The Boies factor

"Earnings worrying markets" has emerged as the business headline of the week, as every financial adviser from New York to London to Frankfurt and back chats away about how disappointing results are chilling the Nasdaq and the S&P.

Piffle, says Larry Kudlow, chief US economist of ING Barings.

Third-quarter profits on a trailing 12-month basis were up 50 per cent for computer and software companies in the S&P 500. (Such a trailing basis compares a quarter to the same quarter a year earlier.) Semiconductor equipment makers' earnings rose by more than 130 per cent. The Kudlow explanation for the downturn is a simpler one. Mr Kudlow blames superlitigator David Boies.

The argument for the Boies Index is straightforward. Mr Boies was the lead outside lawyer in the Justice Department's antitrust case against Microsoft. As recently as late 1999, Microsoft's stock was doing just fine, Justice's attentions notwithstanding. Then traders began to believe that Mr Boies's aggressive representation would sway Judge Thomas Penfield Jackson. The market divined, perhaps correctly, that it was Mr Boies's legal gifts that persuaded the judge to draw and quarter the company. Microsoft shares plunged by half, and the rest of the Nasdaq tech index also snapped, dropping to 3,300 in the wake of Judge Jackson's ruling from a year high of 5,000-plus.

This painful memory intruded when Mr Boies took centre stage yet again in the national consciousness, this time as the star lawyer leading Vice-President Al Gore's legal efforts to claim the presidency. After election day and Mr Boies's re-emergence, the Nasdaq resumed its steep decline, falling nearly 20 per cent in the two weeks after election day. "With David Boies celebrating the Florida Supreme Court's pro-Gore judicial decision at 11:30" one night, writes Mr Kudlow, "it is no wonder the Nasdaq dropped another 100 points" the next trading day.

In the mid-November period when Mr Gore's chances looked the best, posits Mr Kudlow, the market fretted that Mr Boies might become a permanent fixture in a Gore administration, perhaps as head of the Federal Trade Commission or the Justice Department's powerful anti-trust division.

After all, the attorney had already signalled his willingness to take on a low-pay government job when he volunteered to reduce his fee for the Microsoft case. Matters weren't helped by the fact that older traders had not forgotten Mr Boies's success a decade or so ago in bringing down junk-bond king Michael Milken.

Mr Kudlow's research team reckons Mr Boies is personally responsible for an $800bn loss in value this time around-that on top of the evaporation of nearly $1,300bn earlier in the year.

It may seem a little cruel to pin this year's bloodbath on a single figure. But Mr Kudlow's point is a good one. In bumpy periods individuals become proxies for an overall bearish feeling. And as economist Art Laffer has noted, this time the bears are particularly concerned about the prospects for a "regulatory recession". Recent history has shown that regulation and antitrust work can turn a boom into a bust, or at least accelerate and dramatise a shift. Through their heavy-handed management of the savings and loan and junk-bond crises, federal regulators, banking authorities and prosecutors did much to bring about the last recession.

Looking farther back, to the Great Depression, historian Lawrence Reed of the Mackinac Center notes, it was Franklin Roosevelt who played the role of spook. Every time the president proposed a tax hike, and he did numerous times, the market dove. Particularly dramatic was the plunge after FDR imposed, by executive order, a 100% tax on incomes over $25,000 a year.*

Anyone who doubts that an individual can hold such an outsized role in these milder times, must recall the enormous beneficial role Fed Chairman Alan Greenspan has played on the global stage in the 1990s. And if the 1990s/2000 markets can rise because of a man, they can fall because of one. In other words, it can matter when a supposed bogeyman like Mr Boies says "Boo!"

* Great Myths of the Great Depression", by Lawrence Reed, available by e-mail from

© Copyright 2000 Financial Times

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