Jewish World Review July 25, 2002 / 16 Menachem-Av, 5761

Edward I. Koch

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Consumer Reports

I may know next to nothing about the stock market, but I'm not getting out -- I know next to nothing about the stock market, which is why my portfolio is managed by a major Wall Street investment management firm.

And yet, like almost everyone else who maintains an equity account, I have suffered major losses this year. I have invested a little over 35 percent of my portfolio in bonds. I asked my advisor how much I had lost this year, and he told me that my equity portfolio had lost 9.5 percent as of June 28, 2002, the end of the fiscal year. July has seen a further setback in the market. My equity account has now lost in total about 24 percent through July 22.

Nevertheless, I am not getting out of the market. If you are out, odds are that when the market reverses and starts to climb, you will not be in there fast enough to benefit and make up the losses.

The papers are filled with reasons why the market keeps falling, notwithstanding that the country's basic economic strength is exceedingly good. The housing market and purchases to fill those new homes are at a high. Luxury goods and automobile sales are doing well. The Gross Domestic Product for the first half of this year grew at over four percent. The current unemployment rate is at 5.9 percent, considered quite low when compared with 10.8 percent in 1982 when the economy recovered from the 1981 recession or 6.7 percent at the time of the recovery from the 1990 recession. Interest rates and oil prices are low and stable.

So, what's missing? Why is the market doing a swan dive? The public believes, as do I, that the stock market is manipulated by a small group of men who not so long ago were called "Masters of the Universe." Most people now perceive these "Masters of the Universe" to be master manipulators, ripping off stockholders and the public, receiving unconscionable corporate compensation and, worse still, being handsomely rewarded with so-called golden parachutes when voluntarily leaving or forced to leave their companies.

Many company directors who voted for management-requested resolutions have been grossly negligent in failing to do what's known as "due diligence" and may incur personal liability. What would reassure the public investor would be the initiation of many more class action lawsuits against officers and directors that would put the fear of G-d into those individuals.

Special attention should be paid to management-selected directors who were placed on boards without access to or use of independent staff to provide them with the information they needed to determine what their votes should be on matters coming before their boards. Most of them simply voted to support the management's preferred resolutions not knowing or caring if it was in the best interest of the stockholders and the corporation itself, which is, in my opinion, gross negligence.

What is also needed to restore public confidence? First, the assurance that those who violate their obligations of office, e.g., CEOs, CFOs, directors, other corporate officers and employees, will receive prison time if the corporation was used to commit illegal acts. The rule must be that when a corporation is indicted either by the feds or by state authorities, that no longer will it be allowed to plead guilty or "no contest," and simply pay fines, which some corporate officers consider to be business fees, no matter how high the amount. The individuals who intentionally directed or permitted the criminal acts to occur must be included in the indictment. When the President and Congress propose raising the criminal penalty from the existing five years to 10 years for corrupt acts, it is to laugh, since so few, if any, of these bozos ever get the five years or serve it. In fact, I believe the sentences could be less than five years if actually served in prison and those convicted are heavily fined, required to provide restitution and banned from ever again working in their professions.

Why am I staying in the market? I look back and remember that in 1987, the market in which I then was invested collapsed with the Dow at approximately 1600 falling from an approximate high of 2700. It has since risen to a high of approximately 11,500 and is currently at about 7700. I'm still way ahead from where I began and expect to surpass the last high within the next several years, if not earlier. Remember, I don't know anything about the market, so, don't take any advice from me on what you should be doing. Talk to your broker, if you trust him. If you don't, get rid of him and retain someone you know and trust or someone whose reputation is of the highest caliber.

Our clarion call should be, "Prison for the corrupt."

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JWR contributor Edward I. Koch, the former mayor of New York, can be heard on Bloomberg Radio (WBBR 1130 AM) every Saturday from 9-10 am. Comment by clicking here.

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© 2002, Edward I. Koch