Socialist Worker

Down to earth with a bump

by NEIL HODGE and CHRIS HARMAN
Issue No. 1804

WHILE THE British media was obsessed with the jubilee and the World Cup, global stockmarkets started sliding again last week. They did so after two major companies suddenly ran into trouble. The treasurer of El Paso, an American gas firm, recently committed suicide. The circumstances were remarkably similar to those of the suicide of the finance director of Enron last year.

And then the chief executive of the Bermuda-based multinational Tyco was arrested for tax evasion in New York. Such scandals suddenly dented the confidence in big business circles about the American economy. At the end of March a headline in the Financial Times said the US recession might have ended before it began. Now they are not so sure.

These scandals are at the tip of a huge iceberg of dubious practices involving virtually every major capitalist firm on both sides of the Atlantic over a four or five year period. Merrill Lynch, one of the world's largest stockbrokers, was involved in a court case last month.

It gives a glimpse into the grubby reality of the trading in shares which we are told forms the heart of the market economy. The 'theory' put forward by defenders of capitalism is that 'investors' buy and sell shares in the market on the basis of true information about the companies they are putting money into. This, we are told, guarantees that investment flows away from inefficient, unprofitable firms, and into efficient, more profitable firms.

This guarantees economic growth, the argument runs. Only it doesn't quite work like that.

Merrill Lynch came a cropper after its analysts were caught persuading customers to invest in stocks which they knew were 'crap' to bolster the firm's revenues and analysts' own commissions.

The case brought to light e-mails by Merrill analysts which privately disparaged stocks they publicly recommended to investors. One e-mail written by star internet analyst Henry Blodget-whose recommendations were often aired on US TV channels-described 24/7 Media as 'a piece of shit'. But the bank's public recommendation was for customers to 'accumulate' shares in that firm.

On 21 May Merrill Lynch agreed to pay $100 million. The fine imposed is unlikely to damage the firm for long, though. In the first quarter of this year Merrill's net revenues totalled $5 billion. After its share price lost more than one fifth of its value last month, Merrill apologised for 'failing to live up to the high standards that are our tradition'.

But this is not the only spot of bother the firm has been linked to. The firm's fund management arm-Merrill Lynch Investment Managers (MLIM)-has also recently admitted that its UK institutional business has seen a net loss of £3 billion since the start of the year. MLIM is one of the world's largest fund managers, with more than £500 billion of assets.

Defenders of the system would no doubt trot out their usual 'one bad apple' theory to explain all this away. Unfortunately for them the whole barrel is rotten. Merrill is far from being the only Wall Street firm hit by the probe. The investigation has included the vast majority of the biggest investment firms. There are subpoenas against Credit Suisse First Boston, Salomon Smith Barney, Goldmann Sachs, Morgan Stanley, Bear Stearns, UBS Warburg, Lehman Brothers and JP Morgan.

The grubby goings-on at Merrill Lynch are much closer to the reality of how capitalism works, or rather doesn't, than the theories put forward by its supporters.

Such episodes led big business's own weekly magazine, the Economist, to headline last week's issue 'The Wickedness Of Wall Street', and to speak of 'the ills of personal greed, lousy accounts and inadequate surveillance'. Beneath such talk there is an underlying fear. A breakdown of US national statistics has revealed that companies fiddled their figures to exaggerate their profits by up to 50 percent higher in the late 1990s. Now reality is bringing them down to earth with a bump.

The Economist said last month, 'The dot.com bubble was one thing, the realisation that apparently profitable companies are not making any money quite another.

'After Enron, investors are now questioning the accounts of many American firms, including such admired stalwarts as General Electric and American International. The consequences could be dire.' Machinations by governments and bankers may stop the slide in share values over the next couple of weeks.

But they are not going to stop some defenders of big business wondering whether they can get their system out of the mess it has got into.


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News
Sat 15 Jun 2002, 00:00 BST
Issue No. 1804
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