The Second Coming of “Saint” Paul

Early Christian evangelist Saint Paul is widely credited with transforming Christianity from a little-known Jewish sect into one of the world’s great religions. Paul never met Jesus Christ, but his pronouncements in letters to the Christian communities of the Mediterranean were so important as to be considered divinely inspired — and, thus part of the gospel.

One can argue that former U.S. Federal Reserve Chairman Paul A. Volcker’s word carries similar weight in American — and global — financial markets. His latest proposals for reform in the accounting profession should be heeded as much as the original Pauline Epistles were heeded by the Christian communities in ancient Corinth or Ephesus.

Wall Street has long been enamored of the Fed’s current chief, Alan Greenspan. An article that ran once upon a time in The New Republic detailed a shrine to Greenspan that had been set up at a Manhattan bond trading firm. The author, Stephen Glass, wrote that the company’s traders worshipped at Greenspan altar — and even made sacrifices.

That article — like a number of those written by the now-legendary fabulist Mr. Glass — turned out to be a hoax. Yet, its description of the complete faith that the U.S. financial sector has in Mr. Greenspan rang so true that readers — and even the magazine’s experienced editors — were completely taken in.

Yet, few people now remember that the true hero of that 1990s stock market boom was a different person altogether. It was, after all, Mr. Greenspan’s predecessor as Fed Chairman — Paul Volcker — who broke the back of inflation in the 1980s.

In fact, Mr. Volcker made the decade of prosperity possible in the first place. If anybody has the claim to be the patron saint of U.S. financial markets, it is, no doubt, “Saint” Paul.

Mr. Volcker even resembles a Biblical figure. Towering well over 6 feet, the 74-year-old former Fed chief has presided over the cleanup of some of the worst economic and financial mismanagement in America’s history. Appointed by President Jimmy Carter to the Fed post in 1979, Mr. Volcker raised interest rates to extremely high levels.

This tight monetary policy, which was pursued unstintingly by his Fed during the early 1980s, helped to serve as counterweight to the loose fiscal policy adopted by President Ronald Reagan. One might recall that Mr. Reagan’s Administration increased military spending, while also giving Americans a massive tax cut.

In the end, the Fed’s monetary policy brought down inflation and wiped out inflationary expectations among U.S. businesses and consumers. The inflationary spiral was broken. By the time Mr. Volcker passed on the reins at the Federal Reserve to Alan Greenspan in 1987, the U.S. economy was healthy and primed for growth.

Not surprisingly, when troubled accounting firm Arthur Andersen looked for a way to bolster its reputation in the wake of the Enron scandal, it turned to Saint Paul. The firm picked Mr. Volcker to be the chairman of a panel to draft a set of changes for the embattled company.

Anyone who expected Mr. Volcker to be a figurehead — or to dawdle over recommendations for months — was in for a shock. At the very least, they should have considered Mr. Volcker’s track record as member of a panel investigating the behavior of Swiss banks during the Holocaust.

In his 1999 report, the former Fed chairman showed willingness to buck the powerful and the wealthy — and issue a stern condemnation of the banks’ conduct during the Nazi era.

Mr. Volcker’s panel on Andersen, created in February, 2002, unveiled its proposals by early March. The changes that the committee proposed go to the heart of what is wrong with the accounting profession in the United States.

Mr. Volcker recommended separating auditing functions from all other business activities at the firm, rotating partners in charge of accounts, and even instituting a cooling off period before employees could take jobs with auditing clients.

It seems that Mr. Volcker’s recommendations have come too late to save Arthur Andersen, though he has labored mightily to help the company dig out from under an indictment by the U.S. Department of Justice.

Andersen has been hemorrhaging clients — before and after the indictment — and has even persuaded its employees to take to the streets in a public relations campaign to save their jobs.

However, the changes proposed by the Volcker panel should be implemented by other U.S. accounting firms without delay. After all, many of them have the same conflict of interest problems that proved to be Arthur Andersen’s undoing.

In fact, since Arthur Andersen’s money has paid for Mr. Volcker’s work, it should be the parting gift that the firm would make from its deathbed to the remaining Big Five accounting firms. The recommendations issued by Saint Paul can be seen as a vaccine that the sick helped develop to prevent the spread of inflection among the living.

March 26, 2002