NCPA - National Center for Policy Analysis

Greenspan Looks to Market to Forstall Future Enrons

March 27, 2002

In his most comprehensive comments to date on the issues raised by the Enron debacle, Federal Reserve Chairman Alan Greenspan has warned against relying on further regulations and legislation to protect against future Enron-type scenarios.

In remarks before the Stern School of Business at New York University, he reiterated his confidence in free market checks and balances.

Here are a few of his observations:

  • He defended the current approach to corporate governance -- with reliance on trust in the chief executive as the best available -- and suggested that the market was already disciplining corporations by penalizing the stock and bonds of those which try to deceive investors.
  • He said investors seem to be awarding higher relative values to companies whose earnings reports were not exaggerated or misleading -- and that the reliability of financial statements was being reflected in corporate bond prices.
  • Regulation, he said, has "proven only partially successful in dissuading individuals from playing with the rules of accounting."
  • He added that some issues, nevertheless, were ripe for legislative or regulatory action -- especially accounting rules that allow companies to issue stock options as compensation without counting them as an expense.

However, some Senate Democrats want to extend legislation even farther, increasing criminal penalties for some kinds of corporate wrongdoing and giving states attorneys general additional power to sue companies.

Source: Richard W. Stevenson, "Greenspan Says Enron Cure Is in the Market, Not Regulation," New York Times, March 27, 2002.


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