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Martha, Freddie, mutual funds and much, much more

For a year in which there was so much good news emanating from the economy and the financial markets, there sure was a lot of bad news too.
New York State Attorney General Eliot Spitzer launched the investigation into the mutual fund industry after receiving a tip about trading activities of a hedge fund.Frank Franklin Ii / AP file
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For a year in which there was so much good news emanating from the economy and the financial markets, there sure was a lot of bad news too.

Investors who enjoyed the first winning year on the stock market since 1999 also had to endure yet another year of scandal. This time the spotlight focused on the giant mutual fund industry and the New York Stock Exchange itself -- institutions that touch the lives of virtually every investor.

The economy finally began showing signs of life, but only after U.S. companies trimmed their already-spare payrolls even further.

Here are the top business stories of the year, as determined by editors.

It's easy to steal a million dollars. Just steal a dollar each from a million people. Who would ever notice? Perhaps that is what some mutual fund managers and traders were thinking when they cooperated on plans to skim profits from dozens of funds in the worst — and first — scandal ever to hit the $7 trillion industry.

Much of the activity uncovered in a widening probe was not exactly illegal, but investors clearly were misled by fund companies who secretly arranged to do business with rapid-fire, short-term traders. Most of the funds had publicly told investors and regulators they discourage such business, which is harmful to long-term shareholders.

Losses may have added up to only tens or hundreds of dollars on each account, and it was difficult for investors to know what to do. After all, many of them probably had bought mutual funds in the first place so they wouldn't have to think too much about their investing. By year's end, New York Attorney General Eliot Spitzer and other regulators were focusing on broad reform of the industry, potentially including lowering the fees paid by all mutual fund investors.

Less than six months ago, the economy looked like President Bush's biggest soft spot heading into the 2004 elections. Democratic rivals like Howard Dean and Richard Gephardt were hammering away at the Bush record on employment -- the worst since Herbert Hoover's tenure at the brink of the Great Depression.

Holiday shoppers wait to cross the street, Friday, November 28, 2003 in Chicago. The streets of Chicago were crowded with shoppers on the day after Thanksgiving, the traditional start of the holiday shopping season. (AP Photo/Jeff Roberson)
Holiday shoppers wait to cross the street, Friday, November 28, 2003 in Chicago. The streets of Chicago were crowded with shoppers on the day after Thanksgiving, the traditional start of the holiday shopping season. (AP Photo/Jeff Roberson)Jeff Roberson / AP File / AP

Then things suddenly began looking up. Boosted by a tailwind of low interest rates, cash from a wave of mortgage refinancing, and a major federal tax cut, the economy grew at a stunning 8.2 percent rate in the third quarter -- its fastest pace in two decades. Payrolls -- which had shed 2.6 million jobs since January 2001 -- began growing again, and the jobless rate drifted lower.

Employment growth still is nowhere near where it should be in an expansion, but forecasters say the economy clearly is on a path for its best growth in years. And if the economy should show any signs of slipping, Congress and the Bush administration are standing by. "Historically election years have this uncanny ability to outperform non-election years," said David Rosenberg, chief North American economist at Merrill Lynch.


Traders crowd a station on the main trading floor fo the New York Stock Exchange, December 23, 2003. Stocks chugged higher Tuesday as signs of an improving economy helped lift investor sentiment in a quiet session on the last full trading day before Christmas. REUTERS/Mike SegarMike Segar / X00250

The year 2003 was a great year for almost anyone invested in the stock market, but 12 months ago few would have guessed it. A string of corporate governance scandals had pushed the market’s main gauges lower for a third consecutive year in 2002 and a war with Iraq was looming, keeping investors on the sidelines of the market.

But even as the bombs began falling on Baghdad, stocks were already moving off the multi-year lows they sank to in early March, buoyed by one of the most powerful stimulus programs in economic history. They moved steadily higher over the spring and summer, as corporate earnings improved, data on the economy popped and investors placed their bets on a strong recovery in the year’s second half.

By Dec. 11, they were toasting the end of the two-and-a-half-year bear market, as the Dow Jones industrial average pierced the 10,000 level for the first time in 19 months.

In its 217-year history, the New York Stock Exchange has seen its share of financial scandals. After all, as bank robber Willie Sutton observed in a different context, that’s where the money is.

Calls Mount For New York Stock Exchange Chairman Richard Grasso's ResignationE
UNDATED PHOTO: (FILE PHOTO) New York Stock Exchange president Richard Grasso is seen in this undated photo released September 16, 2003 courtesy of the NYSE. Pressure mounts September 17, 2003 for New York Stock Exchange Chairman Richard Grasso to resign in light of his $140 million payout. (Photo credit should read HO/AFP/Getty Images)Afp / AFP

While frauds and swindles have come and gone, the latest upheaval engulfing the epicenter of capitalism is shaking the foundations of the exchange like few in recent memory. Starting with the resignation of former Chairman Richard Grasso — after disclosure of his outsized $187.5 million pay package — the Big Board began to remake itself. Some directors were dismissed, board seats were abolished, and a separate regulatory board will now police members. No longer will one boss rule the operations of the exchange while wielding the threat of enforcement against dissenting voices.

