(c) 2011 M.E Sharpe, Inc All Rights Reserved A Financial History of the United States From Enron-Era Scandals to the Subprime Crisis (2004-2006) (c) 2011 M.E Sharpe, Inc All Rights Reserved Works by Jerry W Markham A Financial History of the United States From Christopher Columbus to the Robber Barons (1492–1900) A Financial History of the United States From J.P Morgan to the Institutional Investor (1900–1970) A Financial History of the United States From the Age of Derivatives into the New Millennium (1970–2001) A Financial History of Modern U.S Corporate Scandals From Enron to Reform A Financial History of the United States From Enron-Era Scandals to the Subprime Crisis (2004–2006) A Financial History of the United States From the Subprime Crisis to the Great Recession (2006–2009) (c) 2011 M.E Sharpe, Inc All Rights Reserved A Financial History of the United States From Enron-Era Scandals to the Subprime Crisis (2004-2006) Jerry W Markham M.E.Sharpe Armonk, New York London, England (c) 2011 M.E Sharpe, Inc All Rights Reserved Copyright © 2011 by M.E Sharpe, Inc All rights reserved No part of this book may be reproduced in any form without written permission from the publisher, M.E Sharpe, Inc., 80 Business Park Drive, Armonk, New York 10504 Library of Congress Cataloging-in-Publication Data Markham, Jerry W A financial history of the United States : from Enron-era scandals to the subprime crisis (2004– 2006) : from the subprime crisis to the Great Recession (2006–2009) / Jerry W Markham v ; cm Includes bibliographical references and index Contents: Enron and its aftermath — Other Enron era scandals — Corporate governance reforms — Securities, banking, and insurance — Commodity markets — The rise of the hedge funds and private equity — The mortgage market — A critical look at the reformers ISBN 978-0-7656-2431-4 (cloth : alk paper) Financial crises—United States—History—21st century Corporations—Corrupt practices—United States—History—21st century Enron Corp—Corrupt practices—History Investment banking—United States—21st century United States—Economic policy—21st century I Title HB3722.M375 2010 332.0973’090511—dc22 2010007754 Printed in the United States of America The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z 39.48-1984 ~ EB (c) 10 (c) 2011 M.E Sharpe, Inc All Rights Reserved For the Markhams (c) 2011 M.E Sharpe, Inc All Rights Reserved I am opposed to millionaires, but it would be dangerous to offer me the position —Mark Twain (c) 2011 M.E Sharpe, Inc All Rights Reserved Contents From Enron-era Scandals Subprime Crisis (2004–2006) to the List of Abbreviations xix Preface xxiii Acknowledgments .xxv Introduction xxvii Photographs follow page 188 Part I Enron and Corporate Reforms Enron and Its Aftermath .3 The Enron Scandal Background Government Response The Trials .7 The Arthur Andersen Fiasco The Nigerian Barge Fiasco 10 Broadband Services Prosecutions 13 The NatWest Three 15 The Lay and Skilling Criminal Trial 18 Lou Pai 32 Summing Up the Enron Litigation 33 The Prosecution’s Scorecard 33 Enron Bankruptcy Proceedings 34 Class-Action Suits 35 Dynegy 36 Other Enron-Era Scandals .37 The Telecom Scandals—The Aftermath 37 Background 37 Nortel 41 Adelphia 42 vii (c) 2011 M.E Sharpe, Inc All Rights Reserved viii Contents Other Telecom Firms 43 WorldCom .43 Other Scandals .47 HealthSouth 47 Tyco 51 Cendant and AOL 53 Computer Associates 55 Grocery Store Accounting 56 Pharmaceutical Companies 57 Conrad Black 57 Kmart 59 Tax Shelters: Another Enron-Era Scandal .59 Other Accounting Scandals 65 The Wall Street Scandals .66 The Financial Analyst Scandals .66 Other Financial Analyst Issues 68 Frank Quattrone .69 Spitzer’s Downfall 71 Corporate Governance Reforms 76 Sarbanes-Oxley 76 The Enron Reforms 76 Other Sarbanes-Oxley Reforms 78 Small Companies 79 Loss of Competitive Advantage 80 Competition from Abroad .80 Blue Ribbon Reviews 80 Government Concerns 83 The Executive Compensation Controversy 84 Background 84 Fiduciary Duties .86 Ovitz’s Compensation 88 Confiscation Through Taxes 89 The Reagan and Bush Tax Cuts 91 Compensation Arrangements .93 Golden Parachutes 93 Class Warfare and the Criminalization of Executive Pay 95 Richard Grasso’s Retirement Package 97 SEC Full Disclosure 100 Background 100 Disclosure Fails 101 The SEC Tries Again 102 Compensation Concerns Grow 103 Compensation as Politics .103 (c) 2011 M.E Sharpe, Inc All Rights Reserved Contents ix Incentive Compensation 104 Options 104 Option Effects .106 More Scandals 107 Option Backdating 107 Prosecutions 109 Other Abuses 111 The War on Perks 112 Corporate Reforms—Shareholder Voting 117 Proxy Votes 117 Election Proposals .120 Majority Votes 122 Staggered Boards 123 Political Correctness 123 Broker Votes 124 Separation of Chairman and CEO .124 Shareholder Bill of Rights 125 Other Reforms 126 Class-Action Lawsuits 126 Some Corporate Pushback 130 Class-Action Lawyer Scandals .131 Part II Financial Market Developments 137 Securities, Banking, and Insurance 139 Securities Market Developments .139 Some History 139 Regulation 141 National Market System .142 Specialists’ Problems 143 Information Technology 144 More Automation 145 The ECNs Compete 146 NASDAQ .149 Transformation of NYSE .150 Broadening Markets .154 Overlapping Regulation .155 The Options Exchanges .156 Some History 156 Competition 157 Subprime Crisis 159 Clearing and Settlement .159 Securities Industry 159 Additional Developments .162 (c) 2011 M.E Sharpe, Inc All Rights Reserved ... (1492–1900); A Financial History of the United States: From J.P Morgan to the Institutional Investor (1900–1970); A Financial History of the United States: From the Age of Derivatives into the New... the United States From Enron-Era Scandals to the Subprime Crisis (2004 2006) A Financial History of the United States From the Subprime Crisis to the Great Recession (2006 2009) (c) 2011 M.E Sharpe,... History of the United States From the Age of Derivatives into the New Millennium (1970–2001) A Financial History of Modern U.S Corporate Scandals From Enron to Reform A Financial History of the