Matthew Goldstein

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Bush's Appeal to Morality Falls Short

Matthew Goldstein

That thud you heard on Wall Street Tuesday wasn't just the sound of plummeting stock prices. It was also the echo of President Bush's much-heralded speech on corporate responsibility falling flat.

Billed by the White House as a stern message to the evil-doers on Wall Street and in corporate America, Bush's half-hour speech seemed more like a recitation of the Golden Rule. That is, Bush's main message was that corporate executives need to adopt "a new ethic of responsibility'' and honesty.

Bush, the first U.S. president with an M.B.A., even called on the nation's business schools to spend more time teaching their students the difference between right and wrong.

Do Unto Investors

Now there's nothing wrong with preaching ethics and urging corporate leaders to voluntarily adopt better business practices, such as imposing limits on executive compensation and barring loans to corporate officers. But for an investing public that's fearful of putting money into the stock market because they don't know where the next accounting scandal lurks, it's not clear that Bush's speech will do much to restore their faith in corporate America.

Indeed, if the stock market can be used as a gauge, investors seemed to all but ignore the president's speech. For the day, the Dow Jones Industrials fell 179 points to 9069. The Nasdaq plunged 24 points to 1381. Clearly, it's going to take more than one speech to wipe away the memory of the monster accounting scandals at companies like Enron, Global Crossing and WorldCom.

Meanwhile, some critics weren't shy about holding back. New York State Attorney General Eliot Spitzer, who led a highly publicized investigation into analyst research conflicts at Merrill Lynch(MER - Cramer's Take - Stockpickr), called the speech "enormously disappointing." Spitzer dismissed the speech as short on specifics and long on "platitudes." Kenneth Janke, chairman of the National Association of Investors, a group that represents 32,000 investment clubs, says the speech seemed light on "substantive information."

Now it's easy to dismiss Spitzer's remarks as partisan sniping coming from an ambitious Democratic politician who is up for re-election this year. But the problem for Bush is that the much-hyped speech lacked a strong call to action. And many of the proposals were suggestions he's either put forward before, or are already being debated in Congress. The speech, for instance, hardly touched upon the big debate in Congress over the best way to police the accounting profession.

Painting the Tape

"Some of the things the president has been talking about are some nice window-dressing," says J. Boyd Page, an Atlanta securities lawyer. "It may be a step in the right direction, but I don't think they are going to solve the problem."

Bush's main new idea: a plan to create a Justice Department corporate-crime task force, seems more like a reorganization of existing personnel than a frontal assault on corporate corruption. Even his call to double the jail time for securities fraud-related crimes, while sounding tough, doesn't address the issue of why so many corporate executives play fast and loose with their company's finances in the first place.

"The easiest thing to do is to call for people to go to jail," says Marcel Kahan, a securities law professor at New York University's School of Law. But Kahan says prosecuting a securities fraud case is not easy. There's often a difference, he says, between what the news media and public like to refer to as a fraud and what constitutes fraud to win a conviction in the courtroom.

May be the best thing Bush did was to call on Congress to provide more funding for the Securities and Exchange Commission. He urged Congress to pass a $20 million funding increase for the SEC so it can hire 100 new enforcement officers and he wants legislators to provide an additional $100 million for the agency in next year's budget.

"We need a good police force," says James Angel, a professor at Georgetown University's McDonough School of Business. "It's clear what we have been doing is insufficient. We've got to improve our monitoring of the markets."

Finding Religion

Of course, it's worth noting that Bush is a late convert to the cause of greater securities regulatory enforcement. The White House's original budget had proposed a "zero-growth" budget for the SEC and called for staff reductions in securities fraud investigations.

And it wasn't just Bush's message that fell flat Tuesday, it was the tone of the speech. Bush, even though he got a warm welcome from the business leaders and local politicians at The Regent Wall Street Hotel, seemed subdued. Speaking just a few blocks from Ground Zero, the site where the World Trade Center once stood, Bush seemed most energized only when talking about the ongoing war on terrorism.

Maybe some of the president's reserve stems from the fact that his own business ethics have come under fire in recent days. There has been renewed scrutiny in the news media of a 1990 stock sale that Bush made while he was a director of Harken Energy(HEC - Cramer's Take - Stockpickr), a Texas-based oil and gas company. Bush sold some 200,000 shares of Harken stock two months before the company reported a bigger-than-expected quarterly loss. The president, who wasn't yet involved in politics, was some 34 weeks late in filing a form with the SEC, which notifies the public of the sale of stock by a corporate insider.

The SEC conducted an investigation into the matter to see if Bush had access to inside information when he sold his shares, but the agency ultimately took no action. At the time, Bush's father was president. At a hastily called press conference Monday night, Bush was besieged with questions from reporters about the stock sale. The president tried to dismiss the matter, referring to it as "old politics."

But it seems the furor isn't over. Bush has yet to offer a good explanation for the delay in reporting the stock sale. Could another speech be in the offing?