A troubled investment banker

Louis Proyect lnp3 at panix.com
Tue Feb 12 08:02:17 MST 2002

The New York Review of Books
February 28, 2002

The Betrayal of Capitalism
By Felix G. Rohatyn

During my nearly four years as ambassador to France I frequently gave a
speech I called "Popular Capitalism in America" to audiences throughout
France. This is a subject of intense interest to the French and to most
other Europeans, who envy us our high rates of growth and low unemployment
but who often believe that the price we pay for these benefits is an
inadequate social safety net, a tolerance for speculation, and unacceptable
inequality in wealth and income. They also see the American system as one
that inflicts high levels of poverty and unemployment on developing
countries by the harsh stabilization measures required by the IMF and other
Western-directed financial institutions. I made this speech to dispel some
of these notions and to encourage reforms in European countries in matters
such as taxes, investment, and employment. These, I argued, would, to our
mutual benefit, align our systems more closely.

In doing so, I defended our economic model as one that could deliver more
jobs, and more wealth, to a higher proportion of citizens than any other
system so far invented. A major component of this system is its ability to
include increasing numbers of working Americans in the ownership of US
companies through IRAs, pension funds, broad-based stock options, and other
vehicles for investment and savings. 

I agreed with, and cited, Federal Reserve chairman Alan Greenspan's
statement that "modern market forces must be coupled with advanced
financial regulatory systems, a sophisticated legal architecture, and a
culture supportive of the rule of law." After forty years on Wall Street I
had no doubt that, despite occasional glitches, our economy met Greenspan's

However, as I regularly traveled back to America between 1997 and 2001
there were developments in our financial system that deeply troubled me.
The increase in speculative behavior in the stock markets was astonishing.
In 1998, as a result of reckless speculation by its managers, the giant
hedge fund Long Term Capital Management went bankrupt and, in doing so,
threatened the financial system itself. The New York Federal Reserve
organized a group of banks and investment houses to rescue the company at a
cost of several billion dollars. The sharp rise in dot-com stocks came soon
after, together with relentless publicity campaigns to push the markets
higher and higher. TV ads of on-line brokers urged everybody to buy stocks
and trade them day by day. So-called independent analysts made fantastic
claims about their favorite stocks in hopes of generating
investment-banking business for their firms. These claims were often
supported by creative accounting concepts such as "pro forma earnings"—a
management-created fiction intended to show strong results by excluding a
variety of charges and losses and one that was implicitly approved by
supposedly independent auditors. A large part of the stock market was
becoming a branch of show business, and it was driving the economy instead
of the other way around.

Full: http://www.nybooks.com/articles/15140

Louis Proyect
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