Posted on 06/26/2002 6:16:40 AM PDT by Dog Gone
SAN FRANCISCO (CBS.MW) - And now this -- the most actively traded stock on U.S. markets is cut by two-thirds as its shareholders drive home from work Tuesday night - the result of a $3.8 billion lie.
Add WorldCon to the growing list of U.S. accounting scandals. Shareholders lost $2 billion in a matter of minutes Tuesday night, after news leaked out that debt-laden WorldCom (WCOM: news, chart, profile) treated billions of dollars in what lawfully should have been expenses as a corporate asset.
The result? The Clinton, Miss.-based telecom giant improperly shifted costs from its rightful pile to a blatantly wrong one so the company could amortize the costs over time.
In what's become a familiar story on Wall Street, the fraudulent accounting helped turn what should have been a hefty loss into a pro-forma profit -- one that inflated WorldCom's wobbly stock.
"This is why the market keeps going down every day -- investors don't know which statements to trust," said Brett Trueman, accounting professor from the University of California at Berkeley's Haas School of Business. "As these things come out, it just continues to build up."
If you're an investor in U.S. markets, is there anyone left to believe?
There's no reason to believe the auditors. A corporate audit conducted in the jungles of South America with an abacus seems more reliable than one done in the United States of America. So much for transparency in U.S. markets, the most equitable markets in the world. (Wave flag here).
Management at the Andersen accounting firm claims that WorldCom executives withheld information during the auditing process. Of course, we're expected to believe that Andersen, destroyer of Enron files, is the company telling the truth.
Also hidden in Anderson's statement is a misconception: Because WorldCom executives didn't explain each line item in the company's reports, why is it that Andersen employees aren't compelled to ask about them?
Another important lesson, if you haven't learned it already, is that you can't trust analysts.
How many of Wall Street's brightest told you to sell WorldCom before February, when the stock started its drop from $14 to $1 and below? How many told you to sell off some shares when the stock was at it's all-time high near $60?
The most bearish analysts have stuck with WorldCom through thick and thin. To be sure, many dropped WorldCom to a "hold" rating at signs of trouble in February. But instead of warning of trouble to come, including debt that has fallen to junk status and the possibility of bankruptcy, most cut back their reporting volume on the company.
The bullish analysts, like those at Goldman Sachs, had the stock rated "Market Performer" as of this month. And Kaufman Bros. just upgraded the stock to "buy" this week, making mention of "well-timed silence" at the top of their research report.
And then there's Salomon Smith Barney (C: news, chart, profile), which is tied to WorldCom's investment banking deals. The company regularly publishes glowing WorldCom reports. But this week, in an out-of-character move, Salomon's Jack Grubman, who faces a $10 million arbitration claim by one investor for his exuberant calls on WorldCom, dropped his price target on the stock to $1.
Did Salomon's investment banking deals get the brokerage inside information from the company? Does Grubman hold WorldCom shares, and has he or Salomon sold off recently? Salomon could soon be fielding those and other questions.
Finally, if it hasn't happened already, maybe we should be more leery of U.S. markets in general, and the excesses they tolerate. It's a flaw in the capitalist system when WorldCom, a company three times smaller than MCI, can use its overpriced stock to buy the larger firm.
The rise of WorldCom, and its subsequent fall, is among the most mind-blowing of any on Wall Street. The MCI acquisition thrust a group of Mississippi-based executives on to the international stage. None of them, especially the deal-making Bernie Ebbers, who built the company and resigned as its CEO in April, ever seemed skilled enough to truly manage the company through tough times.
Much of the day-to-day responsibilities in running WorldCom fell to Ebbers' underlings, including CFO Scott Sullivan, who has become the central figure in the fraudulent accounting. He was fired.
Not to go easy on Ebbers, but with his hands-off style, it's easy to see how he might not have known anything about accounting fraud.
Analysts, journalists, traders, fund managers, shareholders -- in retrospect -- we all should have been asking more questions about WorldCom's books.
Instead we took for granted that the capitalist system worked. We trusted Corporate America. We trusted auditors. We trusted analysts.
The market might not get back on track until we have reason to trust again.
It turns out that many more"paper" empires likely exist and as the market continues to slide, more will have to face the light of day.
Prior to the big crash, everyone was going to be rich, just put your money into the market and retire from work. Well the minnows got fleeced and it sure looks like a lot of minnows were fleeced during the 80 s.
I agree totally, however I do NOT believe anyone in the GOP will point it out. Nor do I believe any Clintoon lover would ever consider it to be anywhere near the truth.
It turns out that the budget surplus was built on paper, no foundation there at all. Today will be a bad day for all the "holders" that have got to make up their mind, hold to the bitter end because of their expertise, or sell and take their loss.
However, when the political debates were ongoing about the surpluses and the tax breaks, everyone said no problem we have Billions in surpluses. Not to worry! We have a balanced budget. That was all bull, wasn't it? Now we need to raise the debt ceiling another 450 billion. Many people said that the way the Government came to these figures all it was going to take was for the machine to break down once, and out the door it all went. We were told that this was political nonsense, and so pop, the machine broke down. So here is my guestion to you and everyone else.
What is the difference between ENRON? WORLDCOM? and some of the others who cooked they're books and the way Congress and the White House did the surplus?
And, isn't it fitting that the company was based in Clinton, Mississippi? You know that if Clinton had been a Republican, the press would say "WorldCom, based in Clinton, Mississpippi" every time to tie them together in peoples' mind.
I have decided that a public company is not worth much more than a private company. If you were going to buy a flower shop that had $300,000 in sales and $30,000 in net income, you wouldn't want to pay more than $150,000 for it, or 5 times earnings. A public company is worth only slightly more because of it's ability to raise capital through issuance of stock. Anything trading at more than 10 times earnings must be scrutinized heavily. Anything not making any money would have to have an extremely compelling growth and profitability plan.
Exchanges would have a pool of accounting firms that they would use and the entire exchange's reputation would then be on the line. If the exchance does not do proper audits, it will be eventually found out and investors would leave that exchange.
The exchange audits would be done by random firms with the firm that conducts the BOD audits being disqualified as well as the firm from the previous year.
Just my .02
It's less expensive than the billions of dollars of damage that has been done by cozy relationships with auditing firms and these companies, though.
By "cozy relationships" I mean "criminal conspiracies."
Take it to a more individual level. It's the American way, bend the rules and go for the gusto. Whether it is rolling through stopsigns or annoying neighborhoods with bass cars or claiming excessive exemptions on tax returns, it's all part of the permissive ethic. Elect Clintons forever.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.