Wall Street’s Verdict

Yes, President George W. Bush was telling reporters, there is absolutely no doubt that Vice President Dick Cheney will beat the allegation that Halliburton Corp. cooked the books while he was CEO. And as for that slide in the stock market, chalk it up to a “hangover” from the Roaring Nineties (when Someone Else was in charge). According to a Bush adviser, the President is focused on the big picture and is “relatively uninterested in the daily economic ups and downs.” Would that include the 390-point implosion in the Dow last Friday, which sent stocks hurtling through post-9/11 lows to levels not seen since 1998?

With observations like these, Bush has managed to look at once self-assured and self-delusional in delivering the message that while he knows people are hurting, the economy is fundamentally sound, that “some bad apples” are being purged from executive suites and that new laws will deter such behavior in the future. Shortly after the President uttered his hangover line in a speech to business executives in Birmingham, Ala., the market regurgitated more than 400 points before recovering–briefly. The Dow lost 7.6% of its value last week. The broader market, as measured by the S&P 500, is now down 45% from the high it set in March 2000. Some companies’ earnings were down last week, but more were up, including DaimlerChrysler’s and Microsoft’s.

What investors were displaying was uncertainty: not knowing how many more corporate scandals would surface and not trusting that anyone in Washington was doing anything meaningful to clean up the mess.

The President and Congress appear to be zealously attacking corporate abuses the way Pilgrims would a dance hall. But get past the reformist posturing, and the proposed new laws add up to half-measures. They would restrict but not eliminate conflicts of interest among accounting firms and stock analysts. With Bush’s support, both houses of Congress beat back an amendment that would require companies to deduct from their earnings the cost of stock options given to executives and other employees, as if they were cash or outright grants of stock. That measure was backed by Federal Reserve Chairman Alan Greenspan as well as investor Warren Buffett as essential to remove perverse incentives that today encourage top executives to mislead investors. But executives, who get lavishly paid in options opposed that reform, and their friends in Washington sided with them, against the interests of investors.

Shareholders are taking action on their own: yanking money from any company showing even a hint of trouble. The latest black-and-blue chip? The respected drug giant Johnson & Johnson, whose stock fell 16% following a report that the company was under investigation by the Food and Drug Administration and the Justice Department over alleged manufacturing improprieties in Puerto Rico. The company denied any wrongdoing, but the market did not care. J&J’s drop contributed 55 points to the Dow’s Friday freak-out, and the company joins Merck & Co. and Bristol-Myers Squibb (which face sales-accounting questions) under investors’ microscope.

This isn’t about just short-term market swings. Across the country, people are wondering whether their shrinking retirement nest eggs will force them to extend their careers indefinitely. (See cover story, page 22.) And that angst and anger is starting to find political expression. Only 52% of the participants in a New York Times/CBS News poll last week said they think Bush is doing a good job on the economy, down from 72% in October. Meanwhile, 61% believe that members of the Bush Administration are protecting the interests of business over those of ordinary Americans. It doesn’t help that Bush (from his time as a Texas oilman), Cheney and other high-profile members of the Administration have been stained by the accounting scandals. Says an Administration official: “Wall Street looks at the Administration as CEOs who don’t know how the markets work, and the public looks at them as just a bunch of CEOs–a group in bad odor. They lose on both scores.”

In what is becoming a political war over the economy, Bush’s army is filled with pacifists. His chief economist, Larry Lindsey, is a laissez-faire purist who views most government regulation of the marketplace as futile, even harmful. Bush’s Veep is mute in public and argues vehemently inside the White House against any overreaction to the recent series of corporate scandals. The Secretary of the Treasury, the gaffe-a-minute Paul O’Neill, was off in Ukraine last week. No matter. Wall Street has not found any solace in O’Neill, a former CEO without a gut feel for what makes markets go.

The economy, on paper at least, is chugging along. “Wages, employment, housing, retail sales–they all suggest a very solid economy,” Lindsey told TIME. Why get in the way of that? It’s a view Greenspan also articulated last week. But the Bush team’s inaction is drawing unfavorable comparisons with President Clinton’s team of Treasury Secretary Robert Rubin, a Wall Street star, and Larry Summers, the high-wattage Harvard economist. Yet, as a Bush adviser notes, Rubin didn’t meddle either and got help from a bull market: “When people were getting 25% return on their investments, all Bob Rubin had to do was breathe.”

That said, the White House knows it must do something, because the Democrats are getting saucer-eyed over November’s congressional elections. According to Roll Call, House minority leader Dick Gephardt recently spoke with senior Dems about the corporate crookery, saying that “if this thing plays out right, we could pick up 30 to 40 seats.” Bush is desperate to show voters that he is not deaf to their concerns, but he has not found the message. “He wrapped his arms around this market,” laments a senior Administration official. “Now he owns it.”

Bush is at least saying many of the right things. In his Alabama speech he stressed the underlying strength of the economy and pledged to lock up the crooks: “I’m willing to work with Congress to make sure that we’ve got the necessary law in place that will hold people accountable without stifling the entrepreneurial spirit of America.”

That last phrase looms large in Bush’s thinking. He resisted much of what the Senate proposed until the political pressure became overwhelming. He is now urging Congress to pass quickly the reform bill, which stiffens penalties for fraud and increases funding for the SEC, whose budget growth he had limited in February. Whatever legislation Bush signs will not address the widespread use and misuse of stock options, which have been cited as one of the main culprits of the market bubble and accounting legerdemain: the higher a company’s reported profits, the higher go stock prices, and the more quick money option-holding executives get. Aides say that when they recently discussed with Bush the proposal to require that stock options be treated as a business expense, like other forms of compensation, he held forth at length on why it was a bad idea. Many of his corporate campaign contributors would agree, since expensing options would initially cause earnings to appear lower. Silicon Valley companies, in particular, are pushing hard against it, arguing that start-ups would not be able to attract talent.

The Administration’s effort to seem concerned was not helped by Army Secretary Thomas White’s appearance before a Senate committee last week. White, a former top executive at Enron, denied that he had a hand in manipulating energy prices in California while vice chairman of Enron Energy Services. Under verbal torture by Senate Democrats, he also had to explain his 77 phone calls from Washington to top Enron associates as that company was disintegrating–and as he was netting $12 million in Enron stock sales and as the war in Afghanistan was at full throttle.

Amid that kind of background noise, neither Wall Street nor Main Street is tuning in to Bush right now. For investors big and small, “it’s a matter of reconnecting the metric–company to industry to economy–that’s missing today,” says New York Stock Exchange (N.Y.S.E.) chairman Dick Grasso. And that may be beyond Bush’s capabilities, as well as the public’s expectations. The N.Y.S.E. is hurrying up new regulations to give independent directors more control of the companies in their care. And Grasso is looking past Labor Day for investors to reconnect with fundamentals, especially as third-quarter earnings reports, which promise to be the most squeaky clean in history, start to surface.

In the meantime, it threatens to be a long, hot, money-losing summer for the rest of us, whether or not the President is watching closely.

–Reported by John F. Dickerson and Adam Zagorin/Washington