Summer Of Mistrust

By NANCY GIBBS

American confidence is more than a state of mind; it is a muscle, a westward-ho-ing, atom-splitting, moon-landing muscle, and Osama bin Laden's autumn ambush, designed to break it, seemed only to make it stronger. The markets reopened within a week after Sept. 11, swooned and then revived, and even as the fires still burned downtown and the soldiers headed off to war, more Americans said they believed the country was on the right track back in October than felt that way last week. Is it possible we could do to ourselves what our worst enemies did not manage?

The corporate criminals among us, the swindlers and profiteers, are now described in language once saved for bin Laden's legions. Business professors are staggered by the suicidal audacity of top executives--did they really think they would not be caught?--and marvel at the damage done. "It's as if we have given the CEOs weapons of mass destruction--at least economically," says accounting professor Brian Shapiro at the University of Minnesota. "The companies they run are bigger than ever. When something happens, thousands can lose their jobs--and more people than ever are invested in them. So a few can do a lot of damage."

And that damage may be lasting. A new TIME/CNN poll finds that fewer than one-third of Americans expect the economy to improve in the next year. It is not just that we have confronted in WorldCom the worst case of fraud in U.S. corporate history; today the bluest of chips, from Merck to General Electric, are being challenged about their bookkeeping. The perception of deception is so widespread, the stakes so high and the costs so great that investors are choosing to forfeit a game they now think is rigged. The markets skidded last week straight past their 9/11 lows into the most bearish forests in a generation. The dollar sank ever lower, and the Dow dropped through 9,000 toward a 7.4% loss for one week alone. Financial planners say many people won't open their 401(k) statements; they just can't look. But as we wait in the dark, a new reality takes hold, that our lives this year are being reshaped by enemies both foreign and domestic, and while the public did unite behind its leaders in the face of the terrorist threat, we have less faith that they can protect us against the villains we planted and watered in our own backyards.

The President spent much of the week working to catch up to the country, to show that he felt its pain and shared its outrage. But when White House aides talked about his anger, they made it sound as if he were more steamed about the decision to end baseball's All-Star game in the 11th inning. No matter how stern Bush looks when he declares that bad guys should go to jail, he has not erased charges that as an oilman in the '80s, he profited from the same kind of sweetheart deals he now decries. Public opinion is focused not on the Beltway but on the boardroom, and the President's career, lineage and aspect all put him in one of the fancy leather swivel chairs. "CEO," an adviser warned the President, "has become a dirty word."

His allies' hearts sank as Bush stood at a press conference swatting at questions about his own past. He had joked his way through a 30-minute prep session earlier in the day, as if to assure his aides, Not to worry; he had this stuff under control. But he did not. "In the corporate world," he declared when pressed about how Harken Energy had hidden losses while he was on its board, "sometimes things aren't exactly black and white when it comes to accounting procedures." It was a defense that only an Arthur Andersen executive could love. The President whose wartime rhetoric runs to all or nothing was making a case for relativism; his business experience was being channeled not into a call for probity but into an excuse for conduct he would declare unethical in a speech the next day. "He can't go where he needs to go," concedes an Administration official. "He is an insider, and he comes across as an insider offering only lukewarm populism."

By the time he arrived on Wall Street to declare that "there is no capitalism without conscience; there is no wealth without character," the markets had shorted his speech. The Dow dropped 179 points by the end of the day. By now people know that capitalism is a spectacle of hope and greed and guts and guile, all racing toward the bottom line. That is its genius, but without guardrails, the whole contraption can take us over a cliff. On Wednesday the Senate voted 97-0 for a program far tougher than the one the President had proposed and even the Republicans in the House were climbing aboard. Unless Congress and the President get serious about reform, Senator John McCain warned in a combative speech, "the damage done by these scandals will outlive most of us in this room."

History may not repeat itself, Mark Twain said, but it often rhymes. As the markets growled, historians recalled the grisly years of 1973-74, a downturn driven not just by a sick economy but by disillusion over everything from Vietnam to Watergate. This too is a summer not of one scandal but of many--the Roman Catholic Church, and the FBI, and Major League ballplayers on steroids. Comedians joke that Arthur Andersen tries to cover up corruption by rotating accountants from diocese to diocese, that Enron and K Mart will merge so Martha Stewart can design the prison uniforms. In each case it is the mighty who have fallen. The church scandal was as much about complicit Cardinals as about wayward priests; the FBI field agents did their job, but their careerist bosses stuffed all the clues into their desk drawers. As for the CEOs, they raid company coffers to pay off margin calls or build new mansions; awash in options, they manage the stock price instead of the company; as their business falls into bankruptcy and the layoffs pile up, they float away on golden parachutes--or yachts bought with company loans. "I've fully understood that they don't always necessarily have my interests at heart," says Dan Brown, a Seattle software-company owner, "but to be out there to rob me, that bothers me." Even criminals look for honor among thieves--and find the greedheads wanting. Mike, 20, a former drug dealer in Seattle, says that not even pushers can lie so blatantly to their clients. "People have to be able to trust you, know that you're selling what you say you're selling," he says. "If I had lied like [the CEOs], I would have been out of business."

