven? Coming right up! Surreal pro forma numbers? Sure, and would you like fries with that?

Meanwhile, accountants' lobbyists worked hard to keep the party going, fending off efforts to tighten auditing oversight, limit the sale of consulting services to auditing clients, and require that options be expensed. It will be at least a generation before the profession regains the trust of the public. If it ever does.

The best you can say for the accountants is that they had only a supporting role in the ripoffs of the '90s; they were more like the guy who drove the getaway car than the guy who robbed the bank. Tell it to the judge, fellas. -- back to top

The politicians

Nobody ever seriously expected politicians, of all people, to keep businessmen honest. But as long as stock prices were going up, Congress looked the other way. Let's reminisce.

There was the chronic underfunding of the SEC. There was the Telecom Deregulation Act of 1996, which helped set the stage for the sector meltdown. Then there was the 1994 defeat of an effort to require the expensing of stock options -- Sen. Joe Lieberman (D-Conn.) gets much of the credit for that.

Off Capitol Hill, there was Alan Greenspan and the Federal Reserve, whose easy credit policies in the mid-1990s helped propel the speculative bubble on Wall Street. There's nothing to the argument, put forward by the likes of House Ways and Means Chairman Bill Thomas (R.-Calif.), that the Clinton scandals are to blame for the current financial mess.

Imagine noted family man and pornography opponent John Rigas of Adelphia waking up one morning and thinking, "Hmm, Clinton had sex with that intern and then lied about it. So it must be OK for me to steal from shareholders!" And it's equally silly to say that the present nightmare is all the fault of the current president.

One could blame the White House team for its spooky skein of connections to businesses like Enron, its initial reluctance to endorse tough corporate oversight legislation and its failure to articulate a coherent economic policy.

Yet even the most rabid Democrat has to admit it: Bush did nothing to spark $2 trillion in telecom losses. And anyway, the tech boom was a fund-raising miracle for both parties. Could there be a connection between all that money and D.C's see-no-evil mood during the '90s? Nah. What are you, a communist? -- back to top

Mutual fund industry

The vast majority of Americans who own stock do so through mutual funds, usually in the 401(k)s that replaced the last generation's savings accounts and pension plans. But those investors have been badly served by many of the managers, analysts and marketers who got rich on management fees, sales loads and 12b-1 fees.

The fund industry tempted Joe Investor into the market with short-term performance records (achieved, on occasion, by folding loser funds into others with better records) and cynical trading strategies (temporarily jazzing up their portfolios with hot stocks to make their quarterly numbers look better).

The industry also appealed to investors' worst instincts by minting hundreds of funds in momentarily "hot" sectors and bombarding the public with ads peddling the illusion that funds were the safe alternative to the tough and risky job of buying individual stocks.

The pros would take care of us. Peter Lynch, looking avuncular, could assure us of that. In fact, fund companies like Janus and Alliance Capital were among the big shareholders in Enron, WorldCom and Tyco. The pros took care of us all right. -- back to top

The media

The bubble we're paying for now was inflated by the financial press: Red Herring,, The Industry Standard and -- we admit it -- mainly sober personal-finance publications like the one you're reading now.

All through the 1990s we pumped up your envy and your greed with stories about how easy it was to get rich playing the market. Business magazines like Forbes, Fortune and BusinessWeek (not to mention Wired) created a cult of the CEO in which every little tin Stalin was hailed as "dynamic" and every tech geek waving a cocktail napkin with a business plan on it was a "visionary." And this was nothing compared with TV.

Remember CNBC's Squawk Box sets with all those computers and loud guys shouting about PEG ratios? And the ads with Stuart, the day-trading punk, and the tow-trucker with his own island? There were some sane voices in this nuthouse -- Newsweek's Allan Sloan, the New York Times' Gretchen Morgenson and MONEY's own Jason Zweig, to name a few.

But why would a nation devouring stock tips from Yahoo! chat rooms care about reality? In "The Great Crash of 1929," John Kenneth Galbraith observed that in times of financial hysteria, wealth comes to be seen as the product of genius. Our forebears in the '20s fell for it. So did many of us. -- back to top

Osama Bin Laden

Bin Laden is evil, ruthless and rich -- and he's intent on the destruction of America and the American economy. Wall Street hates uncertainty, and an army of murderous religious zealots tends to create uncertainty.

Until Bin Laden is captured or proved dead, Wall Street will continue to quake at any mention of airport security breaches or a change in Tom Ridge's emergency color code. And yet the campaign of terror unleashed by Bin Laden has inflicted only slight injury on the markets.

The swoon that resulted from Sept. 11 was over in a matter of weeks. The Nasdaq had already begun crashing; the Dow cratered much later. Moreover, while the human toll was incalculable, the financial losses were not.

The price tag for the collapse of the Twin Towers, for instance, has been estimated by New York State at $54 billion, a minor bruise to a $10 trillion economy. If Bin Laden wanted to do lasting damage, he should have trained accountants for the Big Five firms. -- back to top  Top of page

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