Wall Street’s ‘Poisoned Apples’

(Washington, D.C.): 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.

Enter the Global Security Risk Monitor’

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 ineluctable 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.

Who is Very Evil’?

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 start-up Global Security Risk Monitor: Communist China. As noted by the Center last week,<¹ 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 systems.”

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 democratic Taiwan.

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.”

The Bottom Line

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.

¹See the Center for Security Policy’s Decision Brief entitled: “Back On the China Front” (No. 02-D 36, 15 July 2002).