Enron’s announced Thursday that it was restating its financial results back to 1997 because of losses in limited partnerships involving its chief financial officer. These deals netted CFO Andrew Fastow $30 million and was in many ways the culmination of an extraordinary saga.

Through my investment banking experience, I am familiar with the issue of managers creating new companies through which profits are diverted, but that work was in the struggling former Communist economies of Eastern Europe. I did not expect to see the technique used in Texas.

The disclosure thus raises the question: Was Enron unique, or did the late 90’s bull market see a decline in U.S. business ethics to levels previously seen only in the less solidly run countries of the former Soviet bloc?

Bull markets often see a decline in business ethics and the periods of reaction that follow them have generally seen a “clean-up” accompanied by terms of imprisonment for those of the perpetrators deemed by popular opinion and the authorities to have overstepped most egregiously.

There are historical precedents.

In the 1920’s, Charles Mitchell, president of the National City Bank, sold his bank’s shares short just before the Wall Street crash, thus clearing himself a tidy profit, Needless to say, this action did not go unnoticed when the witch-hunts began.

Richard Whitney, a Morgan Partner and president of the New York Stock Exchange, embezzled client bonds to cover his market losses and ended up the river in Sing Sing.

In the 1960’s, the Texas Gulf Sulfur case resulted in the indictment of a number of investment bankers on insider trading charges, including the Morgan partner Thomas S. Lamont.

More famously, the Drexel Burnham high yield bond operation set up by Michel Milken eventually resulted in the demise of Drexel Burnham and Milken serving a substantial jail sentence for insider trading and a heavy fine.

Thus as the 90’s bull market developed, a certain level of malfeasance was inevitable. The size of 90’s malfeasance, however, was greater than in previous booms. Some of it, of course, was not technically illegal, any more than Charles Mitchell had been technically committing a crime when he shorted the stock of the bank of which he was chairman. Thus the huge stock option schemes, particularly in the high tech sector, that were not reported properly to the stockholders were entirely within the legal limits of current financial reporting.

Nevertheless, the loss of wealth to stockholders through these schemes was real. In many ways, of course, the suspect business ethics were shown not by the management that took advantage of such stock option schemes — they were a loophole waiting to be exploited — but by the business lobbyists who pressured the Financial Accounting Standards Board to abandon their revelatory proposed new accounting standard in 1994 and instead opt for the feeble APB 25, which allows the true cost of stock options not to be deducted from income.

Enron’s case went further. The company entered into hedge contracts with employee-controlled entities, which then remunerated the employees according to their performance. In the case of Enron CFO Andrew Fastow, therefore, there was a clear conflict of interest. The full arrangements were not disclosed in Enron’s SEC filings and when the extent of the arrangements was disclosed in October, Enron was forced to subtract no less than $1.2 billion from its stockholders equity. Fastow himself is said in last Thursday’s SEC filing to have benefited from the arrangements to the tune of $30 million.

What is truly worrying is that he was not of course one of the two top executives of Enron. Fastow’s profit, even in real terms, dwarfs the rewards gained by Charles Mitchell, Richard Whitney and Thomas S. Lamont, although of course Michel Milken’s rewards were in a class by themselves.

Even Milken’s remuneration, which topped out at $500 million in 1987, does not compare to the stock option profits achieved by the top management of, for example, Cisco, which totaled $8 billion in 1999-2000. Most of Milken’s remuneration was legitimate, just as there was nothing (as far as I know) illegal about Cisco’s option scheme. Both resulted in a diversion of resources from stockholders (or, in Milken’s case, bondholders) to insiders on a scale never before thought possible.

Then there are the dot-coms. One hundred billion dollars was raised in venture capital in 2000 and very little of that appears to have created genuine businesses, although around $40 billion of it is said to be still awaiting investment. More important, in the public market $70 billion of new money was raised through initial public offerings alone in 1999, almost all of which are of course now trading far below their offering price, if they are trading at all.

In both public and private markets, traditional standards of “due diligence” investigation were abandoned in the mania to invest. Naturally, much of the mania was concentrated among investors themselves, whose irrationality was boundless. Nevertheless, there is already enough evidence, without any kind of witch hunt having commenced, that selling worthless securities to fools was far too attractive a business for the investment banks for any prudential controls to be maintained.

In all three areas — management insider dealing, stock option self-rewarding, and IPO madness — the problem grew worse as the great bull market of the 1990’s continued. Management, investors and issuing houses saw those who ignored previous standards of business ethics and prudential behavior being richly rewarded, once the bull market got going, with 1995, 1996, 1997 and 1998 all being very good years for the greedy and the unscrupulous, in spite of mid-year hiccups in 1997 and 1998. Hence, as in any free market, the behavior that was being rewarded became more prevalent, and ethical standards took a rapid nosedive.

The exhilaration of making money through day-trading, through issuing and buying stock in companies with no profits or likelihood thereof, of perpetual compounding in executive stock option schemes far beyond the dreams of any reasonably avaricious executive, the creation of special management-rewarding side companies that were undisclosed to the owners of the company in whose interests management was supposed to be acting, and other aberrant behavior took flight from 1995 on and were boosted by five solid years of financial reinforcement.

The 1929 shenanigans were pretty well confined to Wall Street and the Insull public utilities empire, but the 1995-99 behavior was pretty well universal. After all, Vice President Cheney in Halliburton and Treasury Secretary O’Neill in Alcoa — both considered models of probity — benefited from stock option grants in a bull market to an extent they never could have expected when they took their corporate jobs without their companies achieving any great performance beyond the usual swing in the business cycle.

What 1995-99 produced is a U.S. corporate sector, the underpinnings of whose earnings are very unsound indeed. Enron was not unique in general, it is unlikely to have been unique in particular. There will be other companies which suddenly discover billion-dollar losses in management-controlled companies. The losses to investors in venture capital and equity investment have not yet been fully absorbed by those who provided the money, which is why the stock market remains remarkably insouciant in the face of truly terrible economic news. Executives who have been richly rewarded through stock options will want their rewards in cash now that the stock market has stopped rising, which will prove disruptive to both operations and earnings at most of the Fortune 500, let alone the tech sector.

The tsunami of misguided investment will inevitably be followed, not simply by a dearth of money for new projects which we already are seeing, but by a tidal wave of lawsuits and congressional investigations which we haven’t started to see yet.

Ethical standards rotted during the boom will stay rotten during the recession and will be faced by a more urgent need for funds (like poor Richard Whitney, whose outright embezzlement appears to have started only after the 1929 Crash.)

The result will be a lengthy period of recrimination, followed as in the 1930’s by punitive legislation and heavy regulation (it was in 1933, after all, that the split between commercial and investment banking was mandated, which lasted until 1999.) Alas, both the recrimination and the regulations will be justified. They are, however, most unlikely to lead to significant economic recovery.

What a pity, what a great, great pity, that Alan Greenspan, seeing as he did the “irrational exuberance” of December 1996, did not act to abort the boom while there was still time. Not only will the economy suffer from his error, but many apparently able executives will end up imprisoned for crimes that, but for Greenspan’s folly, they might never have committed.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.