Wall Street's Verdict

Yes, President George W. Bush was telling reporters, there is absolutely no doubt that Vice President Dick Cheney will beat the allegation that Halliburton Corp. cooked the books while he was CEO. And as for that slide in the stock market, chalk it up to a "hangover" from the Roaring Nineties (when Someone Else was in charge). According to a Bush adviser, the President is focused on the big picture and is "relatively uninterested in the daily economic ups and downs." Would that include the 390-point implosion in the Dow last Friday, which sent stocks hurtling through post-9/11 lows to levels not seen since 1998?

With observations like these, Bush has managed to look at once self-assured and self-delusional in delivering the message that while he knows people are hurting, the economy is fundamentally sound, that "some bad apples" are being purged from executive suites and that new laws will deter such behavior in the future. Shortly after the President uttered his hangover line in a speech to business executives in Birmingham, Ala., the market regurgitated more than 400 points before recovering--briefly. The Dow lost 7.6% of its value last week. The broader market, as measured by the S&P 500, is now down 45% from the high it set in March 2000. Some companies' earnings were down last week, but more were up, including DaimlerChrysler's and Microsoft's.

What investors were displaying was uncertainty: not knowing how many more corporate scandals would surface and not trusting that anyone in Washington was doing anything meaningful to clean up the mess.

The President and Congress appear to be zealously attacking corporate abuses the way Pilgrims would a dance hall. But get past the reformist posturing, and the proposed new laws add up to half-measures. They would restrict but not eliminate conflicts of interest among accounting firms and stock analysts. With Bush's support, both houses of Congress beat back an amendment that would require companies to deduct from their earnings the cost of stock options given to executives and other employees, as if they were cash or outright grants of stock. That measure was backed by Federal Reserve Chairman Alan Greenspan as well as investor Warren Buffett as essential to remove perverse incentives that today encourage top executives to mislead investors. But executives, who get lavishly paid in options opposed that reform, and their friends in Washington sided with them, against the interests of investors.

Shareholders are taking action on their own: yanking money from any company showing even a hint of trouble. The latest black-and-blue chip? The respected drug giant Johnson & Johnson, whose stock fell 16% following a report that the company was under investigation by the Food and Drug Administration and the Justice Department over alleged manufacturing improprieties in Puerto Rico. The company denied any wrongdoing, but the market did not care. J&J's drop contributed 55 points to the Dow's Friday freak-out, and the company joins Merck & Co. and Bristol-Myers Squibb (which face sales-accounting questions) under investors' microscope.