But the process is far from complete. One of the first tasks facing incoming NYSE president John Thain, a Goldman Sachs alumnus, will be defending against a lawsuit filed by the nation’s biggest pension fund claiming that, on the exchange floor, the game is rigged. CalPERS, the pension manager for California state workers, is arguing that the NYSE’s storied “open outcry” system of trading — where people, not computers, match trades — has allowed its members to line their pockets at the exchange of individual investors.

That basic method of trading has survived since traders first gathered under a Buttonwood tree in lower Manhattan and signed an agreement that created what we now know as the NYSE. What members, investors and regulators are now debating is how that system can continue in the new millennium.

Maybe soldiers and sailors returning from World War II remember getting 30-year mortgages for under 6 percent. But until this year those kinds of rates were just a distant memory for most homebuyers.

With the Federal Reserve Board seal in the background, Federal Reserve Board Chairman Alan Greenspan addresses the Federal Reserve Payments System Development Committee 2003 conference in Washington Wednesday, Oct. 29, 2003. Greenspan said, as the number of checks written in the U.S. declines and electronic payments like debit cards rises, the nation's financial industry will need to be flexible and forward thinking in how best to meet the needs of customers. Greenspan praised legislation passed by Congress and signed into law by President Bush that allows banks to clear checks electronically, potentially slashing paperwork. (AP Photo/Stephen J. Boitano)Stephen J. Boitano / AP

The Federal Reserve did its part, cutting the benchmark federal funds rate to 1 percent, its lowest level since the late 1950s. That, in turn, lowered the rates on a wide variety of business and consumer loans. And central bankers took the unprecedented step of promising they would keep rates low for a "considerable period" of time.

Rates had been heading lower for more than two years, and by the second half of 2003 the impact was becoming clear. A huge new wave of mortgage refinancing pumped cash into the economy, and home sales were on a pace to shatter the 2002 record of 6.5 million units.

And with the economy growing more rapidly, businesses finally were taking advantage of the lower rates to step up the pace of capital investment.

For a company that works on a grand scale, maybe bigger isn't better for Boeing. It certainly wasn't this year.

Harry C. Stonecipher, named new president and chief executive of the Boeing Company, is seen at the company's headquarters in Chicago, Monday, Dec. 1, 2003, after the company's board announced the resignation of Chairman and CEO Phil Condit, effective immediately. Stonecipher is a former Boeing vice chairman, president and chief operating officer. (AP Photo/Anne Ryan)Anne Ryan / AP

The Big B’s airplane business withered, accelerated by 9/11's aftereffects. For the first time ever, rival Airbus delivered more aircraft. The 757 was cancelled in October. The 767 was turned from passenger jet into military tanker.

That latter plan really brought down the curtain.

After a drawn-out battle in Washington over costs for the tankers, Boeing had to fire CFO Mike Sears when it was revealed he recruited the Pentagon official who oversaw the company's contracts. CEO Phil Condit stepped down soon after. Independent reviews of Boeing ethics standards found plenty of holes.

Perhaps this was the comeuppance first forecast when, in 1997, Condit launched a buying spree to grow the company beyond its airplane roots. A 2001 move of Boeing headquarters from Seattle to Chicago – paired with major layoffs — telegraphed that message. As such, its stock and ratings tumbled as investors became understandably worried.

New CEO Harry Stonecipher has scrambled to regain momentum. In December Boeing’s board OK’d the 7E7, the first jet program approved since 1990. But the new plane means big new expenses, and future defense contracts will get scrutiny given the recent stink. Boeing is doing its best to climb out after its miserable year, but the ride will be bumpy.

Amid the tide of upbeat economic news in recent months, one question lingered: Where were the jobs? The labor market has improved since the summer, but the inevitable truth is coming clear: Many jobs aren’t coming back. They were sent overseas.

We didn’t need the Bush administration appointing a “manufacturing czar” to remind us factory jobs were vanishing; that’s been happening for years. But in the retail world, even die-hard patriots like Wal-Mart succumbed to the price pressures of cheap foreign goods. Following its mandate to roll back prices, the world’s largest retailer imported tons of Chinese merchandise, prompting a reconsideration of one Fed official’s assessment that the world’s largest retailer was “the greatest thing” for less-affluent Americans.

