THURSDAY, JUNE 27, 2002 — A long time ago and in a different life, I was a law student at New York University School of Law. My favorite class was corporate law, where the lessons of the 1980s were hammered into our heads. In that class, Professor Marcel Kahan taught us about the checks and balances that kept the financial system in place. Shareholders could bring lawsuits against executives for raiding corporate coffers. Those who used information gleaned through their positions to purchase or sell stocks at a profit could be prosecuted federally or sued civilly for insider trading. And those who cooked the books could be prosecuted for fraud.

This was in the early 1990s, so many of these lessons involved the excesses of the 1980s. While the economy back then was in the doldrums, at least the appropriate parties were working to make sure that checks and balances were riveted back into place. Ivan Boesky went to jail. So did Michael Milken. Mickey Monus, the CEO who orchestrated the hiding of a $500 million shortfall at Pennsylvania-based pharmacy chain Phar-Mor (one of the largest corporate frauds ever at that time), was convicted. The takeover craze of buying corporations for their auction value, which left workers out of jobs, abated for a while. By the time I next checked in with the market, it was flying high — at far higher levels than it ever had before.

Now all the lessons of the 1980s and early 1990s seem to have been forgotten. Even Martha Stewart, blares the New York Daily News, is the target of an insider-trading investigation. Particularly disturbing is the news that executives at WorldCom did Mickey Monus and Phar-Mor one better by hiding $3.6 billion in losses. The WorldCom story, like Enron’s before it, demonstrates the complicity of accounting firms and auditors with less-than-scrupulous executives.

Trying to make sense of these events, I checked in with my former professor. He was concerned, but did not view the state of affairs as apocalyptic. The right people are being investigated in the ImClone scandal, and the WorldCom fraud will incur stringent federal scrutiny, if not prosecution, says Kahan. More important, he says, is to reform the audit system that was supposed to act as a check on corporate excesses.

In particular, Kahan advocates the remedial measure of requiring executives’ stock options to be listed as a cost on corporate balance sheets. "Stock options are an expense and should be accounted for as an expense," he says. "When they are granted, you are giving something valuable away." This measure, if adopted, would at least help maintain a reasonable balance between the amount executives can cash in and the financial health of the company.

Not everybody is as sanguine as Kahan about the market’s ultimate health, however. Some on Wall Street are talking of "shareholder populism," a wave of shareholder anger led by enraged pensioners and stock-holders that will crash down upon the financial system. The political fallout of this movement has yet to be felt. President Bush yesterday vowed to "hold people accountable" for their roles in the fraud. The Chicago Sun-Times’ Robert Novak claims that Bush read a group of executives the riot act over the unfolding sordid disclosures about business ethics in the modern era. Novak’s reporting is usually solid, so there may be a kernel of truth behind his story. But so far, Bush has done nothing of the kind publicly. He may have to, however; if the anger brewing among the public even remotely resembles the predictions of some on Wall Street, he’ll be in a race with the Democrats to see who can most effectively play the populist. Bush will have to deal with the inconvenient fact that his vice-president, Dick Cheney, was the CEO of Halliburton, a company that saw its stock value plummet when the Securities Exchange Commission launched an inquiry into how cost overruns were treated on its accounting books. This may block Bush’s potential populist play. Or perhaps Cheney will be the sacrificial lamb that enables Bush to play it.