There Must Be Some Way Out Of Here

THE ECONOMIST
July 18th 2002 | WASHINGTON, DC From The Economist print edition

Americans are losing confidence in the economy. Can George Bush stem the slide?

THESE are not happy times for the White House. Share prices are tumbling, consumer confidence has fallen sharply and George Bush's own approval ratings seem to be heading down. For an administration haunted by the ghost of George Bush senior, whose defeat in 1992 was blamed on a sluggish economy, the parallels are becoming painful, not least because the current president's efforts to reassure Americans are also falling flat.

Mr Bush's trip to Wall Street to preach about corporate ethics was widely derided as too little, too late. This week's follow-up, a hastily-arranged pep talk on the economy in Alabama, proved another embarrassment. “This economy is coming back,” boomed Mr Bush. “That's the fact.” Meanwhile, in one of Wall Street's more dramatic days, stockmarkets slumped (though they recovered somewhat after he finished). It was all too close to Herbert Hoover, who famously proclaimed America's economy to be on a “sound and prosperous basis” in October 1929.

Judging Mr Bush's words by short-term movements in share prices is, of course, neither fair nor useful. The real questions are whether the White House has correctly diagnosed what ails the American economy, and whether its policies are right.

Mr Bush's basic contention is that the fundamentals of the American economy are in good shape. This was also the message of Alan Greenspan, chairman of the Federal Reserve, in congressional testimony the following day. At first blush, they have a point. Inflation is low and productivity growth remains surprisingly robust. Much of the excess investment that firms had built up during the boom has been worked off. Consumer spending remains surprisingly solid. Retail sales, for instance, rose 1.1% in June, far faster than analysts were expecting. The Fed has raised its forecast for economic growth in 2002 to 3.5-3.75%.

Yet despite these apparently good fundamentals, consumers are worried. The University of Michigan's consumer-confidence index fell sharply in July, to levels last seen in November. The main reason, of course, is the stockmarket slide (see article). Over the past two weeks alone the Dow Jones Industrial Average has fallen by 6%. The S&P 500 has dropped to levels not seen since October 1997. The technology-laden Nasdaq index is 72% below its peak in March 2000.

In large measure, this slide is the deflation of the 1990s bubble, a point Mr Bush himself hinted at: “America must get rid of the hangover that we now have as a result of the binge...we just went through,” he said in Alabama. But it has clearly been aggravated by the slew of corporate scandals and the loss of investor confidence.

Sliding equity prices could begin to hurt those fundamentals, promoted so assiduously by Messrs Bush and Greenspan. Household saving, in particular, may be found wanting as Americans re-evaluate what they can expect from their retirement portfolios. That suggests a protracted spell of sluggish, rather than buoyant, consumer spending. Capital investment could also suffer, if firms become more cautious about borrowing.

Unfortunately, there are scant signs that the administration will help counter this. In his Alabama speech, Mr Bush promised an “agenda for long-term growth”. This encompassed: fiscal policy (he wants to make his tax cut permanent, whilst forcing Congress to hold the line on spending); trade policy (he urged Congress to grant him “fast-track” authority to negotiate trade agreements); corporate reform (he touted his new Corporate Fraud Task Force, promised more money for the Securities and Exchange Commission, and urged Congress to send him an accounting-reform bill before August); boosting accountability in schools; and terrorism-risk insurance.

This grab-bag of assorted policies hardly constitutes a post-bubble economic agenda. Even if you thought it did, once you start going through the individual bits, the progress is patchy. For instance, the Senate certainly passed a tough corporate-reform bill on July 15th, and Mr Bush welcomed it. The next day Republicans in the House of Representatives promised to dilute many of the measures in the Senate bill (though they did agree to stiffer sentences for corporate criminals).

Nor do the prospects for trade policy look good. The Bush team has been pushing Congress for fast-track authority for 18 months. Legislation squeaked past the House of Representatives last December and the Senate in May. But reconciling the two bills has been difficult. If Congress does not get round to voting on fast-track by the August recess, the proximity of the mid-term elections in November suggests that the politically sensitive trade bill has little hope.