Even in Mexico, which used to be the stalking-horse for our manufacturing woes, workers freaked out as waves of Chinese goods flooded the market. Meantime, the U.S. job drain expanded into new sectors. If it wasn’t news that tech firms reaped benefits in Bangalore, we learned this year that all sorts of white-collar jobs could be shipped overseas by the tens of thousands, from Delta reservations agents to J.P. Morgan number-crunchers. Perhaps this was globalization’s real eventuality, underscored by record U.S. imports. The unresolved paradox of free trade remains: ever-better prices, but fewer people to spend as the appeal of lower wages elsewhere eliminates many jobs for good. American consumers will have to decide how that one ends.

It was a party reminiscent of the Predators Ball — that annual 1980s-era bash thrown by Drexel Burnham to fuel the junk bond factory that funded the excesses of that decade. There were the toga-clad guests, swaying to Jimmy Buffett tunes on the Mediterranean island of Sardinia, ringing up a $2 million tab for a Roman-style feast that included an anatomically correct ice sculpture of Michelangelo's statue David squirting vodka into crystal glasses. The occasion: the birthday of the second wife of Dennis Kozlowski, former CEO of Tyco Interational.

** FOR USE IN YEAR-END EDITIONS WITH STORY SLUGGED YE WHITE COLLAR SCANDALS ** Former Tyco Internatonal CEO L. Dennis Kozlowski stands between toga-clad women in a frame copied from the videotapes shown to jurors at his trial in New York Tuesday, Oct. 28, 2003. The highly-edited tape was made at the birthday party Kozlowski held for his wife in Sardinia that cost $2 million.(AP Photo/HO/New York district attorney)New York district attorney / DISTRICT ATTORNEY

The ice sculpture was just the tip of the iceberg, prosecutors say. Kozlowski stands accused of teaming up with the company’s former chief financial officer, Mark Swartz, to fleece the company of some $600 million.

Every corporate boom leads to excess. But Michael Milken stands as a model of restraint next to the interior decorating spree disclosed in Tyco’s SEC filings. Jurors at Kozlowski’s trial in Manhattan recently viewed hundreds of invoices for furnishings to the Tyco tycoon’s $18 million Fifth Avenue apartment: A $6,000 shower curtain, a $15,000 umbrella stand, a $38,000 backgammon table, a $113,750 George I walnut arabesque clock.

In all, the bills came to about $11 million. Kozlowski, 56, and Swartz, 43, each face up to 30 years in prison if convicted of using Tyco's money to finance their lavish lifestyles. The defense contends that multimillion-dollar loans and bonuses were legitimately approved by the company board of directors and vetted by outside auditors. As for Kozlowski's $100 million salary, defense attorney Stephen Kaufman said: "He earned all of it." Testimony resumes Jan. 5.

When Martha Stewart was at the height of her powers, her fans could not get enough of her. As her syndicated television show gained popularity in the 1990s, she built an empire that included a magazine, books, lines of bath products, linens and flowers, and finally a publicly traded company -- all bearing her name.

** FILE ** Martha Stewart leaves Manhattan Federal Court, Wednesday, June 4, 2003, in New York, following her indictment on securities fraud and obstruction of justice charges that could result in a prison term. Martha Stewart Living Omnimedia Inc., which continues to be dragged down by the legal woes of its founder and namesake, swung to a loss in the third quarter, though it was less in the red than Wall Street analysts expected. The multimedia company, which produces magazines, TV programs and merchandise, said it lost $3.84 million, or 8 cents per share, for the three months ended Sept. 30. That compared with a profit of $2.77 million, or 6 cents per share, in the year-ago period. (AP Photo/ Louis Lanzano)Louis Lanzano / AP

Now that she has been indicted on insider-trading charges, the modern doyenne of entertaining has moved from the lifestyle section to the business pages.

Stewart stands accused of lying about her sale of $228,000 worth of stock in December 2001. By selling just before bad news was disclosed about the biotech company, she avoided losses of about $46,000, prosecutors contend. In a trial that begins next month Stewart -- who denies any wrongdoing -- will face up to 30 years in prison and $2 million in fines. Her company, Martha Stewart Living Omnimedia, has seen its share price fall from $20 to about $9.

No wonder Stewart told Larry King that for her, this is "the saddest holiday ever."

There is little doubt that Freddie Mac is a major player in the real estate industry. It is somewhat less clear exactly what the company does. Even the company's accountants seem to have a hard time sorting through the complex web of derivative transactions the financing giant uses to hedge its interest-rate bets and boost profit margins.

One of the nation's biggest financial concerns, Freddie Mac was rocked by revelations that it had misstated its earnings for years, apparently in a concerted effort to smooth quarterly flucturations and meet Wall Street expectations. The fact the the company earned $5 billion MORE than previously announced did little to stem the outrage over a company that is seen to enjoy special status by virtue of the congressional mandate that created it.

Freddie Mac has agreed to pay a record $125 million to settle charges with the federal agency created to regulate it and aces the possibility of additional fines and penalties.

MSNBC's Jon Bonné, Roland Jones and John Schoen contributed to this story.