Dick Grasso is gone as chief of the New York Stock Exchange, but the system of super-enrichment for insiders lives on. The NYSE's new chief, former Citicorp co-chair John S. Reed, has little experience in stock trading and even less as a reformer. But in this sorry mess, he passes for a clean broom. The recent financial scandals -- from Enron to WorldCom to Arthur Andersen to Merrill Lynch and now to the epitome of capitalism itself -- have had one thing in common. The insiders at the very top contrived ways to take astronomical amounts of money for themselves, eluding the supposed forms of accountability, because the self-regulators were on the take, too.
Were it not for two fortuitous accidents, Grasso might have happily continued. First, he very foolishly decided to cash $140 million in deferred compensation, which shone an unwelcome spotlight on his deal. Second, William Donaldson, chairman of the Securities and Exchange Commission, happened to be former head of the New York Stock Exchange and an old rival of Grasso. Poor Donaldson, chairman until 1995, had never made more than $1.5 million in a job that paid Grasso as much as $30 million a year plus enormous extras.
Donaldson found himself at the SEC only because the Enron/Andersen mess had forced President Bush to turn to someone more savory than his appointee Harvey Pitt, formerly a lobbyist for the accounting industry. If only these people had been just a little less greedy, the party might have continued uninterrupted.
In the financial scandals, conflicts of interest are everywhere. Stock analysts who were supposed to be counseling investors were actually rewarded for touting stocks. Accountants, supposedly attesting to the accuracy of corporate books, were rewarded for helping executives disguise scams. Corporate board members, ostensibly looking out for shareholders and the public, were cashing in, too. Grasso himself sat on the board of Home Depot, whose founder was on the Stock Exchange's compensation committee.
A hilarious aspect of the coverage of Grasso's downfall has been the premise that the Stock Exchange's board somehow "set" Grasso's astronomical pay package almost without Grasso's connivance. The board, not Grasso, should be fired, says The Wall Street Journal. Well I'm all for firing the board. But, as anyone who's negotiated a salary knows, the pressure for big bucks comes from the executive, not the board.
In the bonanza atmosphere of the late 1990s, Grasso successfully pressed the exchange's other moguls to let him in on the party. Why should these Wall Street insiders give super-rewards to the head of the stock exchange? Because he is positioned either to keep the inflated profits of brokerages coming or to spoil the fun.
The New York Stock Exchange, despite a lot of lip service about serving investors, is run by and for brokers. Oddly, it's the last major holdout resisting instant electronic transactions. Having human traders scream trades across a floor, 18th-century fashion, is bizarre in a computer age. This archaic system continues only because it facilitates insider profits at the expense of investors. "Specialists" -- firms that make markets in particular stocks (for customers and for themselves) -- are conflict-riddled anachronisms with especially exorbitant profits.
The idea that the Stock Exchange should have "regulatory" functions is absurd. Its directors are elected by a closed club, not subject to any public confirmation process. Ordinary brokers, who pay fees to the exchange, finally revolted because Grasso, unlike Bill Gates, took no entrepreneurial risk to earn his astronomical pay. But anyone pulling down $30 million a year is no regulator, either.
The entire system of self-regulation, in which the SEC delegates regulatory functions to self-serving industry bodies, lies disgraced. These private bodies, accountable to themselves, have an incentive only to avoid overt scandal. One by one, they failed even at that. The SEC allowed accountants' trade associations to supervise accountants and stock exchanges to police stockbrokers. That's why it took two complete outsiders -- Sen. Paul Sarbanes (whose bill restored some regulatory power to the SEC) and New York Attorney General Elliot Spitzer (who went after flagrant abuses that the Stock Exchange tolerated) -- to begin the real cleanup.
Donaldson's SEC has begun a major review of the Stock Exchange. There's talk of splitting it into exchange and regulator. But events prove that regulation should be returned directly to the SEC. Don't hold your breath. Donaldson may have been disgusted by Grasso's pay, but he is a longstanding member of the same club.
Robert Kuttner is co-editor of the Prospect.
This column originally appeared in yesterday's Boston Globe.
