Issue No. 597
International
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1 - 7 August 2002 Issue No. 597 International |
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| Published in Cairo by AL-AHRAM established in 1875 | Recommend this page | ||
The sun also rises
An avalanche of corporate scandals are unravelling and the recession may be here to stay, writes Faiza Rady
A glimmer of hope filtered through Wall Street on Monday, when global stock markets finally picked up following long months of a disastrous decline. As the Dow Jones index of leading US shares soared by 285.50 points, markets in London, Paris and Tokyo responded setting the tone for better things to come. However, despite the good news the tone among market insiders was cautiously optimistic. Closing at 8,549.87 points the Dow remains deeply mired in bear territory, signalling the way to yet more doom and gloom.
Observers link the market disaster to the corporate scandals hitting the global markets as a host of US corporations are going under amidst ugly charges of fraud and corruption. A recent case of severe market jitters was triggered by pharmaceutical giant Bristol-Meyers Squib. Earlier this month investors fell all over each other to dump Bristol-Meyers stocks, following reports of a federal investigation into its unorthodox accounting practices. Company's shares dropped by 13.6 per cent, after the US Securities and Exchange Commission (SEC) announced it was investigating whether the pharmaceutical firm had padded its revenues by $1 billion last year.
This, however, is small change for the likes of Enron and WorldCom of recent ill-fame and fortune. WorldCom, in particular, has broken all records with its $30 billion debt sheet and its $90 billion bankruptcy declaration. The transnational, 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. Cornered by the SEC last month, the telecommunication company (telecom) claimed to having "mistakingly" posted $3.8 billion of expenses as capital expenditures since the beginning of 2001. Seasoned WorldCom executives said they had erred, "inadvertently" posting profits in lieu of losses.
Last year, this subterfuge allowed WorldCom to fake profits of $1.38 billion on Wall Street and safeguard its share price. Thus WorldCom managed to appear alluring on paper by sporting a reasonably attractive stock profile.
In July another telecom bigwig Quest Communications, the biggest local telephone company in 14 US states, announced it was facing criminal investigation for financial fraud. In this case, as in a host of others, the vicious cycle follows its inevitable downward spiral: stocks plummet, credit dries up and banks clamour for their money. As a result Quest is currently scrabbling to sell some of its major assets to avoid defaulting on its $26 billion debt before the year's end.
The story repeats itself as the worms begin crawling out of the corporate cracks. Xerox, the world famous office equipment manufacturer, is yet another corporate victim of overzealous SEC investigators. In the wake of the investigation, the transnational was forced to restate its accounts last month, admitting it had overstated its profits by $1.4 billion over a five- year period. Not to worry, explained a company spokesperson, it was only "a misapplication of generally accepted accounting standards".
Unlike Enron and other big time transnational transgressors, Xerox was in the position to skirt criminal charges by settling with the SEC: it gracefully paid a $10 million fine and rid itself of several senior executives.
A somewhat conservative old-timer, Xerox's misdemeanour pales in comparison with those of the upstart hi-tech telecom breed. Take the case of the French conglomerate Vivendi. Burdened with a debt of 20 billion euros after having bought Universal Music, Universal Studios and USA Networks, the telecom is on the brink of defaulting. Vivendi's staggering debt burden naturally calls for a healthy dose of profit padding. In the scrabble for survival, cooking the books to post profitability and look good on the paper market -- despite heavy losses in the real world -- has apparently become an essential part of the corporate game.
The French daily Le Monde recently accused Vivendi of having fraudulently added 1.5 billion euros to its 2001 profit accounts under cover of a complex share transaction with BskyB. Yet, the company vehemently continues to deny allegations of ever having inflated its profit sheets. Criminal charges are not yet pending.
Since the mid 1990s and until 2000, the phenomenal rise and fall of telecoms created the greatest bubble ever witnessed in the annals of corporate history. At the time, the gurus of neo-liberal wisdom predicted health, wealth and prosperity for all marketeers in the sector.
Grounded in the ever-expanding market of the "revolutionary" information technology (IT), the "new economic paradigm" was going to put an end to the vicious boom-slump cycle, claimed the spin doctors.
For a while, the market was up for grabs. Riding high on the tide of IT craze, anybody and everybody with real or imaginary "dot.com" credentials vied for a slice of the pie. Telecom stocks spiralled, and the banks kept the supply of money flowing like there was no tomorrow.
Consequently, freshly-baked telecoms sprang up left right and centre -- gobbling up the money. Wary of missing the boat, reputable transnationals branched out in order to jump on the telecom bandwagon. In the frenzy of capacity building, demand for money soared and the banks complied. Telecom indebtedness ballooned to hit an estimated $1 trillion this year.
By the end of the millennium, the market had become saturated -- setting the stage for recession, the curse of capitalist overproduction. In a saturated and therefore overly competitive market, commodity and service prices inevitably fall below production costs and profits evaporate into thin air. In effect, global corporate profits have fallen for the past five consecutive quarters, signalling the largest drop in three decades.
As the IT-cum-telecom craze took over and swamped the market, huge investments in the new sector in no way paralleled price rises. US prices are now barely rising. Over the last three months, retail rises have hovered around 0.1 per cent, while wholesale prices have effectively dropped -- falling at an annual rate of 2.6 per cent.
Recessions signal the proverbial struggle for survival of the fittest, pushing weak companies out of business. However, recessions are not supposed to be all bad. According to neo-liberal dogma, and all things being equal, recessions tend to "free up" resources like capital and skilled labour, which will then be shifted and redeployed in a more efficient capacity elsewhere.
"Ideally that would mean Wall Street bankers (and corrupt executives) who touted bankrupt telecom stocks sky-high for fat bonuses get shifted to local fast food restaurants to serve people in a capacity for which they are much suited," comments political analyst Michael Roberts.
Unfortunately, all things are never equal and textbook neo-liberalism does not quite square with the real world. Notwithstanding a few cosmetic sackings for PR purposes here and there, the bosses appear to be doing fine -- recession and all. By 2000, the average annual pay of CEOs at 362 of America's largest corporations reached, $12.4 million, representing a six- fold increase over a ten-year period. The average CEO pockets an amount 475 times larger than the average manufacturing worker's annual pay.
At any rate, no matter how flamboyant, CEO annual salaries only amount to small change. Corporate stock options is where it's at. Take Charles Wang, boss of Computer Associates International, who pocketed $650 million in restricted shares. Although, Wang got the biggest bonus to date, others have no reason to grumble. When Lucent downsized its workforce last year, CEOs Richard McGinn and Deborah Hopkins were let go. The telecom awarded McGinn $13 million in severance pay, after a three- year tenure at Lucent, and Hopkins received close to $5 million for less than one year on the job.
Besides the two departing top executives, 10,500 workers also got the sack, without the accompanying bonus. All things being equal, they will be redeployed in a more efficient capacity elsewhere.
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