Wall Street ballyhoo and flim-flam to the contrary, the year 2005 closed-out half a decade of misery and pain for the average investor in US equities according to Federal Reserve flow of funds accounts F102 and L102.

	Investors Forsaken by the SEC

During these years, the SEC, the investors’ watchdog, had forsaken investors and averted its gaze from the diversion of shareholder wealth through buyback-option schemes, while appearing to protect shareholders’ interest with the show trial of Martha Stewart, for a matter unrelated to ordinary investors’ well-being.

With January 2000 as a starting point, the Federal Reserve flow of funds accounts show that stock investors were down $4.3 trillion in portfolio value and dividend payouts in 2005 were only running at about the same level as in 2000, five years earlier.

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On April 26, 2020 at the Milken Institute in Los Angeles, California, at the Milken Institute Global Conference for 2006, the topic “Baby Boom — Baby Bomb?” was debated by Michael Milken, Chairman of the Institute, and Professor Jeremy Siegel, of the Wharton School, University of Pennsylvania. The debate was moderated by Paul Gigot of the Wall Street Journal.

This debate was of such significance as to be featured in BusinessWeek on June 5, 2020, in the article, “When Boomers Cash Out: A buy-and-hold legend sees tough times ahead.”

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The Sarbanes-Oxley Act of 2002, by discouraging companies to go public, will exacerbate the shortage of equities, with a negative effect on the U.S. stock market, although this was not the intent of its authors.

The formal intent of the Act was to “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.”

This goal will not be achieved. In fact, the opposite may be the outcome.

Inspired by Enron

The December 2001 bankruptcy of the Enron Corporation was the legislative inspiration for Senators Sarbanes and Oxley who swallowed hook, line, and sinker the popular press story that the Enron bankruptcy would not have happened if it were not for devious accounting practices of its admittedly unscrupulous executives.

When Enron shares reached the all-time high of $90 in August 2000 (just as the Great Bubble of the 1990s was about to burst), its shares were selling at a speculative 61 times earnings with a dividend yield of only 0.5%. The financial statement of December 2000 showed a current ratio of a mere 1.06 with equity only 17.4% of total assets. The company was engaged principally in speculating in exotic energy contracts and derivatives. Its bonds never rose above the lowest investment grade.

In other words, a quick examination of the published statements would reveal the plain truth, even to an amateur analyst, that this was an extremely highly-leveraged speculative company, with no cash reserves or working capital, borderline credit, with little investment merit and with stock that was wildly over-priced, floating in the clouds of Wall Street ballyhoo.

Many things, from a terrorist bombing to a catastrophic hurricane, could have driven Enron into bankruptcy. The company existed on the extreme edge of an asset-lite financial fantasy world created by Jeffrey Skilling, the Harvard MBA and fair-haired boy from McKinsey and Company. Just as in the case of Long Term Capital Management, the nutty ideas of the Nobel Gods had fallen to earth.

The Sarbanes-Oxley Act would not have prevented the Enron bankruptcy and does absolutely nothing to protect investors against the far more common, harmful, and widely accepted corporate practice of diverting hundreds of billions of dollars of corporate cash reserves each year into company executive bank accounts through stock buyback-option schemes, instead of equitably paying dividends to shareholders.

See: Essays on Stock Buybacks and Options.

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