Eruption of Corruption
By ALAN ABELSON
[from the new issue of Barron's]
If you're waiting for the other shoe to drop -- give yourself a break and don't.
For it's like waiting for a shod centipede to drop the other shoe: There's always another shoe.
God knows (we trust this doesn't put us in contempt of court in San Francisco), Corporate America is no stranger to scandal. But who would have dreamed that, as the past six or seven months revealed, the two have become bosom buddies?
One would think that if an entire generation of corporate executives were born with such an aptitude for corruption, they'd have naturally gravitated into politics. We suppose you can't steal as much, but that depends on how many times you get elected.
In truth, the latest and, in some ways, most spectacular case of misbehaving -- WorldCom, which, in the interest of full disclosure, may change its name to WorldCon (the New York Times editorial page anticipated us here; drat!, sometimes it hurts to be a scribbler on a weekly) -- evokes sympathy, along with the obligatory censure. For a spell there, despite all the effort expended by its executive chefs in cooking its books, all eyes were on Enron.
Think how those WorldCom guys must have chafed at the notion of a twit of a trading company hogging the limelight just because it resorted to a few schoolboy tricks that any self-respecting numbers masseur would find degrading to perform. We mean, put yourself in their place: You're busily laying the groundwork for the biggest restatement of earnings in all of recorded history, but it's Enron that becomes a synonym for devious dealings, big time.
Oh sure, folks took notice when founder and top dog Bernard Ebbers borrowed $400 million from the company to meet a margin call on his WorldCom stock. (The board loved Bernie and just couldn't hang him out to dry. Besides, they owed their cushy jobs to him.) And it did cause a bit of a stir -- in Wall Street if not Main Street -- when earlier this year the company announced it planned a small write-off -- $15-$20 billion -- of some acquisitions and, a few months later, allowed as it probably would miss this year's revenue target by $1 billion, maybe more. (We like the odds on "more").
But where were the TV cameras? Or the oceans of ink spilled on Enron or even Global Crossing (known affectionately to shareholders as Global Double Crossing)? Or even a single invitation to visit with a congressional committee?
Yet, in contrast to Enron's fancy, schmancy accounting gimmickry, WorldCom's ledger-demain was a minimalist work of art, in its simplicity a thing of beauty. The WorldCon artist opted for a touchingly old-fashioned, straightforward manipulation, shifting costs -- in this case, the charges to WorldCom levied by local carriers on calls made via the company's MCI subsidiary -- from their usual slot on the income statement, where they'd mess up earnings, to the balance sheet, where they couldn't do any immediate harm.
Over five quarters, billions of dollars in such expenses all but disappeared, while their absence correspondingly swelled earnings. So it is that WorldCom, once it went public with its remarkable feat of prestidigitation, was able to disclose a coming restatement of earnings of some $3.8 billion, an all-time record high in the vast corporate annals of earnings restatements and a full six times Enron's puny revision.
What's more, WorldCom no longer can complain that it lacks celebrity. The company is a veritable cynosure, the object of fierce fascination for Wall Street and Washington, securities analysts, brokers and bankers, panting, pontificating politicians, the 6 and 11 o'clock news, the front pages of every significant urban daily and not a few suburban ones, as well. Lives there a soul in this fair land for whom its name doesn't command at least some faint resonance?
The irony is that the men who, for all intent and purpose, made the company what it is today have left it just when it achieved this apogee of fame. Mr. Ebbers departed only two months ago, while the unsung Scott Sullivan, its master financial finagler, was forced to depart by an ungrateful board only last week, almost simultaneously with his earning due and widespread recognition for his extraordinary talent and work ethic.
One can only rue that they are no longer around. But then with well over $32 billion in debt and enough cash to keep it going for barely three months, how long WorldCom itself will be around is an open question. On this score, the newcomers at the helm can draw some comfort from the fact that if the wounded company isn't too big too fail, it's probably too big for its creditors to abandon all solicitude.
The only things that can be said with certainty about the erupting volcano of scandal spewing its acrid lava over such a wide swath of the corporate landscape is that we haven't seen or heard the last of it and its mark will be evident for a long time to come. To change the metaphor, the wild, wonderful, tumultuous movie of the 'Nineties is being run backward and that, you may remember, wasn't exactly a quick flick.
WorldCom, Global Crossing, Adelphia, Enron and the rest of the now familiar suspects, besides no end of rage and pain, have also inspired humor (not, need we say, among shorn shareholders, laid-off employees, retirees and the other desolate victims of their chicanery). This isn't exactly gallows humor, but it's a sardonic sibling. A sample was sent to us by a hedge-fund manager who often finds funny what normal human beings only find fretful. To wit:
EBDITA = Earnings before I tricked the dumb auditor.
EBIT = Earnings before irregularities and tampering.
CEO = Chief Embezzlement Officer.
CFO = Corporate Fraud Officer.
NAV = Normal Andersen valuation.
EPS = Eventual prison sentence.
Our fey friend, we should add, forwarded ccs to Bernie Ebbers, Ken Lay, Jeff Bezos, John Chambers and Jack Grubman. We had no idea he was on intimate terms with so many distinguished types. But then, he's not the boastful sort.
