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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (51406)	5/14/2002 12:48:13 AM
From: stockman_scott	Read Replies (1) \| Respond to of 65232

Taking Stock: Enronitis and other ills By Guy Rolnik Ha'aretz [Israel's leading newspaper] Tuesday, May 14, 2002 Sivan 3, 5762 Israel Time: 07:45 (GMT+3) "How corrupt is Wall Street?" asks the latest cover of the magazine Business Week. When the leading American business magazine can put the question so bluntly, it is clear something fundamental is changing in America's relationship with its financial markets. And to the question, we are willing to offer a short answer - very. First, where there is other people's money, there is always corruption because the temptation is great. Second, and perhaps more important, in Wall Street's five-year boom most of the industry went mad and the bodies charged with supervision - accountants, the SEC, Congress, directors, the media, and investors themselves - generally preferred to ignore all the writing that was up on the wall. The most prominent expression of the corruption that invaded Wall Street is Enron - a company that raised billions, backed by most major investment banks, faked its financial reports with the help of its accountants, and went in less than a year from one of the financial markets most "successful" companies, into bankruptcy. Enronitis is not the only chronic disease that ails Wall Street. There is a whole raft of other ills that will raise the risk of investing on American financial markets for years to come. E-Tradeitis The Internet brokerage's CEO, Christos Cotsakos, announced over the weekend that, following investor criticism of his 2001 salary, he plans to return $21 million to the company. How much is left after you return $21 million? No small sum - Cotsakos compensation last year cost the company $77 million, which the company explained was slated to "keep him with the company." E-Trade (NYSE:ET) is one of Wall Street's greatest success stories of recent years. In seven years Cotsakos brought the company from revenues of $70 million to $1.3 billion in 2001 - even with the collapse of the Internet and financial markets. But E-Trade's financials from the last five years indicate an interesting aspect - the company never had any positive cash flow from operations and all its activity was financed by funds raised in bond and share issues. In other words, what financed Cotsakos's salary was not profits, but fund raising. The claim that Cotsakos must be compensated for the company's performance is groundless because as founder, he still holds 5 percent of shares. Wall Street is full of companies like this - companies in which there is no connection between executive compensation and company performance. Such huge salaries guarantee that even if the company crashes in flames, the executives, their children, their grandchildren - indeed their great-grandchildren - would not have to work a day in their lives. Worldcomitis Two years ago Worldcom (Nasdaq: WCOM) was synonymous with the impressive results an aggressive communications company could achieve. CEO Bernard Ebbers was considered a management genius. Today the second largest long distance carrier in America is on the edge of bankruptcy. Worldcom suffers from many ills, including recent suspect symptoms of Enronitis - fake financials - but the most serious illness is the $30 billion debt the company took on in its halcyon days. The debt disease may be the worst on Wall Street right now. In the boom years, public companies took huge loans on the finance theory of the more debt the better. The increased debt allowed the companies to grow quickly and increase profits. However, it also led to more and more risk in the event of managerial failure or a turn for the worst on the market. Executives had a vested interest in increasing the risk to which the companies were exposed as most companies suffered from E-Tradeitis - executives got huge salaries so long as the companies grew. Since it wasn't their money, they had an interest in raising the stakes. If the bet paid off, they got huge salaries. If the risk came to pass and the companies collapsed, it wasn't their problem but that of the shareholders and creditors. In the case of Worldcom, the combination of E-Tradeitis and Worldcomitis has reached outlandish proportions. We recently learned the company lent its founder a quarter of a billion dollars to save him from bankruptcy after he mortgaged his shares in the company for his personal investments in ventures like a Canadian cattle farm. Ciscoitis The revered computer equipment giant Cisco (Nasdaq: CSCO) suffered from a number of ills in Wall Street's boom days which only became evident in last year's huge inventory write-offs. But Cisco is a relatively healthy company and, in its case, it is not the company that is ailing, but the stock. We mean share price. Even after the fall of Wall Street and investors sobered up from their Internet binge, Cisco still traded at $110 billion - five times annual revenue, and 100 times profits - despite the fact the company is not growing. Cisco is an excellent company but with a market cap like that it would have to show some rare performance, unlikely in the current economic climate. And this may be Wall Street's greatest ill - investors fleeing from companies that disappointed or even cheated, and racing to companies that are still profitable. The result is many companies that don't suffer from Enronitis, E-Tradeitis, or Worldcomitis, still suffer from Ciscoitis. Their shares are just too pricey. haaretzdaily.com