The long term effects of Enron’s collapse “will be good, not bad,” in that it will spur changes to “put corporate governance back on track,” Alan Greenspan, chairman of the Federal Reserve, testified before Congress Wednesday. The problems with Enron will result in a necessary restructuring of corporate governance that “will be favorable to the long term outlook.”

Greenspan also said he did not expect significantly more fallout in the short term from the Enron debacle. “It’s too late for delayed effects to materialize. We’re already seeing it,” Greenspan responded to questions from members of the House Financial Services Committee. He acknowledged “there may be other Enron’s out there,” but believes the markets have already seen the worst.

He defended the competitive markets and the operation of derivatives, noting that “swaps and other derivatives have been remarkably free of default” and have succeeded in moderating risk.

Reforms should be directed at re-aligning the interests of the top executives of companies with their stockholders, Greenspan said, criticizing the current market’s pressure to produce short term results and the emphasis on stock appreciation. When corporations paid more in dividends, companies had to come up with the cash and investors could rely on the dividends. They didn’t have to worry as much about how a company’s strategy would grow its valuation.

Greenspan said he believed recent market pressures had already caused a shift in corporations to provide more transparency. There now is a push to moderate leverage and “a price-earnings premium for corporations without a spin.” There is however, still “a need to fix what’s wrong,” he said, cautioning Congress to make “the proper diagnosis,” and advising that “overall the level of corporate governance has served this country well,” and better than any other system in the world.

He pointed to a shift in the early 80’s away from companies buying back stock, saying that had gotten a bad reputation for “price manipulation,” and indicating it might be time to encourage the practice. Another item to be looked at is the accounting for stock options, which he said have become a way to “game the accounting system” by “accelerating the earnings outlook.”

Testifying on the U.S. economy, Greenspan said he believes it has turned the corner. He also said he did not see a material impact in the future coming from economic problems in Argentina or Japan. He noted that Argentina’s problems had not even had a significant impact on Brazil or Mexico.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.