Can America Count?
Are U.S. financial services becoming the laughing stock of the world?
July 1, 2002
American CFOs used to be quite smug. U.S. accounting standards were above reproach. Disclosure requirements mandated by the Securities and Exchange Commissions were the standard for the rest of the world to emulate.
SEC enforcement was regarded as inexorable and timely. On top of all that transparency, there were independent auditors and credit rating agencies on the lookout for mistakes and irregularities.
Not surprisingly, U.S. business regarded the rest of the world with much contempt. When the Asian crisis struck in 1997, financial irregularities started to be uncovered at many Asian Tigers.
U.S. accountants were feeling understandably superior to their colleagues at Korea's chaebols, or family-owned conglomerates, as billion-dollar holes were uncovered on their balance sheets.
Of course, everybody knew the Koreans couldn't count. After all, they didn't go to fancy U.S. business schools. There, they would have been taught rigorous financial analysis — rather than the murky art of financial obfuscation.
But as more and more financial shenanigans are uncovered in their own backyard, U.S. finance professionals can no longer feel so smug. It appears that cheating and misrepresentation has been widespread in the United States — at least as much as in some emerging-market countries in the bad old days of the mid-1990s.
And the widely touted system of independent auditors has done nothing to identify errors — or to blow the whistle on wrongdoers. It is now the rest of the world that is laughing at U.S. incompetence.
Just how badly has the image of U.S. economic practices deteriorated in recent months? It has gotten to the point where Russian President Vladimir Putin is praising President Bush for his efforts to shore up investor confidence in U.S. corporate governance.
It is a stunning role reversal indeed for a world accustomed to U.S. officials encouraging Russia and other emerging countries in their efforts toward improving economic transparency.
However, there are alarming signs that the problem is not limited to the balance sheets of U.S. corporations. It seems that over the past couple of years, Americans on the whole have been infested by this inability to count.
Along with accounting scandals at U.S. corporations and auditors, there is an equally embarrassing debacle at the country's leading investment banks and stockbrokers, such as Merrill Lynch and Goldman Sachs.
Their star equity analysts, it turns out, were either unable — or unwilling — to warn investors about the dodgy quality of dot-com start-ups during the stock market bubble of the late 1990s.
Some analysts were bad apples, to be sure, writing dismissive emails in private while touting the same companies in public. But others were fools — merely repeating wildly unrealistic earnings projections supplied to them by the start-ups themselves. It seems they just played their pre-assigned role in order to keep all these lucrative M& A deals coming.
Rating agencies have also dropped the ball. Many financial disasters in the United States and abroad are now routinely followed by the spectacle of Moody's and Standard & Poor's hastily downgrading investment-grade ratings of failed bond issuers.
And so on. The Bush Administration and Congress were projecting enormous budget surpluses only a year ago, around the time the government gave U.S. taxpayers a massive tax cut. But already this year the budget deficit may reach $160 billion—and the misguided tax cuts contributed greatly to the flow of red ink.
It is an indication of where things stand that Mr. Bush had to appeal to the "patriotism" of Members of Congress when he asked to raise the federal debt ceiling of $5.95 trillion in late June 2002. That stands in sharp contrast to his Administration's insistance a year earlier that the ceiling could remain unchanged until 2008.
Poor arithmetic also plagues U.S. consumers, who have been unable to live within their means. The U.S. saving rate remains around 1%, one of the lowest in the world.
Statistics also show that U.S. households carry credit card balances averaging $8,562. Since those balances are charged interest rates of 15% and higher, the average household pays $1,000 in interest per year. What is it if not poor counting skills?
But if the world loses confidence in America's ability to count, the consequences may be disastrous. The United States is a linchpin of the global financial system — and its dollar is the world reserve currency.
As financial scandals rocked U.S. businesses, foreign investors started to withdraw their funds from the United States. Wall Street tumbled — and the mighty greenback lost over 10% of its value in a few short weeks. Americans had better go back to school to brush up on the basics — especially in math.