The Enron Crisis Had Arthur Anderson and the Mortgage Crisis Has KPMG

When I started working in the corporate world in the early-1980s, there was The Big Eight, consultancy and accounting firms that guided the world's largest corporations through the fog and into the dream world that would be Reaganomics. They were Ernst & Whinney, Price Waterhouse, Coopers & Lybrand, Arthur Young, Arthur Anderson, Peat Marwick, Kidder Peabody, and Deloitte Touche.

Over the coming decade, in the orgy of mergers sparked by Reganomics, they became The Big Five: Ernst & Young, PriceWaterhouseCoopers, Arthur Anderson, KPMG, and Deloitte Touche.

Then Arthur Anderson got caught with its hands in the cookie jar, or is that the cooking jar, as it cooked the books for Enron and watched the energy business fall into the hands of a few evil billionaires who have taken the nation hostage while millions of people lost. Arthur Anderson is no more and we are left with The Big Four: Ernst & Young, PriceWaterhouseCoopers, KPMG, and Deloitte Touche.

I was particularly disheartened by the closure of Arthur Anderson. As a child, my pediatrician told me that really smart people worked for Arthur Anderson and he thought I should work there some day. I failed to pursue an education that would have brought me to such a firm, but I always remembered that Dr. Levine said it and Arthur Anderson always held a mystique for me. Its closure was an odd disappointment. The other disheartening thing about Arthur Anderson closing was that two low-level executives from their New York office made their way into the organization where I was employed and they instituted the sort of re-engineered policies that make companies momentarily more profitable, a shitty place to work and eventually a failure. That company no longer exists as it had to be absorbed into a better-run company in order to survive on any level. I think there is a direct correlation between the arrival of the Arthur Anderson people and the demise of the firm. Even if their policies did not lead directly to the failure of that partnership, their shitty re-engineered philosophy made it a crap place to work and the loss of that company was actually no loss to the New York business community. (As I heard a local professional say about its closure: Company A merging with Company B -- two shitty firms getting together to form one big shitty firm.) But, enough about Arthur Anderson.

Come now, the mortgage crisis that is bringing-down Bear Stearns, the most successful (and most Jewish) investment bank in the history of investment banking, forcing Americans out of their homes, seeing investors go broke, and causing one of the nation's largest mortgage companies, New Century Financial, to dissolve. How did this happen? Well, KPMG (one of the remaining accounting firms that make up The Big Four) helped New Century Financial alter it's accounting practices so that losses actually appeared to be profits. Just like Arthur Anderson did with Enron!

A five-month investigation has produced a 580-page report documenting how New Century cooked its books (while KPMG was its accounting firm) in the second half of 2006. They admitted their accounting was wrong in February, 2007, and entered bankruptcy when its lenders shut off its cash supply. Showing a profit in 2006 meant that executives were paid huge (HUGE) bonuses.

KPMG denies the accusations, of course, as did Arthur Anderson during the advent of the Enron scandal. But, you don't need a weatherman to know which way the wind blows!

Investigator Michael Missal said in a telephone interview, "I saw e-mails from the engaged partner [at KPMG] saying 'we are at the risk of being replaced.' They acquiesced overly to the client which in the post-Enron era seems mind-boggling."

A partner at KPMG went along with (encouraged?) a plan by a nearly-bankrupt company to cook its books! And it's documented! Sounds like malfeasance, or fraud, to me!

So, will we be left with The Big Three: Ernst & Young, PriceWaterhouseCoopers, and Deloitte Touche? Let's hope so! I say we toast to the demise of KPMG. If you pray, perhaps you could pray for their demise.

If you own KPMG stock, I suggest you sell it now for any price you can get before it looks like Bear Stearns (or worse, Enron or Arthur Anderson) stock.***

Read an article at the New York Times.

***Follow-up:

I stand corrected. I did not realize that KPMG was a partnership. Had I known this I would not have recommended people sell their shares of stock.

Sorry to have mispelled the name of Arthur Andersen. I should have done my homework better.

Thank you to the readers who commented on these shortcomings.

Neither of these mistakes detract from the point that KPMG is complicit in the New Century collapse, debacle, scam (whatever you want to call it), and should be prosecuted for it.



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Industry Eats Itself

The airline industry was deregulated in the late 1970s as the next step in the conservative movement that brought us alleged tax cuts at the state level, the anti-abortion movement, and the first anti-gay movements in the mid-seventies. In the case of airline deregulation, economists convinced liberal Democrats that the airline industry, and therefore all its consumers, would benefit from the lifting of regulation. Airline deregulation was implemented without much fanfare, but with the blessings of an otherwise liberal Congress.

The industry will police itself, we were told. An unregulated market would create more jobs, lower prices, foster more competition, and lead to a boom in profits for everyone.

With that success under their belts, the deregulation movement started snow-balling, It found a poster boy in the face of Ronald Reagan, who convinced America that their government (the government for, by and of the people) was bad, needed to be gutted/downsized, and that industry would save us from inflation only if it was allowed to operate unfettered in an unregulated market. This became known as "Reaganomics" after the nation elected Reagan.

Let me take this moment to say that the only politician I recall speaking-out clearly and succinctly against this movement was George H. W. Bush, who referred to it as "voodoo economics"!

Neo-cons on both sides of the aisle began the long march to Friday, March 14, 2008, which I believe should be dubbed Red Friday.

Regulation of industry has proven to be a hugely successful policy. Every industry that was regulated after the Great Depression flourished, expanded, and realized profits undreamed of in the nineteenth century. Growth of American communications companies and financial institutions was spectacular while those industries were regulated, and those regulations ensured the industries, the companies and the workers who made them work, would be around forever.

Come now, Reaganomics. If we deregulate all these businesses then everything will be even better!

What we have seen however, is that once deregulated, an industry eats itself, its young, its resources, and its future is annihilated.

The idea that an unregulated industry will bring more competition, lower prices, more growth, more jobs, and greater growth was not only a pipe-dream at the time, it has taken only one generation to prove that it is an unmitigated (and unmitigatable?) disaster.

The airline industry is a disaster.

The entertainment industry is a disaster.

The telecommunications industry is a disaster.

And now, the financial services industry, the lifeblood of our entire economic systems, is a disaster.

Last Friday, the government gave two hundred billion dollars ($200,000,000,000) to Bear Stearns to prevent it from going bankrupt. And today, Monday March 17, 2008, Bear Sterns will be consumed by one of its competitors, JP Morgan Chase, for two dollars a share; down from thirty dollars a share last Thursday.

This is a financial collapse of amazing proportions. No financial institution has been bailed-out like this since 1929, the beginning of the Great Depression.

Still, however, we listen to pundits and politicians, columnists and candidates, worship at the altar of Ronald Reagan. Still we are being told that deregulation is the only path. That the marketplace will save us.

And I ask, how can the marketplace save America when it can't even save itself?



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