Louis Rukeyser on Scandals, Reforms, Taxes, and More
from March/April 2003
by William S. Rukeyser
At 70, Louis Rukeyser shows few signs of tapering off. He writes and hosts the weekly television show Louis Rukeyser’s Wall Street; edits, and writes large chunks of, his monthly stock and mutual fund newsletters, the country’s most widely circulated; speaks often around the U.S. for hefty fees; and presides over thronged investment cruises and conferences.
He made headlines of his own last spring. After 32 years at the helm of public television’s Wall $treet Week With Louis Rukeyser, he parted company with Maryland Public Television (MPT) when it surprised him with plans to revamp the program—by far the most watched of any financial TV show—rename it Wall $treet Week With Fortune, and diminish his role. Within weeks he was back on the tube at his usual Friday-night time with three of his four W$W corporate underwriters and all 22 of his regular panelists—this time on CNBC, where Louis Rukeyser’s Wall Street soon became the cable network’s top-rated program. In a unique arrangement, CNBC airs it on Friday nights and then makes it available to PBS stations for weekend rebroadcast; 167 PBS stations have signed on, contributing to a combined weekly audience of more than a million viewers. Meanwhile, the Maryland replacement show has languished, and MPT has had to cut staff and salaries.
Just as there is life after Wall $treet Week, there was life before it. Once, in fact, Louis Rukeyser was a little boy, growing up in and around New York City with his parents and three brothers, one of whom, William S. Rukeyser, grew up to become editorial director of Corporate Board Member (and a former managing editor of Fortune). On a rainy night late last fall in his Connecticut living room, Lou sat down with Bill, 63, to explore what recent developments in business, the markets, and Washington may mean for corporate directors in particular. Excerpts:
William S. Rukeyser: Which do you think has scared investors more, terrorism and the threat of war or the Enron and other scandals and the reactions to them by legislators and regulators?
Louis Rukeyser: I think there’s a much more enduring legacy of the terrorism. The preoccupation with corporate and accounting scandals will pass, as it has in the past. There’s nothing like a bull market to bring out the crooks, and nothing like a bear market to start catching them.
The financial markets have been hit by an unprecedented quintuple wind—first, the Internet overinflation. Then came the recession. For two or three years I had been warning that what I regarded as an excessive and untimely tightening by the Federal Reserve was going to have deleterious economic effects. I’d get a flood of mail every week in which people would inform me that Alan Greenspan knew more economics in his little finger than I knew in my entire body and that Alan Greenspan would not be taking these steps if they would do any harm to the American economy.
Just when we were showing signs of beginning to get over that, we had 9/11.
I am convinced that its effects have been underrated, whereas I think some of the others have been overrated. The markets remain highly jittery, so that when we had the anthrax scare the markets took a tumble. And we see it whenever there is a new threat of terrorism.
Then we had the rash of corporate and accounting scandals, just when people were beginning to get some footing again. And now we have the twin worries of the geopolitical uncertainty, focused as we speak on Iraq but it’s broader than that, and also of still-disappointing corporate earnings.
So it’s not surprising the market’s been going through a rough patch. It’s had a lot on its mind.
BILL: The scandals didn’t help.
Lou: Those of us who believe in a free-market system should not be in the slightest defensive about this issue. We should be the most indignant of all. I think the perpetrators have ill served the republic and they have ill served the cause of economic freedom. So I hold no brief for them.
Having said that, I think that as usual in America we’ve let the pendulum swing too far. We have been sympathetic to the somewhat nutty idea, in my judgment, “Business bad, government good” . . .
BILL: Not among our readers.
Lou: [Laughs] That’s right. Your readers have been among the victims of this attitude.
I hope that corporate directors do not get discouraged by the assault on their integrity. I hope that they reexamine, make sure that their slate is as clean as it ought to be. And they should never forget who it is they’re supposed to be representing—which is not that nice fellow who put them on the board, and who they’re going to put on their board next week, who plays a lovely game of golf and has such a charming wife—but that they’re working for the owners of the company, the shareholders. I hope that they’ll be vigilant in doing their jobs as overseers.
BILL: Will the Sarbanes-Oxley corporate-reform law help or hinder?
Lou: It may have been overkill. We’ve set rules, particularly governing CEOs, that are going to be unacceptable to many companies elsewhere in the world, and as a result you may see, in the narrowest sense, that they won’t list on the New York Stock Exchange though they planned to, and in the broader sense that they may be a little wary of getting too tied in to our economic life.
The underlying notion that honesty in numbers is something that we should be taught by the United States Senate and House of Representatives doesn’t belong on the evening news. I think it belongs on Saturday Night Live.
