Monitor

HERE IS A little home truth that has great application to all the reports of corporate scandals now coming out of the United States - drowning people will clutch at straws in the hope of saving themselves.

It happens the whole world over when a big bull market has drawn to a close and corporations find their share prices falling and their margins pinched just when they had structured themselves for another period of growth.

Put yourself in the shoes of a corporate director at a board meeting as this unwelcome truth begins to dawn. The finance director has just finished going through his transparencies and it has become clear that the golden rule of booking profits only when they are in the bag and booking losses when you see them coming could wipe out at least half the firm's stated capital this year.

If this is what goes in the earnings announcement the share price will tumble much further, banks will start getting nasty, the big acquisition will be off and the sale of that loss-making subsidiary at five times what it is worth is no longer in the cards.

More to the point for our director, all those profits he thought he had built up in his options will go out the window too.

So the finance director makes it easy. It is a temporary setback, he says, and pulls out another set of transparencies to show that everything will come good again next year.

There is a price, however, to get to next year smoothly. Those losses cannot be booked immediately. They will be treated as long-term investments. Some expenses will also be capitalised and with a little more finagling, although the finance director will not call it that, everything should be all right.

Does everyone agree? And what does our director say then? He is not the accounting expert and the experts say it is legal to do it this way. Is he on the team or is he not?

Well, of course he is and most times it turns out that the finance director was right. Next year everything turns around again and this little patch of discomfort is forgotten.

But then comes the end of the bull market and things do not turn around next year. What is our director to do now? He has already connived at trickery once and it is much more difficult to object to it now. The finance director finds a way to make it easy once more and our director stays on board. A year later the ship is sinking and he is in the water clutching at straws. He will accept anything this time.

To mix the metaphor, let whoever is blameless cast the first stone. We have all done this in some small way, played double or nothing and then found ourselves drawn in deeper than we had expected.

Of course, the instances we now see of it in the US are on a much larger scale and have become suddenly more frequent. The mistake, however, is to treat it as something new and think our now heightened awareness of it represents a sudden degradation of moral standards in the US.

In my experience, from years of being a stockbroker, those moral standards were always lower than claimed and all that has happened is that a bear market has come round to put the double or nothing question on those standards to corporate directors and then reveal what would have remained hidden if times were better.

So I do not have much time for US President George W. Bush's sudden discovery of moral principles on this score. There are no lessons to be drawn here other than that playing double or nothing at the edge of the law is a dangerous game because you will almost certainly be drawn over the edge when a bear market arrives.

And if over the edge lies deep water then you will clutch at straws. What is so new about that?