Even before the carnage of the past week and yesterday, U.S. government policy had destroyed US$5.6-trillion in U.S. stock market wealth in a little more than two years -- or 33% of the peak value (US$17-trillion) reached in March, 2000. Nearly US$2-trillion has been destroyed in 2002 alone. Instead of conducting a War on Terrorism, the U.S. government -- to the applause of most economists, journalists and (yes) CEOs -- is conducting a War on Business.

Nothing has yet been done to eradicate or punish the Axis of Evil (Iraq - Iran - North Korea) that was so ably identified by U.S. President Bush in January. In its place is a new Axis of Evil: Accountants - Analysts - CEOs. It should be obvious why both of these policies are harmful to the stock market: The first continues to expose business to terrorist attacks, while the second exposes it to an array of new regulatory attacks. In Washington this summer, Congress was supposed to hold hearings to investigate the foreign-military-security policy breakdowns that permitted the destruction of Sept. 11. They lasted all of two days. No one in government was fired, no one was fined or jailed -- and focus was quickly shifted to alleged "corporate crime."

The graph nearby gives a brief account of actual government interventions that have been inflicted on markets since March of this year. These and other interventions since March, 2000, are the main cause of the destruction of trillions in corporate stock values. Value destroyed due to corporate fraud -- say WorldCom's US$3.8-billion in overstated earnings -- is but a tiny fraction of this gargantuan, overall loss.

No major executive -- or even dozens of them -- can possibly come close to destroying wealth on a scale that government can. We suspect that most politicians know this all too well -- and that their anti-corporate screeds are an attempt to issue a smokescreen to deflect attention away from the real culprits (them). Nor has any Federal Reserve official -- least of all Alan Greenspan -- been criticized or asked to resign for raising rates and trashing markets. Nor has any U.S. trust-buster been called to account at the so-called Justice Department; if anything, trust-busting has intensified recently. Nor has anyone in the California state government been held accountable for causing blackouts, losses and bankruptcies.

The alleged "corporate crime wave" is nothing but a smokescreen and a lie (but a dangerous one) to divert attention from the real wealth destroyers. Since the stock market peak of March, 2000, -- a peak, by the way, which was shared by nearly all major stock markets in the world -- the U.S. stock market (as measured by the S&P 500), despite negative absolute returns, nevertheless has outperformed seven other major markets. These include Japan, Germany, Hong Kong, France, Sweden and Italy. And U.S. stocks have only slightly underperformed stocks in Canada (by 0.1 percentage points), Britain (by 2.2 percentage points) and the Netherlands (by 3.2 percentage points).

If the real cause of U.S. shareholder wealth destruction is "corporate fraud," or "dishonest accounting," or "incompetence" -- as so many claim -- one would have to conclude that fraud, dishonesty and incompetence have occurred to a far greater degree and in a far wider scope in these other countries, versus the United States.

Below is a list of proposals that may be imposed on business within the year. We rank these proposed interventions from most egregious (bearish) to least egregious:

- Formation of a new Corporate Fraud Task Force, headed by the deputy attorney-general of the United States (established on July 9 by an executive order of the President and described by him as a "financial crimes SWAT team");

- Creation of a government-staffed and run Public Accountability Board to oversee, micro-regulate and punish private accounting firms;

- CEOs must vouch for the accuracy of their corporation's financial statements, sign off on them and be held personally liable for any "material" errors that might be uncovered later;

- Executives must be required to hold any stock (or stock options) in the corporations they work for, for as long as they work there;

- Corporate boards must include members who are "independent" of the firm;

- The IRS is to investigate and subpoena accounting firms that promote (legal) tax shelters for the wealthy;

- Jail terms for corporate fraud will be doubled, from five years to 10 years;

- Increase the SEC's budget by 77%, to US$750-million, and employ 100 additional SEC investigators and enforcement personnel;

- The IRS is to block reincorporations in "tax havens";

- Strip CEOs and executives who "abuse the trust of investors" of all forms of recent compensation;

- Freeze the compensation of executives who are under any kind of government investigation;

- Compel accounting treatment of stock options as a corporate expense;

- Make the "improper" destruction of certain corporate documents a crime;

- Compel CPA firms to divest consulting and tax advisory practices;

- At brokerage firms, force a separation of research from trading and investment banking, and impose greater government censorship of research;

- Force the public disclosure of corporate tax records and filings;

- Implement an SEC rule to more than triple the number of items and events companies must disclose and to accelerate the timing of those disclosures;

- Compel reporting of all transactions by "corporate insiders" within two days;

- Prohibit corporations from making loans to executives;

- Deprive firms of federal contracts if they're under any investigation or if they access tax havens.

The harsher and more comprehensive the eventual regulatory assault on corporations, the more likely it is that the market will remain depressed. The less severe and less comprehensive the "reforms," the more likely it is the market will bottom out and recover (but not quickly or robustly). The market already has, to a large extent, discounted or "priced-in" the bulk of the (likely) bad effects of the current proposals. But proposals could easily become more punitive in the current congressional-regulatory feeding frenzy. Corporate earnings in the United States already bottomed out three quarters ago, but, as indicated above, regulatory-political risk is undermining the quality of those earnings. Even if earnings continue to increase (they will) and even if they increase by as much as 25% over the coming year (as is likely) stock prices will not increase by anything close to that magnitude.

DOW JONES AVERAGE UNDER ATTACK:

MAR. 6 2002 Bush imposes steel tariffs

MAR. 22 Bush imposes lumber tariffs

APR. 25 AOL-Time Warner writes off $54-billion in goodwill

MAY. 3 O'Neill, in Congressional testimony, abandons strong dollar policy

MAY 13 Bush signs farm subsidy bill, reversing free market agenda

MAY 22 Merrill Lynch fined $100- million for analysts' faulty forecasts

JUNE 4 Tyco Int'l CEO ousted for "tax evasion"

JUNE 17 Arthur Andersen is convicted of "obstructing justice" - and dissipated

JUNE 20 FTC launches antitrust investigation against DRAM chip makers

JUNE 21 SEC/Congress propose a partial nationalization of the accounting industry and noncorporate directors

JULY 8 WorldCom executives grilled by Congress

JUL. 9 Bush proposes "crackdown" on "corporate fraud"

JULY 10 IRS sues KPMG and BDO Seidman to disclose tax shelter advice

JULY 11 Republicans joint bill to jail CEOs

JULY 12 Congress assaults firms and shareholders for voting to access tax havens, promises to block them

JULY 16 Greenspan decries "infectious greed"; Congress moves to expand legislation on corporate crime

JULY 18 Congress agrees on $28.9- billion in new emergency spending, increasing U.S. government deficit

JULY 22 Bush says WorldCom bankruptcy should push Congress to take action on corporate crime

Source: Bloomberg News