Even beyond the remarkable unearthing of so much corporate dirt and hidden bodies, these initial six months of 2002 were downright dreary. In fact, the nicest thing about the first half is its leaving.
It's true that we knocked the devil out of the Taliban. But the devil himself -- Osama bin Laden -- remains on the loose, brewing up mischief. Everyone knows there's no honor among thieves or thugs. So that none of those thieves and thugs he's so thick with has moved to cash in on the $25 million reward for his corpus -- warm or cold -- means either that $25 million isn't enough or, more likely, they can't read the wanted posters.
In any case, all of Washington's brave words and feverish motion notwithstanding, terrorism still ranks right up there with the escalating cost of martinis on any sensible soul's worry list. Among Mr. Bush's signal achievements on the security front in the first half was getting the heads of the FBI and CIA to pose for photo ops together, unarmed.
India and Pakistan staged another of their dust-ups. Under enormous international pressure, they pledged not to use nuclear weapons, only conventional ones, to blow each other up. That may not have cleared the air, but at least it kept it from being irradiated.
The scene in the Middle East continued uglier and uglier. The pool of wannabe martyrs among the Palestinians appears inexhaustible, and so is Israel's ability and willingness to fight fire with fire. Mr. Bush, nudged by the Saudis and the Egyptians, has agreed with foreboding (that will probably be fully borne out) to act as a kind of referee. And his first ruling was that the Palestinians had to get with the program -- free elections, free markets, kick out the crooked pols stealing them blind and dump Mr. Arafat. As usual, Mr. Arafat said swell, and promptly promised to run for president of the new, reformed governing body.
While most of the world began to recover from recession and moved toward recovery in the first six months of 2002, there were some notable exceptions, most of them in our backyard. Argentina, which had entered the year mired in economic mess, became even more deeply mired in a steadily worsening mess. Venezuela, with a mildly maniacal so-called popularist (mostly popular with his family and henchfolks) was also floundering, had a coup and counter-coup, all within what seemed like an hour, that left the mildly maniacal popularist still in control. And Brazil came down with a bad case of the economic blahs.
The dollar, which had been so strong for so long, suffered a dizzy spell that showed every likelihood of turning into a more prolonged and earnest decline. The euro, which dropped below parity with the greenback in December '99 and had been taking gas pretty much every since, rebounded smartly, coming within a hair of regaining status with the dollar.
What ails the dollar, not necessarily in order of importance, are the increasingly huge gap in our accounts with the rest of the world, the punk action of our stock market, the return of budget deficits -- upwards of $150 billion this fiscal year and rising -- after a long stretch of surpluses, the slowing pace of the recovery and, not least, in a reinforcing way, the weakness of the dollar, which put paid to the notion that it couldn't go anywhere but up.
What makes such weakness such a dicey business is that foreigners have been one of the old reliables buttressing our markets and own such a big chunk of our stocks and bonds -- 40% of Treasuries, nearly a quarter of corporate liens and 13% of equities. If their buying dries up, that's bad; if they get mad or discouraged and take their money home, that would be worse. Those serial scandals, chances are, haven't brightened their mood.
The economy got off to a steaming start early this year, stoked by business stocking up on inventory, and wound up the first quarter with a flourish: GDP shot ahead a neat 6.1%. Trouble is, with profits and capital spending and jobs lagging, the recovery slowed to a walk in the second quarter, with growth subsiding to 2-2½%. And even though there are shoots here and there of a pick-up in capital investment and housing remains buoyant, we suspect the reaccelerationists are destined to disappointment.
On this score, Goldman Sachs surveys its analysts every month on the state of business and even compiles an index from the results. And in June the index dropped to its lowest reading since November. The analytical gang singled out a worsening in new orders and exports. And even with some firming in profits, the research gals and guys reported that companies still had their heels dug in on stepping up capital spending or hiring.
Goldman's conclusion is that its analysts feel the economy has hit a "speed bump" but isn't ready to go into reverse. What strikes us is that the cautions on the economy are coming from analysts, not, we somehow have the impression, a notoriously bearish breed.
Finally, the first six months of the year were not a fun period for the stock market. In fact, after a nice bouncy start, the action in the closing months turned rather grim. Despite a spunky rally as the second quarter drew to a close (helped by some frantic mutual-fund window dressing -- and their windows really needed dressing -- and short covering), the averages finished in the red.
More specifically, the Dow was off 7.8%, the S&P 500 lost 13.8% and the Nasdaq -- oh, how it hurts just to relay the number -- lost a staggering 25% in the first half of the year, after brutal losses in both 2000 and 2001.
Tech's woes continued to kill the Nasdaq and didn't do the S&P much good, either. The eruption of corruption depressed both investor spirits and stock prices. And, as we noted last week, the economy's loss of ebullience was a significant drag as well.
That the averages, particularly the S&P and Nasdaq, which came perilously close, did not break through the lows set last September got the technicians all excited about a double bottom. (Technicians are easily excitable.) And more than one sage who had been stand-offish toward the market turned more or less bullish because everyone else seemed to be bearish.
We suspect they'll both be proved wrong. |
