Rupert Cornwell: Knives are out for corporate America's most greedy (well, until the next boom)

Yesterday, I guess, was pretty average for the criminal rapsheets which pass for business news front pages here. Members of the Rigas family which once controlled Adelphia, the sixth-largest US cable company, were indicted for swindling investors out of $250m (£160m), and hiding $2.3bn of corporate loans to the family.

Alongside, we learnt that Citibank's Salomon Smith Barney investment bank had accepted a $5m fine for duping its clients and puffing the stock of Winstar, a broadband internet provider that went belly-up last year.

Featuring in the saga, inevitably, is Jack Grubman, Salomon's $20m-a-year telecoms analyst who was Wall Street's version of a rock star – until it emerged he was an intimate of the bosses of WorldCom, another hot communications stock whose shares he pumped. WorldCom has also filed for bankruptcy, having concealed $6bn (or is it $8bn now?) of losses. One massive rip-off blurs into another. It is almost impossible to keep up.

Thus however do market bubbles burst, with corporate collapses and charges of criminality. But they also end with smaller excesses, such as $15,000 dog umbrella stands, $2,900 coathangers and $1m birthday parties for the wife of Tyco's erstwhile chief executive, Dennis Kozlowski, in Sardinia (paid for by the company, naturally). Had we but known of them, we would have realised the longest and giddiest stock boom of modern times was approaching its lurid end.

Was it only two or three years ago that the renaissance of corporate America was being hailed as a model for all civilisation? When Enron was hiring 250 MBAs a year and its fallen CEO, Jeffrey Skilling proclaimed a new mantra, how "In the old days, people worked for the assets but now the assets work for the people?" The business cycle had been banished, ahead lay only gleaming uplands of ever-rising profits, wealth and prosperity.

James Glassman and Kevin Hassett published their book Dow 36,000, explaining how – even at record levels – market values were but a third of what they should be. Meanwhile, Warren Buffett, once regarded as the wisest investor in the land, was mocked as a fuddy duddy for his aversion to hi-tech stocks. Beyond America's shores, the apparently irresistible US model underlay the so-called "Washington consensus" that liberal, free market economics were the key to development everywhere.

Ah Nineveh and Tyre. The endless boom has been revealed for the bubble we all deep down knew it was. The Nasdaq is at a six-year low, having lost 76 per cent from its March 2000 peak, while the Dow is testing the "floor" it was held to have hit in July. Every boom of course has its wide boys. What we did not suspect, however, was how wide they were – the sheer extent of the greed, chicanery and downright fraud that sustained the boom.

The shock that reverberates through mainstreet America is twofold. There is the amazement that the guardians were asleep on the job, or worse. Even now it is hard to believe how an audit firm such as Arthur Andersen, supposed to be a pillar of probity but in fact prey to a hopeless conflict of interest, failed to raise the red flag at its clients WorldCom and Enron – and then shredded compromising documents.

Only now do we fully grasp how stock analysts such as Mr Grubman, naively imagined to be impartial judges of corporate performance, were really those corporations' East Coast promotion men. In short, figures and research papers on which an ordinary punter made his market judgements might be little more than a pack of lies.

And if only that were all of it. Dog umbrellas and gala bashes on Italy's Costa Smeralda were the tip of an iceberg of greed. Not only did the CEOs of Enron, WorldCom and the rest lead their companies to disaster, they made a bomb in the process, often through stock options turned into gold by an artificially inflated stock price.

When the market soared, the disparities were bearable. Chief executives such as Mr Skilling truly did seem visionaries, creating wealth for everyone. If chief executive pay leapt by 535 per cent between 1990 and 2001 and Jack Welch, the most revered of their number, fixed himself a retirement package to make Croesus blush, nobody protested too loudly. After all, the market rose 300 per cent then. But when stocks began their nosedive, the music changed.

For the chief executives, as their companies plunged towards the abyss, it made no difference. Whether they walked away of their own accord, or were forced out, the top executives left as extremely rich men. The 1990s bubble followed the usual rules: the markets keep going up, and ultimately the masses can't resist, daring not miss out on a sure thing. But as the ordinary investor bought, egged on by Mr Grubman and his ilk, the big guys pulled out.

Thus the remarkable calculation by the Financial Times that 181 leading executives at the 25 largest US companies to declare bankruptcy since 2001 took with them a total pay of $3.2bn (an average of some $16m apiece). So much for putting your money where your mouth is. Not privy to such inside information, lesser mortals saw their savings shrivel. President George Bush is probably right when he says that the vast majority of chief executives were honest. But he's missing the point. A few rotten apples do subtly infect the whole basket. An "everyone's-doing-it-mentality" takes hold, in sound companies as well as dodgy ones.

Much today drives the markets down: war drums over Iraq, poor corporate results and fears the US economy could be entering part two of a double-dip recession. But pervading everything is a corrosive loss of public trust in the system. The old guardians, the analysts and the accountants, have been found wanting. And what of the boards of directors, supposed to protect the interests of shareholders but act as rubber stamps for every whim of the top executives? Why, embittered small investors ask, should they play a game rigged from the get-go?

Superficially, the system is coping. The US Treasury Secretary, Paul O'Neill, has a point when he says that the precipitate fall of Enron reflects the "genius of capitalism" – that in the end the fraudsters are found out, and the Government will not (or cannot) save them. Would this have happened in Russia or even France, not to mention developing countries where business and government are two words for the same thing, where nepotism and institutionalised corruption are the system?

But try telling that to the average Enron worker. Alas, the luminous justice of this free market model does not extend to the Ken Lays, Jeffrey Skillings and Andrew Fastows who cashed their chips for hundreds of millions of dollars, while the rank-and-file employees who were prevented from doing so lost not only their jobs but their retirement savings too.

As the receding tide on Wall Street has exposed other corporate shipwrecks, some of those responsible are seen on TV leaving courthouses in handcuffs. Others are facing angry Congressional panels, or that uniquely American hell of lawsuits without end. Driven by public outrage, Mr Bush has signed an unexpectedly tough accountancy reform bill. Top executives for their part now must reimburse stock options and other goodies they received for financial years in which accounts had to be restated. This, it is maintained, will dissuade them from cooking the books to drive up the share price and thus line their own pockets.

All in all, some argue that the danger is of over-reaction, that the new measures will get in the way of a normal, and perfectly healthy, market recovery. In that sense, regulation mirrors the tendency of the market themselves to overshoot. Either it is too lax, or too severe. Right now, it may well have veered from the former to the latter. But sooner or later, as surely as day follows night, another great boom will occur. Lack of trust (aka fear) will give way to the belief that easy pickings are there (aka greed). Once again exuberance will become irrational. Such are market bubbles and such is human nature.