It has taken a while for the blow to sink in. a market crash doesn't always come in a day. It can sneak up, slow and surreal, and you can think you survived it only to find it has barely begun. Now each week brings a new shudder and crack--first Enron and Arthur Anderson, then WorldCom, Adelphia, Xerox and the trials of Martha Stewart. Most Americans--72% in the TIME/CNN POLL--fear that they see not a few isolated cases but a pattern of deception by a large number of companies. In one survey, more than half of corporate chief financial officers said they had been pressured by their bosses to cook the books, if not to a full boil then at least to a simmer.

If the revolt was slow in coming, that may be because most Americans hate to hate the rich. They'd rather envy them and hope to get there themselves. The '90s offered a whole new breed of heroes, not starchy heirs to fortune but barefoot geniuses who discovered new worlds in their garages, who wrote best sellers and sat grinning from magazine covers and defended the billions they made on the grounds that they were making us all rich in the process. You did not actually need to get richer to feel richer; even other people's paper profits had a magical effect: Times are good; the Dow is up; let's go to the Sizzler instead of McDonald's, the Seychelles instead of Sarasota. Cabbies turned day traders got crushed when the NASDAQ tanked, but careful investors who did their homework were the luckiest generation ever. Pay $9.95 a trade, buy and hold, and retire at 50.

People now know that this crisis was years in the making. Stocks kept climbing because executives kept finding creative new ways to hide the truth and fake a profit, to pretend they were investing money rather than just spending it. The revelations make for some dark magic now. When $2 billion disappears from Xerox's revenues, $4 billion from WorldCom's, it makes people feel poorer even if they personally lost nothing. The markets now look as if they could manage their third straight year of losses, for the first time since World War II, even though the economy grew at 6% in the first quarter. If people stop investing and capital becomes tight, then how exactly does a recovery happen? If they feel poor and stop spending, how does the economy grow?

"I've been a stockbroker for 15 years," says John Guyette of Greeley, Colo., "and I can't recall a feeling of outrage like there's been lately with these stories. And then you see the pictures of the homes these guys are building..." It's a short road from disgust to despair: What do I do with my money now? Business schools are adding courses on Enron to their fall lineup; a new book, How Companies Lie, promises to help investors see through the smoke and break the mirrors of corporate accounting. People say they have stopped investing and play poker instead; it's a safer bet. The Wall Street Journal profiles the barber who has given up on cnbc and now takes longer walks with his wife because he knows he has to stay in shape--he'll be working more years than he had thought. Fully one-third of Americans between 50 and 64 said they had decided to delay their retirement because their assets had shrunk in the market--and that was back in February. "There's no doubt there are more now," says G.O.P. pollster Frank Luntz. "They saw their retirement in the near future, and they watched it move away from them."

Luntz warns politicians that these are people who almost always vote. "The Irritable Voter is the one I'm afraid of," he says. "Someone who had something and lost it." For Democrats, the political beauty of the corporate scandals is that they "play into what people already believe" about Republicans--"that these guys are in the tank with corporate special interests," says Steve Elmendorf, chief of staff to House minority leader Dick Gephardt. "I don't see any downside to this for us." But when the interests of voters clash with the interests of donors, the Democrats too put on the brakes, helping kill McCain's demand that companies list stock options as expenses on their books.

America's gilded ages have reliably ended in scandal, followed by soul-searching and reform. But investors are divided over what needs to be done. The gentle, self-policing era that SEC chairman Harvey Pitt proclaimed last October is dead and gone, but even some battered investors don't trust grandstanding lawmakers to distinguish between reforms that are needed and those that will cramp the recovery even more. That was the argument Dick Cheney and others made to the President--that in the long run, Bush will suffer more if he gets a quick political boost from reforms that strangle the economy. While more Americans now see Big Business as a threat, polls show they think Big Government is more dangerous yet.

There are still plenty of cool-headed investors out there who have seen these bumps before and are confident the market will come back eventually. But that has a way of taking years, even without a crisis of ethical confidence. Stocks didn't return to their 1929 levels until 1940; they took 30 years, till 1996, to return to the peak reached in 1966. Many stocks still aren't cheap, third quarters are often painful, and the bears, at least, think there's more bad news to come.

Maybe it was just a coincidence that Attorney General John Ashcroft told us there could be thousands of al-Qaeda sleepers lying in wait among us. But then maybe it wasn't. If the war against terrorism drags on--if there are more attacks--will people find themselves feeling helpless once again in the face of an elusive enemy who hits and runs and can't be found? Or does the threat become a blessing, keeping people united against a common danger and forgiving of leaders who face challenges greater than figuring out how stock-option grants should be handled on balance sheets? "If they find Osama bin Laden's body," says a Republican close to the White House, "that'll push everyone back 10 to 15 feet." And if they don't, Bush can still argue that there are far more dangerous enemies out there than the sharks in our own seas. --Reported by Melissa August, James Carney and John F. Dickerson/Washington, Rita Healy/Denver, Sean Scully/Los Angeles and Nathan Thornburgh/Seattle

With reporting by Melissa August, James Carney and John F. Dickerson/Washington, Rita Healy/Denver, Sean Scully/Los Angeles and Nathan Thornburgh/Seattle