The biggest and most intractable problems, however, concern fiscal policy. Nobody seems to have absorbed how a post-bubble environment might influence the budget. On July 12th, the Bush administration announced that the federal government would run a deficit of $165 billion this year, compared with an earlier forecast of $106 billion made in February 2002. Although the economy has grown faster than expected since February, tax revenues have plummeted. Much of this revenue drop is due to the stockmarket, as individuals' capital gains have turned into losses. If the bear market lasts, so too will those revenue shortfalls.

In these conditions, Mr Bush's main fiscal policy—that his 2001 tax cuts, ostensibly to be reversed in 2010, should be made permanent—is hard to justify. If demand weakens substantially, there may be a case for more tax cuts (or spending) today. But it is hard to see the fiscal wisdom in making future tax cuts permanent at a time when revenues are so uncertain.

On spending, blame needs to be divided between the White House and Congress. Mr Bush talks tough on spending. He has threatened to veto a $27 billion supplemental budget bill that Congress has larded up to $31 billion. However, by agreeing to far larger, and permanent, expenditures (such as the massive farm bill) Mr Bush has lost the moral high ground. Congress, in turn, is closely divided, and short on any procedural systems for fiscal discipline. Finger-pointing and partisan bickering are far more likely in Washington than the confidence-inspiring policies that America's economy needs.

Repeal the 16th amendment and abolish the income tax. Abolish the IRS and take away the citizenship of senior IRS officials and send them to Russia where they'll feel at home. Obliterate federal spending, and start to pay off the national debt in large chunks. Abolish "static scoring" with regards to taxation of any kind. Reinstate and restore the Constitution and Bill of Rights and abolish all laws, treaties, emergency orders and executive orders that have rendered it useless and return to the Constitutional boundaries of our constitutional Republic our founding fathers gave us. Importantly, repeal the Emergency and War Powers Acts. Repeal all laws created by unconstitutional and extraconstitutional devices, such as Executive Order or Presidential Directive. Repeal and abolish all unconstitutional federal involvement in states issues such as: crime, health, education, welfare and the environment, and only God knows how many other intrusions. Social programs such as Social Security, welfare and Medicare must be repealed. So too, do most federal subsidies. Rescind all treaties and International Agreements which are not in perfect agreement with the Constitution. Tell the United Nations to stuff it! The U.S. should disassociate itself from the U.N. and the U.N. should be forced to leave the United States. Destroy all documentation that links the U.S. with the U.N. See Arthur Andersen for details. Alger Hiss, screw you. Furthermore, demand that the federal government refrain from meddling in the business and squabbles of foreign nations, unless there is an imminent threat to the people of the United States. PROTECT OUR BORDERS!! Elect a real small government candidate for President, and the same for Congress. Take memory loss drug to try to forget that most Americans love socialism in about every way and that politicans are simply a reflection of themselves, and, none of the above is going to happen. Now, returning back to reality. Terrorism, shadow government, Stock market crash, federal government crash, Police State, Martial Law, gun-confiscation, FEMA, FBI, CIA, Dictatorship, T.I.P.S., Carnivore, Operation Magic Lantern, Echelon, The Patriot Act, Executive orders too numerous to count, slavery, death, One World Government. It could never happen here. For those of you not just interested in Medicare Part B.

THE BUBBLE THAT IS STILL BURSTING: LARGEST BANKRUPTCY IN HISTORY

NYSE's Grasso: Monday May Be Rough Day

Reuters
By Caren Bohan
July 21, 2002 04:24 PM ET
Source

WASHINGTON (Reuters) - The head of the New York Stock Exchange warned on Sunday that Wall Street may face a rough ride when stock markets open this week but urged investors to stay calm and focus on the wisdom of long-term investing.

"Mondays following Friday declines have always been difficult and I suspect tomorrow will be no different," Richard Grasso, chairman of the world's No. 1 exchange, told NBC's Meet the Press.

On Friday, the Dow Jones industrial average sank to 1998 lows when it crumbled 390 points, or 4.6 percent, to 8019.

In a bear market, stocks can be especially vulnerable on Mondays because the market closure over the weekend allows time for investor anxieties to build.

