A major reason for America's capitalist success is that its financial markets are the world's least corrupt, or at least everyone thought so until this year. So restoring that reputation by cleaning up the corporate saloon is now essential to reviving economic trust and growth.
On this score, the Bush Administration has a mixed record. Its Justice Department, assisted by Manhattan D.A. Robert Morgenthau, has done well in breaking up what was allegedly the Tyco gang of thieves, deciphering the complex Enron fraud and in general holding individuals accountable. The Securities and Exchange Commission under Chairman Harvey Pitt, on the other hand, has been so inept that it has become part of the problem.
On the prosecution side, Justice has hit its stride after its detour of indicting the entire Arthur Andersen firm. It is now going after individual corporate wrongdoers, with the result that the crooks aren't getting away with it. The enormous WorldCom fraud is being unraveled, with two plea deals already struck and the most senior former officers charged.
More important, the Enron fraud case is slowly building from the bottom up, with financial whiz Andrew Fastow the latest to pose in handcuffs. This is no small feat, because many once predicted that Enron's off-balance-sheet partnerships were so complicated that they could never be legally deconstructed. Last week's charges describe an astonishing fraud both to disguise Enron's true financial performance and to line Mr. Fastow's own pockets. Intriguingly, Mr. Fastow is employing a famous World War II defense--he was only following orders. This suggests the Enron legal trail is likely to climb even higher.
For sheer audacity, however, the "criminal enterprise" that prosecutors say operated out of Tyco beats even Enron. Mr. Morgenthau's 95-page, 34-count indictment reads almost like a description of a mob operation, with hoods gouging out an otherwise legitimate business. That this wasn't the local garbage business but a global Fortune 500 company makes this the kind of case that really scares investors. These columns have long worried about the spread of international crime using business as a cover, ā la BCCI, and Mr. Morgenthau should get the resources to follow the Tyco tale from here to Belize, if that's what it takes. A sheriff such as Mr. Morgenthau is an asset to U.S. markets because he reassures investors that he'll hang the cattle thieves.
We wish we could say something similar about Mr. Pitt's SEC. After a market boom and bust like we've just had, the SEC needs a chairman who projects independence and mature judgment. He's the guy who has to toss the drunks from the bar to bring back the paying customers. Instead Mr. Pitt has behaved as if he cares less about the integrity of markets than about playing the Beltway angles. The irony is that this has only made him more vulnerable to political attack from Democrats, who yesterday called again for his resignation.
We warned the White House that Mr. Pitt would become a walking piņata long before the politicians took out their sticks. One reason markets got saddled this year with more intrusive accounting regulation than they needed was Mr. Pitt's determination to protect the accounting lobby from any reform at all. He is now compounding his mistake, and opening markets to new political threats, by backing away from his choice of pension-fund chief John Biggs to lead the new accounting standards board.
If done right, that standards job should be a two- or three-year tour of duty. The task is to impose some adult supervision on an accounting profession that lost its ethical moorings during the boom, and then go home. With his market experience and reputation for independence, Mr. Biggs has the credibility that markets now need. So it's a mystery that Ohio Republican Mike Oxley and Mr. Pitt are now resisting his nomination, unless they're fronting one more time for the accounting lobby.
Yes, Democrats are now exploiting Mr. Pitt's blunders with November in mind. That's politics. We're more concerned that the Bush Administration put people in the top regulatory jobs who can assure the world that America is once again running a clean stock market.