Congress Plots Reforms — Wall Street Isn't Waiting

Congress is going to fix our financial system if it takes forever. After a month of asking Enron executives what they knew and when they knew it — and getting more Fifth Amendment pleas than answers — Enron-obsessed lawmakers, particularly Democrats, are massing this week for an entire Enron-based 2002 legislative agenda. A chunk of the proceedings will be aimed at the big Wall Street firms (Citigroup, Merrill Lynch, Alliance Capital) that helped Enron get where it was before it collapsed under its own debt.

If there's enough shame in Washington to keep the lobbyists at bay, the Chinese walls that crumbled so long ago at accounting and investment firms — between accounting and consulting, between investment advice and underwriting — may get a much-needed OVERHAUL. Accounting standards may be cleaned up; enforcement may be beefed up; tax shelters may be closed up. And if things go exceedingly well, it may all happen by, oh, summer? November? Next year? That's the speed of legislation in Washington — we'll be lucky if it happens at all.

Wall Street, though, moves a lot faster, particularly when it's in the legislative crosshairs, and if we're really lucky many of the excesses of the earnings-driven, expectations-obsessed, stock-price-is-king investor culture of the last half-decade will be cleaned up by investors themselves. One plus of a stock-obsessed corporate world: It's self-policing. When investors find a suspiciously Enron-ish company, they just sell it.

So how to explain IBM? Big Blue is no house of cards. Recently departed CEO Lou Gerstner turned a flabby dinosaur into the nation's biggest tech survival and revival story by transforming it into a lean-and-mean IT services company. And he did it just as a nation of IT purchasers, their budgets gone bust, needed services most of all. The result: IBM emerged from the tech downturn with loyal customers, long-term service contracts, high earnings and low costs.

But, while IBM is indeed in solid shape, its earnings have grown 20 percent annually since 1994 while its revenues have grown only 5 percent a year over the same time period. Should the stock really be up more than fivefold?

Financial journalists, eager not to let the next Enron pass them by, have been taking the company to task for its accounting practices: conveniently categorized asset sales, share buy-backs and adjustments to the projections of pension-fund earnings and long-term services contracts. And investors, led by those same market-making investment firms that Congress is penciling in for its spring hearings season, have turned up the heat on current CEO Jeff Palmisano. IBM is down 20 percent on the year, and fell nearly $4 Tuesday, bringing both the Dow and the techs down with it. (The latest kick was a New York Times report Friday that fourth-quarter revenues met expectations only from a one-time $300 million asset sale.)

And so it was Tuesday, that John Joyce, IBM's chief financial officer, said that Big Blue would be opening its books a little wider every quarter at earnings time, making previously obscure information about asset sales, earnings projections and revenue streams easier to find. Joyce told the Wall Street Journal that while IBM's past practice has been correct under accounting guidelines, "our shareholders and analysts have been asking for more." The responsive, reformative powers of Congress were not mentioned as a motivation.