The October 1987 market crash, when the Dow plunged 508 points or 22 percent, occurred on "Black Monday" -- which followed a 108-point-drop the previous Friday.

A slew of corporate accounting scandals have left investors mistrustful, prompting them to dump equities.

The Securities and Exchange Commission has ordered leaders of U.S. companies to vouch for the honesty of recent financial reports, giving them until Aug. 14 to do so. The SEC named the top 945 publicly traded firms whose books must be certified as accurate by chief executive and financial officers.

The Aug. 14 deadline is also looming over the marketplace. And after the scandals at Enron, WorldCom and other companies, investors are worried about what new bombshells might drop when executives put a stamp of approval on their company's results.

But Grasso played down such concerns.

"I'd be very surprised, if any of the major companies ... would, in essence, renege on their previously reported financial statements," he said.

Over the past two weeks, the Dow has lost 14 percent of its value, falling in every session but one. Other market gauges have hit multiyear lows as well.

KEY THRESHOLD

With the Dow perched just above the psychological threshold of 8,000, Grasso made a plea for investors to keep a cool head and think about long-term goals like saving for retirement or their children's college education.

"Please be patient," he prodded. "Please don't do something that emotionally feels good but in the long term will be a mistake."

He noted that over the long haul stocks outperform fixed-income assets. Grasso also highlighted statistics showing that despite the stock market's woes, the U.S. economy remains in a recovery mode after last year's recession.

"Our economy is strong. We've seen first-quarter (gross domestic product) grow at a rate of 6 percent. Inflation is nonexistent. Interest rates are the lowest they've been in 30 years," Grasso said.

Economist Allen Sinai of Decision Economics agreed the economy has held up so far but two of its key pillars, consumer spending and the housing market, may be vulnerable because of the beating the stock market is taking.

The stocks' declines threaten to undermine confidence and could lead consumers to shut their wallets.

Speaking on the CBS program "Face the Nation," Sinai also said he saw a chance of a temporary reprieve from stocks selling but they may lose even more ground.

"We still have significant downside risk to our equity markets, even from these levels, I'm sorry to report another 8 or 10 percent possibly down before we could bottom out and then move up," he said.

Goldman Sachs strategist Abby Joseph Cohen was more optimistic, saying stocks have absorbed much of the bad news.

"I can't give advice to all of the different investors out there, but would I say that I think that stock prices are today priced too cheaply," Cohen told "Face the Nation."

In several public appearances recently, President Bush has also emphasized some recently positive economic signs in an effort to shore up investor confidence.

But that has not stemmed the stocks' slide. Even Federal Reserve Chairman Alan Greenspan was only able to bring about a momentary pause in the sell-off when he testified on Capitol Hill last week, saying the corporate accounting mess had not shaken the core foundations of the U.S. economy.

Grasso said efforts by Washington and within the private sector to reform the financial system would eventually renew investors' faith but that would take time.

The New York Stock Exchange chairman urged tough measures to crack down on corporate managers who commit fraud, saying the country needs to "wage a war against terrorism in the boardroom, against misleading investors."

'Difficult' Monday looms over Street

WorldCom to File Bankruptcy Sunday

WorldCom Will File for Bankruptcy, Wiping Out Common Holders

Dollar Seen Hitting Fresh Lows

Dollar lower against yen in Tokyo

Trade Deficit Swells to $37.6B

White House Says It Expects Government Deficit to Hit $165 Billion

Vivendi Still Faces Liquidity Crisis
Note: Vivendi In Big Trouble.

AOL Time Warner Inc.'s stock falls on report of questionable accounting

The AOL Time Warner Black Hole

Investors Fear Another Tough Week

Johnson & Johnson shares Hit By Federal Investigation

WorldCom files for bankruptcy

The Wall Street Journal
By Shawn Young, Carrick Mollenkamp, Jared Sandberg and Henny Sender
July 22, 2002
Source

Embattled telecom’s board of directors approves action

WorldCom Inc. filed for bankruptcy-court protection late Sunday, succumbing to $41 billion of debt and an accounting scandal that has destroyed its access to capital.