BILL: Do you think that all the requirements in Sarbanes-Oxley are likely to further damage the initial-public-offerings market, by making companies thinking of going public decide, “Who needs all this regulation and trouble?”
Lou: I think when we have a more vigorous stock market that we will see IPOs again, so I don’t want to be too sweeping. Sarbanes-Oxley is inhibiting not just IPOs, but innovation. It also clearly—talk to the audience of your magazine—is making it harder to recruit directors. If we discourage people of intelligence and integrity from being corporate directors, the whole economy will lose out.
BILL: If you were a director of a private company that was looking toward going public, would you tell your fellow board members to reconsider?
Lou: Certainly a number of companies are reconsidering. A number are either delaying IPOs or even talking about going private, in a way that was not heard two or three years ago.
There’s a great history of abuses being discovered and economically ignorant media pouncing on them, resulting in a vast array of legislation designed to cure it once and for all and banish evil from the world. Our father [the late financial commentator Merryle Stanley Rukeyser] told the story that 70 years ago, when the Securities and Exchange Commission was first established, his friend Bernard Baruch allegedly said to him, “It’s a big mistake, Ruk. The suckers are going to think they have a government guarantee.”
Two things can weed this out more effectively than politicians. First is the marketplace: People are going to be a little more skeptical about company reports, and they’re going to insist on a higher level of proof. Companies are so scared about appearing on the front page as having overstated their prospects that I think some of them are deliberately understating and you’re seeing the pendulum swing too far in that direction.
The second area is the courts. We have pretty tough laws on the books against fraud.
BILL: Are there things that companies need to be doing now to get investors back?
Lou: They have to be clean as a hound’s tooth. But I reject the prevailing view that most of American business is corrupt. I reject the prevailing view that most accountants are bums. And I also reject the prevailing view that analysts have no worth. The best analysts have been very valuable over the years. To give you one example, an academic study done at the Universities of Chicago and California of 17 years of my old program discovered that if you’d done what I’ve always advised people not to do, which is to rush out on Monday morning and buy whatever has been recommended and then sell them one year later, over those 17 years you would have beaten the S&P by an annualized 4%. So the notion that nobody is giving good information to the public, that it was all just a scam designed to get investment-banking money, is a grotesque overstatement.
BILL: One of the things our father was proud of was that he belonged to the New York Society of Security Analysts. As the scandals involving analysts have unfolded, it’s occurred to me that the environment really has changed. There wasn’t always the built-in conflict of interest that there has been in recent years. The conflict started, I guess, with the end of fixed brokerage commissions in 1975—suddenly the retail customer wasn’t worth providing expensive services to as much as he had been. And later, with the mixture of retail brokerage with investment banking, the conflicts got worse. Does the system need to change?
Lou: You’re absolutely right that some of the blame attaches to the large brokerage houses in particular. Many have been their own worst enemies, in showing contempt for small investors. My own first investment in the stock market was precisely $286. It was June of 1950, I was graduating from high school, the Korean War had just started. One of the things the Marxists are wrong about, among many other things, is that they say Wall Street’s a bunch of warmongers. In fact, as we see repeatedly, Wall Street’s a bunch of peacemongers. And when the Korean War started, the stock market predictably took a big dive, and I stepped in with my earnings as a high school sports reporter and did my part to save America by purchasing three shares of General Motors.
Those shares increased in value seven or eight times over the years, plus paying a dividend of some substance by today’s standards, until I sold them 18 years later as part of the down payment on a house. And I wondered how long this had been going on! But just imagine if somebody had said to me, “You think you can get started in the stock market with $286? Why are you wasting our time?”
BILL: If one of your children or grandchildren came to you and said, “Dad, Grandpa, I’m thinking about becoming a Wall Street security analyst,” what would you say?
Lou: [Smiles] Well, as long as their other habits were good, I don’t think that would be disqualifying.
I would tell them what they had to contend with, what they would need to succeed there. I’ve always thought that the closest parallel I can get to security analysts is foreign correspondents, which you and I both spent some time being. Very often they’re most valuable when they’re least admired in the area that they’re covering. But I never thought that nonstop negativism was journalism. I don’t think that nonstop negativism is security analysis, any more than nonstop boosterism is. These people are useful when they do a little independent research and when you can understand their thinking and why they reached their conclusions.
BILL: You can make a case that Regulation Fair Disclosure [requiring companies to give significant news to all comers simultaneously] has been particularly damaging to small companies, which depend on relationships with, if they’re lucky, one or two analysts who take an interest in them, and which have to do what they can to cultivate those analysts.
