In recent weeks, government officials, business leaders and market
analysts have assured shell-shocked American investors that plummeting
indexes are the fault of just a few corporate "bad apples." Unfortunately,
the loss of confidence so far induced by the lack of transparency and
accountability in a handful of board rooms is likely to pale beside the
problems associated with what might be called Wall Street's "poisoned
apples" -- some 300 U.S. and international companies with ties to
terrorist-sponsoring states and/or their commercial enterprises.
The companies in question have recently been identified by a new
product called the "Global Security Risk Monitor." The Monitor describes
the operations of companies that have links to one or more of six countries
(Iran, Iraq, Syria, Libya, Sudan and North Korea) designated by the State
Department as state-sponsors of terrorism. In addition, it profiles
companies that have been publicly linked to proliferation-related concerns.
Subscribers can discern within a few clicks of a computer mouse the kind of
people and enterprises who would benefit from their investments.
This could, and should, have two salutary effects: First, the
Global Security Risk Monitor will enable those Americans who have no
interest in helping to underwrite terrorists or their sponsors -- surely a
majority of the roughly 60% of our countrymen who now own a piece of Wall
Street -- to do the financial equivalent of "voting with their feet." They
can divest their personal portfolios of stocks and bonds of companies and
foreign state-owned and government entities associated with such threats as
terrorism and the proliferation of weapons of mass destruction. Even more
consequential would be if they were to demand that the trillions of dollars
wielded by institutional investors managing their funds (for example,
through pension plans, life insurance companies, mutual funds, etc.) also
desist from holding such financial instruments.
Second, the transparency imposed by the Monitor should impress upon
corporate executives and boards of directors, as well as investors, that
there is a real risk to share value if their companies persist in doing
business with countries that wish to do us harm -- or who collaborate,
underwrite or otherwise support terrorists who do. President Bush has made
clear the U.S. government's determination to cut off the financing that
enables al Qaeda and other terrorists to operate. Deputy Secretary of
Defense Paul Wolfowitz has metaphorically described the challenge we face as
one in which we must not only swat at the terrorist "mosquitoes" but "drain
the swamps" in which they breed.
The clear logic is that companies "with us" in the war on terrorism
will not be doing business with terrorist-sponsors. Those discovered to be
doing otherwise should reasonably expect to suffer in the marketplace as
their activities come to light.
Investors concerned that they may unwittingly be financing threats
to this country have a new front to worry about -- one that is, regrettably,
not currently addressed by the Global Security Risk Monitor: Communist
China. As noted in this space last week, a report just issued by the
U.S.-China Security Review Commission expressed concern about the PRC's "use
of the U.S. capital markets as a source of funding for the Chinese military
and intelligence services and for Chinese companies assisting in the
proliferation of weapons of mass destruction or ballistic missile delivery
It is not clear whether American investors -- who have thus far
shown commendable willingness to hold onto much of their stock portfolios in
the expectation that the market will come back -- will be similarly disposed
towards companies that have allowed their resources to be used by China and
its friends to threaten this country and its interests around the world.
The prospect that they might not so alarmed the Chinese Foreign Ministry
that it took the unusual step last week of formally denouncing the
Commission's work on capital markets as "very evil."
China is currently in the midst of what appears to be an
increasingly messy leadership struggle. If past experience is any guide,
the principal beneficiary of the competing factions' bids for power will be
the People's Liberation Army (PLA). The Chinese military will give its
support to whomever offers it the greatest amount of resources, advanced
weapons technology and latitude in bringing Taiwan to heel, dominating Asia,
driving the U.S. out of the region (by force if necessary), etc. Even as
things stand now, according to the Security Review Commission, the PLA's
build-up may put it in a position as early as 2005-2007 to move against
The Commission served stark notice: "[China's penetration of the
U.S. capital markets] not only poses direct security concerns, but raises
issues regarding investor transparency and material risk as well." The
report went on to say that "Given this dynamic, the Commission is troubled
that neither the U.S. government nor the U.S. investment community is
adequately evaluating security-related risks related to China's fund-raising
in the U.S. capital markets."
Clearly, if the federal government and Wall Street truly want to
reestablish investors' confidence in the U.S. financial market, they are
going to have to find ways to address the need for transparency not only
with respect to corporate governance of a few "bad apples" but also with
respect to the "poisoned apples" that could pose mortal threats to us all.