WORLDCOM, WHICH has $35 billion in annual revenue but is now nearly out of money, filed under Chapter 11 of the U.S. Bankruptcy Code. The filing, which shields the company from its creditors as it reorganizes, was made in the U.S. Bankruptcy Court for the Southern District of New York. The company intends to continue its normal operations. WorldCom’s board had unanimously approved the step at a meeting Sunday afternoon.

WorldCom, parent of MCI, is the nation’s second-largest long-distance provider and serves 20 million consumers and thousands of corporate customers. In its filing, the company, based in Clinton, Miss., lists assets valued at $107 billion, making the bankruptcy filing by far the largest in U.S. corporate history. Enron Corp., which had been the largest bankruptcy until now, listed assets of $63.4 billion.

Analysts believe, however, that WorldCom’s assets today may be valued at less than $15 billion.

“The shame of it all is that underlying the debt and the restatement and the alleged fraud is a really great company that will ultimately survive,” said Chief Executive John Sidgmore in an interview Sunday. “If we can emerge from bankruptcy without the debt load, we can have a strong position in the industry. We might emerge with the strongest balance sheet.”

WorldCom’s list of creditors, which reads like a who’s who of Wall Street, is made up mostly of bondholders and bank lenders. The largest noteholder is J.P. Morgan Chase & Co.’s J.P. Morgan Trust Co. which, as a trustee, lists $17.2 billion. As a trustee, J.P. Morgan Trust doesn’t necessarily own the bonds, but it is simply an administrator for the investor that owns the bonds.

As expected, the banks that loaned WorldCom $2.65 billion in May, just weeks before WorldCom imploded, are on the list, with Deutsche Bank AG, the largest bank loan creditor, seeking $241 million. ABN Amro Bank NV is owed $203 million.

The filing was made by WorldCom and its roughly 180 domestic subsidiaries, but it doesn’t include the company’s foreign affiliates.

WorldCom intends to sell off nonessential assets and focus on key businesses so it can emerge from bankruptcy protection as a viable company. As part of the court process, WorldCom creditors, including bondholders and banks, will jockey for payment. The bankruptcy almost certainly will wipe out common shareholders, who are last in line among stakeholders in such a proceeding. WorldCom has about three billion common shares outstanding. WorldCom plans to continue serving its residential and business customers, but it faces a major challenge to hang on to them, as some have begun voicing concern that the company’s financial condition could impact service.

Mr. Sidgmore, who took over after veteran CEO Bernard Ebbers was ousted in April, plans to remain in charge, though some bondholders in interviews have raised the possibility that they will seek new management to start fresh. The company will hire a restructuring adviser, who would report to Mr. Sidgmore, to handle relations with the creditors’ committee and help keep management from becoming so distracted by the bankruptcy details that it can’t run the company.

WorldCom’s longer-term tasks will be more difficult. It has to protect the rapidly eroding value of its brand. And it has to decide what its core business should be. WorldCom doesn’t have a group of assets it can easily spin off to raise billions of dollars. Some minor assets, such as the company’s Brazilian and Mexican operations, could be easily disentangled from the rest of the company, but they wouldn’t raise much money.

The expected bankruptcy filing caps a spiraling series of troubles that culminated in disgrace last month when WorldCom admitted to what could turn out to be the biggest accounting fraud ever. WorldCom misstated $3.8 billion in expenses over five quarters in a way that allowed it to report profits when it actually lost a total of about $1.2 billion in that period. The company will have to restate financial results for 2001 and the first quarter of 2002. The move placed WorldCom at the front of a growing line of scandal-tinged flameouts among major companies that have undermined investors’ faith in the market and sent stocks reeling.

WorldCom, whose high-profile former CEO Mr. Ebbers once boasted that his company’s stock was more valuable than cash, had a market capitalization of about $120 billion at its peak in the summer of 1999. By Friday, with expectations widespread of its impending bankruptcy filing, WorldCom’s market capitalization had dwindled to $280 million, a good deal less than Mr. Ebbers’s $408 million loan from the company.

Bondholders are the dominant creditors and will have one of the loudest voices in determining the company’s fate.

