The wall seperating analysts and traders appears to have completely broken down in Merril Lynch.

April 17, 2002 4:33 PM

The wall seperating analysts and traders appears to have completely broken down in Merril Lynch. Yesterday, NYT reported that SEC is joining the investigation. The accounting scandal in QWest is now one of many in the telecommunication world. There is also the well documented travails of Anderson Consulting.... This year there has been a crop of accounting scandals. Does the financial world needs stricter regulatory mechanism or is it simply a matter of lax supervision? (more inside)
posted by justlooking (12 comments total)

BusinessWeek did a story called 'Accounting in Crisis' (its rather long) some months back (I linked to it in another thread on AC sometime back). In that, they called for major structural reform in the auditing/accounting world. They followed it two months later with a story on Harvey Pitt, the current SEC chair (another very long article). They basically implied that Pitt, while eminently qualified, is unlikely to go for structural reform of the system. He has an almost religious belief in the ability of the market regulate itself. He would probably go for stricter enforcement.

I have a certain amount of faith in the market too. But it has been shaken badly in the last few months. Also this wall business (between consultants and auditors, between analysts and brokers etc.) evidently doesnt work too well.

What do you guys think? What are the experiences of people outside of North America? Are there major accounting sleights of hands coming to light elsewhere too?
posted by justlooking at 4:36 PM on April 17, 2002

It can regulate itself in theory. The problems are not caused by lack of regulation but by letting regulation get in the way of self-regulation.

And justlooking, I have a feeling that Wall Street will be collapsing soon. Too many powerful people unchecked, pushing too much money around and getting too much money for the job. Corporations are allowed to overstate profits, and they are allowed to regulate themselves. All that afflicted Enron afflicts all large corporations, simply because when Enron did what they did, other corporations had to do the same to catch up. This pro-forma reporting was an assinine idea which obstructed free markets, as, I believe you will find, all bad ideas do.
posted by Settle at 4:46 PM on April 17, 2002

i just wanna know when ken lay is going to prison, and how far behind are ballmer and gates? justice awaits!
posted by quonsar at 5:00 PM on April 17, 2002

I'm also curious about accounting and public reporting in other countries, if anyone out there has any information.

Are there public entities like the SEC in other countries that provide things like 10-Ks and 10-Qs? Public reporting is one of the best things about a free-market system - anyone with access to the internet can read the lasted filings. The problem is that they are so farking difficult to read, and the accounting rules don't seem to work. If someone had taken the time to read Enron's public reports, would they have figured out it was going to implode? Probably not, and there's the rub.
posted by birgitte at 5:31 PM on April 17, 2002

Haha -- too muck fark today.
posted by birgitte at 5:32 PM on April 17, 2002

Just a point of clarification: The Merrill situation is only similar to the Enron one because analysts who profess to offer objective analysis have investment bankers crawling up their rears concerned about relationship management and investment banking fees have the same inherent conflicts as accountants who have consultants trying to sell-on additional work. To say nothing, of course, about the opportunity to be the in-house audit firm for next 10 years. Its impossible to determine if regulation will solve this problem unless/until these functions are completely seperated: no more "chinese" walls and depending on these companies' senses of honor. After all, recent experience has taught us not to expect honor...
posted by zia at 5:42 PM on April 17, 2002

This sort of crap goes on all the time, but most people are happy to ignore it so long as the cheques keep rolling in. Only in times of economic downturn where the poor assumptions and bad mangement end in some sort of failure do people stop ignoring the lies and deception.

If these stories were all breaking during an economic boom I'd be surprised.

"...conflict of interest...", "...follow the money...", blah, blah blah...
posted by krisjohn at 6:01 PM on April 17, 2002

Wall street will be fine. Enron, leading by extreme example, has kicked off a wave of scrutiny by the media. Now, in this wave of media exposure we all learn that things or not as we thought they are or as they should be. And we will all of course be "surprised", shocked, shocked, by what we read.

Anybody who has worked in a large corporation knows about egregious examples of misbehavior - its the stuff of watercooler conversation. We tend to forget that these companies are staffed by human beings - curious, gossipy, fallible human beings - not just functional elements in some corporate architecture. Wall street is all about mutual back-scratching as is much of politics. If dirty politicians have become a cliche, why not dirty bankers?

Perhaps some more large companies will fall. Perhaps, in their smug indulgence, they reached too far. If so, other companies will take their place. The cycle will continue. As long as there is money to be made, Wall street will go on.
posted by vacapinta at 6:05 PM on April 17, 2002

That's the assumption, but there's a chance that the companies that should collapse are too far ahead in their racket to collapse...and that's when stuff begins to suck.
posted by Settle at 6:19 PM on April 17, 2002

there's a chance that the companies that should collapse are too far ahead in their racket to collapse

Microsoft comes to mind. P/E ratio above 50, a book value of $8.49 (and only if you believe MS's accounting), 5.4 billion shares. Talk about over-inflated.
posted by five fresh fish at 8:01 PM on April 17, 2002

Companies like Microsoft and Cisco are great examples of companies which are going to take a beating in the market. Apparently if you count options as expenses they've had losses in recent, allegedly profitable years. That's one reason why Microsoft keeps raising prices for customers they've locked in - even though it's a long term risk, it's the only way they can meet Wall Street's expectations in markets with aren't expanding the way they used to.
posted by adamsc at 1:59 PM on April 18, 2002

Microsoft comes to mind. P/E ratio above 50, a book value of $8.49 (and only if you believe MS's accounting), 5.4 billion shares. Talk about over-inflated.

That would put the company's book value at $46 billion. Considering they have $40 billion in stashed under their mattress, that seems like a conservative estimate. 15% of their profits came from interest from that pile of money in Q4 2001.
posted by euphorb at 4:51 PM on April 18, 2002