Gretchen Morgenson tells us this week that the Enron verdicts "were, at best, the end of the beginning of this dispiriting corporate crime wave. . . .Last week, for example, investors learned that a throng of former executives at Fannie Mae, the mortgage-financing giant, had cooked the company's books to generate munificent bonuses for themselves. And while this was going on, Fannie's board was AWOL."
And so this week's story begins with a kernel of truth. Unfortunately, it doesn't end there.
We’ll pass the fact that no crimes have been charged, as Morgenson later acknowledges. Clearly there were serious, perhaps criminal, problems at FM, as I wrote earlier in the week. But FM was no Enron, because as a WSJ editorial has pointed out:
The larger story here is that Fannie Mae is less a corporate outrage than a political one. It is the tale of a company that has grown rich off an implicit taxpayer subsidy and then plowed those profits back into buying political protection in Congress and feckless regulation from the executive.
Consider that FM’s board included Jamie Gorelick of the Clinton Justice Department, Kenneth Duberstein, Reagan White House chief of staff and Anne McLaughlin Korologos, Labor Secretary under Reagan. James Johnson, former FM CEO was an adviser to Walter Mondale and John Kerry.
This political part of the story is inconvenient for Morgenson, because it makes you wonder about what the alternative is to letting firms govern themselves – an option Morgenson seems to abhor.
But there’s worse coming in the story. The real lesson, according to Morgenson, is this:
Shareholders . . . should demand that executives forfeit compensation generated by fraudulent practices. And they must hold their mutual fund managers responsible for proxy voting practices that encourage excessive pay and cozy, somnambulant boards. If these managers don't vote against directors who hand out oversized pay for undersized performance, they are part of the problem and should be fired. As the Enron jury eloquently told us last week, silence in the face of these offenses gives consent.
In other words, better governance is the solution to the “corporate crime wave”? If the shareholders actually know what’s going on, then where’s the crime? And if they find out later, presumably the government will hold the executives accountable if there really are “crimes.”
Or perhaps Morgenson is suggesting that corporations, through better governance, really can work all this out, which sounds like my solution – don’t criminalize agency costs. But since Morgenson has already called these crimes, I don’t think she’s saying that. So what is she saying?
The whole thing is explicable only in the context of Morgenson’s prior work, as I’ve described in past weeks (see my Gretchen Morgenson archive). She’s got a fable about how corporate problems can be solved by turning them over to good-governance experts. These experts would give the shareholders/labor activists more power. Then they would tell the shareholders how to use this vote: obsess over executive pay. All the shareholders have to do is follow her and her experts’ instructions.
The problem is that there may be a few readers out there who don’t wake up screaming every night because the ceo’s of the corporations in their mutual funds’ portfolios make a few extra bucks. How to reach these misguided souls? Tell them about fraud! At Fannie Mae! And hope they don’t stop to ask exactly how this ties to her story.
In the business world this would be called cooking the books – inflating the numbers so they tell a good story whether or not it relates to business fundamentals. Morgenson illustrates how the same happens some precincts of business journalism: It’s all about telling a good story whatever it takes. It's not about the more complex work of actually making good corporate policy. That would involve showing appropriate distinctions between events like Enron, Fannie Mae and a run of the mill corporate board meeting.
As I've said before, this is fine for undemanding readers who are only looking for something to spill their Sunday brunch on. But caveat emptor if you have more weighty uses for this stuff.
I know somethings about Fannie Mae that are not public record. This is a Clinton Administration scandal.
Posted by: Robert Schwartz | May 28, 2006 at 10:06 PM