Issue No. 595
International
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18 - 24 July 2002 Issue No. 595 International |
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Another day, another scandal
Could the recent revelations of corporate corruption in the US have pushed the world economy closer to the brink? Fayza Radi investigates
Global markets witnessed yet another black week as stocks continued their free-fall. In Britain the FTSE 100 index of leading corporations registered a £95 billion loss in the value of British shares over the week. In the US the Dow Jones slid deep into bear territory, falling 117 points to hit 8,684.
"It's a brutal market, I have been doing this for 30 years and I have never seen anything like this," said Peter Mancuso, a New York Stock Exchange analyst.
Many economists link the market disaster to the financial corporate scandals hitting the global markets.
First there was Enron, then there was WorldCom and somewhere in between there are a myriad other US corporate giants going under amidst ugly allegations of fraud and corruption. This time around, the multinationals can no longer make a case for the proverbial rotten apple in their midst -- the entire barrel is decaying.
WorldCom and other companies stand accused of inflating their profit profiles by camouflaging expenses as capital investments. Billy Tauzin, chairman of a US House of Representatives committee investigating Enron, compared the latter's debacle with the WorldCom scam: "In many respects, this case appears to be eerily similar to the accounting hocus- pocus that occurred at Enron."
WorldCom, which operates in more than 100 countries, is the second-largest long- distance telephone operator in the US and the world's largest provider of Internet connections. Leaving a debt sheet of $90 billion in its trail, the company topped Enron's $70 billion bankruptcy that was billed, just two months ago, as the world's greatest. In retrospect, WorldCom's misdemeanours appear simple -- if not simplistic. Burdened with colossal debt and pocketing diminishing profits, first, that soon turned into losses, the company covered its tracks by reporting $3.8 billion in expenses as long-term investments. Last year, this move allowed WorldCom to fake profits of $1.38 billion on Wall Street and safeguard its share price. Hence, WorldCom managed to appear respectable on paper even while maintaining a reasonably stable stock profile.
The day of reckoning finally came when WorldCom proposed to buy up rival US telecommunication giant Sprint Corp for $129 billion in 2000. The sale was blocked by the authorities and the scam began to unravel. The result was that WorldCom stocks plummeted from $60 in 1999 to 20 cents and below in recent weeks.
This said, WorldCom is in good company and its demise just one example in what is rapidly becoming a corporate trend. "You walk into the kitchen, and see a cockroach -- you are pretty confident that it is not the only one around," commented John Hendricks, a vice- president at State Street Global Markets.
A host of historically reputable multinationals besides WorldCom have been cooking their books in order to keep up appearances and "look good".
A random sample of the sinking multinationals reads like a business "Who's Who" and sports heavyweights of the calibre of General Electric (GE), Xerox, Tyco International, Right Aid pharmacies, the Kmart retail chain and Arthur Andersen -- the accounting firm that cooked Enron's and WorldCom's books -- in addition to a growing number of other financial heavyweights. All are under investigation for evidence of "malfeasance".
Take GE, the world's biggest company. Like WorldCom, GE has inflated its profit sheets for the benefit of Wall Street investors. An ingenious company, GE devised a clever padding mechanism which involved transferring money from employee pension funds to company coffers. Now the pension fund is billions of dollars in deficit but, for a while, GE profits looked much better than they really were.
Considered a chic, "in" kind of financial misdemeanour among the corporate elite these days, malfeasance translates in regular old- fashioned parlance as financial fraud.
Malfeasance obviously profits some while costing others highly. Scott Sullivan, WorldCom's financial director, is evidently one of the profiteers -- his $2 million waterfront mansion currently under construction in Florida gives this particular fat cat away. Meanwhile some 17,000 workers lost their jobs in the wake of the company's debacle.
But this is only the tip of the iceberg. As a result of WorldCom and Enron's demise, millions of US workers lost their hard-earned savings and pension funds.
Halliburton is the most interesting example of the recently discredited multinationals and comprises one of the largest oil services in the world. Despite its global glamour and stature, Halliburton retained a small, charmed circle of associates and CEO. The company was audited by none other than Arthur Andersen of Enron and WorldCom fame and headed by US Vice- President Dick Cheney. Cheney served as Halliburton's CEO between 1995 and 2000, before moving on to Washington DC and greener pastures.
Along with other corporate chief executives, the vice-president has now been slapped with charges of financial fraud. Last week, Judicial Watch, a government corruption watchdog, began legal action against Cheney and other current and former Halliburton officials. Judicial Watch charged the CEO with engaging in "a massive scheme to mislead and defraud Halliburton shareholders, potential investors and the securities market as to Halliburton's true financial condition and the value of Halliburton securities".
The administration did its best to appear unruffled. Despite the gravity of the charges, Bush spokesperson Ari Fleischer dismissed them as being "without merit". The law suit against Cheney came at an inopportune time for George Bush, who had solemnly vowed, earlier, to restore "ethics and responsibility" to corporate America. The market remained unimpressed; the free fall continues.
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