After the Bust, It’s Time for Payback

Once an economic and stock market boom goes bust, the search for the guilty begins.

In the U.S., that search has been underway in earnest for more than a year. It is now in the retribution phase: Those held responsible for the boom/bust cycle--or those viewed as having profited unfairly from it--are getting the bill for the financial and psychological pain they are accused of visiting on the population at large.

Retribution was the order du jour in a broad cross-section of venues last week:

* At Bank of America Corp.’s annual meeting, shareholders surprised management by approving a measure to seek limits on severance-pay packages for top executives.

The resolution requests that the company’s board allow a shareholder vote on any severance agreement worth more than twice an executive’s annual salary and bonus. The proposal, put up for a vote at BofA’s annual meeting by union pension funds, stemmed from the $30-million severance package given to former BofA President David Coulter when he resigned in 1998 at the age of 51.

In the boom years, a proposal like this was sure to fail on a major company’s proxy ballot. Institutional shareholders almost never said “no” to management. But post-Enron Corp., the mood has clearly changed.

“Shareholders Poke Holes in Bank of America’s Golden Parachutes,” the Teamsters union gloated in a news release.

* The New York state attorney general’s investigation of Wall Street analysts’ conduct became a full-fledged pile-on, as the North American Securities Administrators Assn., the National Assn. of Securities Dealers, and, finally, the Securities and Exchange Commission joined the fray.

The SEC said it opened a “formal inquiry” to look at analysts’ stock recommendations and whether they have been tainted by conflicts of interest within brokerages--for example, by the need to drum up fee-rich investment banking business.

The SEC’s move was viewed as inevitable in the wake of the evidence New York Atty. Gen. Eliot Spitzer turned up after a 10-month probe of Merrill Lynch & Co.’s Internet-analyst department.

Spitzer’s now-famous report, released April 8, accused Merrill analysts of routinely recommending to investors in 2000 and 2001 Internet stocks that they secretly viewed as sure losers.

The SEC, which is supposed to be the nation’s principal watchdog over securities markets, was forced to acknowledge that Spitzer’s revelations--including private Merrill e-mails between analysts--”reinforced the commission’s conclusion that further inquiry is warranted” into analysts’ conduct.

Merrill, which has denied wrongdoing, nonetheless took a stab at apologizing Friday. At the firm’s annual meeting, Chairman David Komansky said the “e-mails that have come to light are very distressing and disappointing to us.”

Merrill’s shareholders seem more than mildly disappointed: The stock slumped 13% last week to its lowest level since October. Brokerage shares in general were sharply lower on fears that the industry as a whole will face severe retribution if outright fraud in stock touting is shown to have been common among analysts as the late-1990s bull market roared, then died.

* A key symbol of the U.S. economy’s might in the 1990s--the dollar--came under attack in global currency markets, adding to Wall Street’s already heavy load of worries.

By Friday the dollar had slumped to a 3 1/2-month low against the euro and to a seven-week low against the Japanese yen.

Considering the dollar’s surge over the last decade, last week’s give-back doesn’t look like much. It took 90.2 U.S. cents to buy one euro on Friday, still far less than the $1.17 the European currency was worth when introduced in January 1999.

Likewise, a dollar still buys more yen today than it did a few years ago. One dollar was worth 128.1 yen as of Friday, compared with 102 yen in late 1999.

The important questions are what is behind the dollar’s sudden weakness and whether the slide is the start of a long-term trend.

If the dollar sell-off reflects concern on the part of foreign investors that the relative appeal of U.S. assets is dimming, then the buck’s decline may signal a sort of global retribution against the American economy and its markets.

A currency, after all, often is a good barometer of what’s right, or wrong, with the economy it represents. The dollar’s surge in the late 1990s was in large part a function of the fundamental strengths of the U.S. economy, especially compared with the alternatives.

Indeed, America’s traditional role as a safe haven became even more important from 1994 to 1999 as Mexico, Brazil, Russia and most East Asian countries were forced to devalue their currencies, depressing their economies.

A strong dollar meant that U.S. consumers paid less for foreign goods, while foreigners paid more for U.S. goods. A robust currency also allowed the U.S. Federal Reserve to keep interest rates subdued and made American assets of all kinds--businesses, stocks, bonds, etc.--instantly more appealing for foreign investors because of the currency’s appreciation potential.

Consider this example: If a Japanese investor paid the equivalent of 102 yen for a U.S. asset in late 1999, that asset today would be worth 128 to the Japanese investor if its value in U.S. dollars simply stayed the same.

No wonder foreigners have been willing to continue to finance the U.S. economy, as shown by the record U.S. trade gap. The current account, the broadest measure of the nation’s trade balance, was in deficit by a massive $417 billion last year.

Economists have long warned about America’s dependence on foreign capital, but in the 1990s global investors increasingly had few good alternatives to U.S. assets. America won at the expense of others, particularly those countries that suffered devaluations.

If that favorable perception of U.S. assets changes, and foreign capital investment here withers, the implications could be serious. A weaker dollar might be welcomed by U.S. exporters because it would make their goods cheaper overseas, but it also would make imports more expensive, potentially fueling inflation and higher interest rates.

In any case, U.S. interest rates (such as on Treasury securities) might have to rise to hold on to foreign capital.

These warnings have been recited like a broken record for the last two decades. Yet the day of reckoning never came. And if the dollar suddenly strengthens in the next few weeks, the warnings about foreign-capital dependence will again fall by the wayside.

There is a powerful argument that U.S. assets still are the best alternative for global investors, given the economic despair in Japan, the perennial uncertainty about the future of an aging Europe and the risks inherent in many smaller markets.

But the same doubts and concerns that are dogging American investors about the true health of the economy and the U.S. financial system--the anger over executives’ rich salaries, the suspicions about brokerage analysts’ objectivity, the lingering excesses of the technology capital spending boom, and the underlying fear that corporate accounting has been dishonest--are almost certainly registering with foreign investors as well.

It may be only a coincidence, but the U.S. stock market, as measured by the popular indexes that foreign investors watch, is among the worst-performing of major (and many minor) markets this year.

The blue-chip Standard & Poor’s 500 index is down 6.3% year to date, after last week’s steep sell-off. The Nasdaq composite index is down 14.7% year to date.

By contrast, Germany’s main market index is down 3.1% for the year, the British market is down 1.1%, Canada is off 0.8% and the Japanese Nikkei-225 index is up 9.5%.

Meanwhile, the price of gold is up 11.8% so far this year, to a two-year high of $311.60 an ounce Friday in New York futures trading.

Numbers like those may just add to foreigners’ sense that there finally may be better places to put money than in U.S. financial assets.

Of all of the forms of retribution that may await the U.S. economy, markets and key players of the boom/bust cycle, the threat of “payback” by foreign investors is among the most frightful.

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Tom Petruno can be reached at [email protected]. For recent columns on the Web, go to: www.latimes.com/petruno.