Lou: Regulation Fair Disclosure has had a lopsided negative effect on smaller companies, and I think it’s had a negative effect on the economy as well as the financial markets. The notion that you can’t tell analysts anything, which is the way an awful lot of companies have interpreted this, has, I think, limited the free flow of information rather than enhanced it. Letting the government decide precisely who should say what to whom doesn’t work very well. The course of the financial markets since each of these wonderful reforms has been put in has not been a sudden revival to the upside.
BILL: Do you have any opinions on which are the best-run companies in terms of how top management communicates with investors?
Lou: I think that those that make their CEOs available are smarter than those that don’t. And if I look back over the years at the ones that made their CEOs available, I’m not surprised to see that they have tended to do better than those that hid them.
BILL: I have to say that [former Enron CEO] Ken Lay was always very amenable to being interviewed.
Lou: But that was different. He went to the other extreme: They said it was the best company in the world. You can be full of bombast too, but if journalists do their job—which is a big “if” sometimes—they don’t have to just ask soft-soap questions any more than they have to always be attacking.
BILL: When these people from the Enrons and WorldComs and others of their ilk finally go to trial and sit there before jurors, do you think the fact that many of those jurors have seen their 401(k)’s decimated will have any impact on their judicial temperament?
Lou: Absolutely yes. The notion that there is a conspiracy, that the little guy always gets screwed, is immensely appealing, particularly in a bear market. What I’ve found true of business generally, and true of a number of other professions, including journalism, is that outsiders tend always to overrate the malice and underrate the incompetence.
BILL: Will the changes President Bush made in his economic team have a significant impact on investor confidence?
Lou: Let’s hope so. [Former Treasury secretary] Paul O’Neill was a disaster; he showed absolutely no grasp of the economics of growth, was clearly unsympathetic to the presidential economic policy he was supposed to be spearheading, and was an awful communicator. Other than that, a splendid choice as secretary of the Treasury! Larry Lindsey [former assistant to the president for economic policy] was a much better economist, but ran afoul of the political team at the White House, which itself has done a superb job on security matters while continually revealing a troublesome tin ear on economic and financial matters. The backgrounds of the two new appointees [John Snow at Treasury and Stephen Friedman at the White House] are far from entirely reassuring or unambiguous on the economics-of-growth question, but both swear they are now totally on board with the Bush tax-cut approach. Stock investors’ confidence would certainly be helped by a bold, unapologetic tax-cut program, including across-the-board rate cuts, movement toward ending the corporate-finance-distorting double taxation of dividends, and more realistic relief on capital losses. The way to balance the budget, as usual, is to ignite the private economy while restraining government spending.
BILL: In the November elections, the voters reacted less to the problems of the economy and the markets than many expected. Was this because they were preoccupied with terrorism and the threat of war?
Lou: It certainly is a bigger concern right now, but it would not have been if we had had much more massive bad times than we did. This was, let’s face it, a very shallow recession. We’ve had a very anemic recovery, but that’s not a surprise. Very often the recovery is in proportion to the recession.
BILL: Why don’t you give Alan Greenspan more credit for the length of the boom and the mildness of the recession?
Lou: Don’t misunderstand me about Alan Greenspan. I just think in Washington, where the economic IQ is somewhere in low double digits, that he was prematurely beatified. His record is mixed. I think he was too tight a decade ago, making things worse than they had to be then. I think he contributed mightily to keeping prosperity going through most of the ’90s. But then I think there was a moment of panic. Like generals fighting the last war, he became obsessed with inflation and took the focus off economic growth at a time when I think inflation was clearly not the dominant problem facing the country and sustaining economic growth was the problem.
I don’t hold him responsible for the excesses of the Internet, and in that case I’m being kinder to him than many of my media colleagues, who are suddenly saying, “Oh, if he hadn’t pumped it up in the ’90s . . .” I think that’s baloney. When he made that famous speech about irrational exuberance, it was 1996 and the Dow Jones Industrial Average was thousands of points below where it is even now, after this supposedly terrible bear market.
BILL: He did put a question mark after “irrational exuberance” in that speech.
Lou: Right now I think he’s doing the right thing. I hope that he follows through.
BILL: To what extent do you think Greenspan should worry about the effects of his actions on the stock market?
Lou: I don’t think he should. His job is to have a moderate, steady expansion of the money supply and not be too concerned about how the market’s going to take it today.
BILL: Finally, on a personal note, what have you been doing all these decades since you left home and everybody lost track of you?
Lou: I’ve actually been painting watercolors in the South of France. One of these days I’m hoping to sell one.