One of the first things WorldCom will do now that it has filed will be to ask the bankruptcy-court judge to approve a $2 billion bank loan in the form of senior secured debtor-in-possession financing. WorldCom said Sunday it has secured $750 million of the $2 billion to use in the interim. One of the stipulations the banks made is that WorldCom hire a chief restructuring officer to shepherd WorldCom through what has the potential to be a daunting reorganization.

WorldCom’s debtor-in-possession funding was arranged by lead bank Citigroup Inc. along with J.P. Morgan Chase and General Electric Co.’s financial-services arm, GE Capital. Providing the financing gives these institutions what is called “super-priority” status among WorldCom creditors, which means they will be repaid for the new loans before anyone else.

Another early step will be for WorldCom to seek authority to pay bills outstanding to some creditors-so-called “critical trade vendors”-before it pays bills owed to other creditors. That step is taken to ensure good relations and critical service. An early court battle could occur over how WorldCom categorizes the regional Bell companies, which provide much of the nation’s local-phone service. The Bells could be categorized as utilities and therefore wouldn’t have to be paid immediately for past bills.

But the Bells could argue that without the ability to connect to local phone networks, WorldCom wouldn’t be able to function. The regional Bells are: Verizon Communications Inc., SBC Communications Inc., BellSouth Corp. and Qwest Communications International Inc. WorldCom owes Verizon, which the largest of the Bells, $121 million, according to the filing.

The Bells, which are also WorldCom’s competitors, have been demanding upfront payments, as have other suppliers, as the company’s fortunes slumped. That demand sharply accelerated the rate at which WorldCom burned through its remaining cash and hastened a bankruptcy filing that already seemed inevitable. Even with WorldCom in bankruptcy-court protection, the regional Bells seem inclined to take a tough stance.

“We will take an aggressive approach to protecting the interests of our shareholders,” said Peter Thonis, a spokesman for Verizon.

Some people familiar with the situation say that WorldCom’s cash flow could improve significantly because of the protection a Chapter 11 filing provides and that the company may not need much of the $2 billion in loans that will be available. For example, WorldCom won’t have to pay $500 million in estimated quarterly interest expenses that go to WorldCom’s bondholders.

“Working capital could actually shift to be a significant” help to WorldCom’s operations, said Banc of America high-yield analyst Trent Spiridellis.

There is some desire among bondholders for Mr. Sidgmore to step down, said people familiar with the bondholders’ views. Such changes are common in bankruptcies, particularly if the existing management is tainted in any way. Mr. Sidgmore has denied any knowledge of the accounting improprieties, but some bondholders believe he lacks the heavyweight management credentials the company needs and was too close to Mr. Ebbers and fired Chief Financial Officer Scott Sullivan.

Mr. Sidgmore said he doesn’t believe his departure would benefit the company. “If you believe the company is going to be liquidated, then that’s what you need,” he said. “If you believe that the company is going to be rebuilt, then I think they’re dead wrong.”

“We haven’t heard any outcry to displace management,” said Marcia Goldstein, a senior partner at Weil Gotshal & Manges, which is handling the WorldCom bankruptcy procedures.

“The most important thing is to ensure stability of the operations,” says Daniel Golden, the Akin Gump Strauss Hauer & Feld LLP lawyer for the bondholders making up the informal creditors’ committee. “To preserve WorldCom’s network of customers and suppliers, speed is key.”

At Sunday’s meeting, WorldCom’s board approved two new board members to succeed Mr. Ebbers and Mr. Sullivan. The company named Nicholas Katzenbach, 80 years old, a former undersecretary of state, attorney general, and Yale Law School professor; and Dennis Beresford, a 64-year-old professor of accounting at the University of Georgia who formerly served as the chairman of the Financial Accounting Standards Board.

Some of the stakeholders in the bankruptcy say once WorldCom’s balance sheet is clean, it could become an attractive acquisition target for the Bells or other competitors. Mr. Sidgmore said some would-be buyers are interested enough to have hired investment bankers to assess possible deals. But so far, some prospective buyers are still intensely wary of the company’s weakening core business and the many unknowns that still could lurk in the company’s books.

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