We'll be all right after Worldcom. Really, we will. Investors who hadn't already abandoned ship by the time Worldcom admitted to boinking Wall Street to the tune of nearly $4 billion, most likely had trimmed their telecom stake way down anyway. This isn't like Enron, where the company cogs, for reasons known only to them and Ameritrade, sank the entirety of their portfolios and 401Ks into the company pot. The jobs and the assets will be picked up by someone else - they had all very recently been someone else's to begin with.
What's disturbing, perhaps even more so than the mind-boggling monetary figure, is the complete astonishment feigned by anyone, everyone, who was within spitting distance of this grease fire. What happened at Worldcom happens everywhere, to smaller and greater degrees perhaps, but it's not hard to imagine that if Worldcom's excuse is "Everybody's doing it," then maybe everybody is doing it.
See, what they did was take the money going out, what you and I would call "expenses" and sort of turn those numbers around, crunch them, and then make a loud noise. When everyone was looking at the spot where the noise came from, they would simply slip those numbers into the "revenues" bucket. After that, they'd look at each other and say "Hey, did we just make more money? Life is awesome!"
Something like that.
I'll try to simplify. Go get your checkbook. Now, look at the most recent entry in your ledger. I'll wait if you have to balance. Good, now, how much money do you have? All right. Take your pen and just sort of add a couple of zeros to the right of that entry in the ledger. All set.
You've got, what, three or four weeks until the bank gets a hold of you?
That's what Worldcom did. Only with billions instead of hundreds and it took the SEC a little while longer to drop by and check up on things.
If you're really looking for answers, the question becomes not "How did this happen?" but rather, "Why did this happen?" Anyone familiar with the situation can give you the what's up. Worldcom never sold anything. They got away with this by borrowing a bunch of money and buying a bunch of companies.
This would be equivalent to you, say, quitting your job and then having all your friends move in with you. You can sure get a lot more done around the house with all the extra hands, so it's a great idea right off the bat. And between the six or seven of you, I mean, someone's got to have a job, right?
Well, now everyone is kind of shrugging and looking helplessly at you. Uh-oh. Standoff.
Solution? Everyone whip out your credit cards. Now, by all accounts, things are fabulous. You're having keg parties and buying new furniture. You even convince everyone to go out and get new polo shirts and khaki pants, so when you have people over, it'll look like everyone just got home from a rough day at the office.
Worldcom acquired more than 60 companies in its brief existence, including MCI in 1997 for the bargain basement price of $37 billion. When telecom screwed the pooch in 2000, it should have been time for Worldcom to face the music. However, it wasn't that easy to give up the 740 and the house in the Caymans. And they had just spent all that money on those cool Generation D commercials with the funky sax music. And hey, wait a minute! How come nobody else was suffering? A few looks over a few shoulders spelled it out pretty succinctly.
The answer was, of course, to cheat. But that still doesn't mean they had to pick the stupidest way possible.
Back to your house and all your friends. You did the right thing. You expected everyone to have a job and that all kinds of cash would come in. When that suddenly didn't materialize, you were left to do the plastic shuffle. Then one day the phone rings and it's a "Mr. White" from "American Financial Retrieval Incorporated" who has a very urgent message for... you.
Not your buddies.
One of your pals pipes up. Don't you have a relative who knows how to handle this type of problem? Sure you do. So you call the smartest, most influential, most respected guy you know. Your Uncle Arthur, who happens to be an accountant. He comes over and you tell him things. Maybe not everything, but he gets the jist. He listens to you, nods every once in a while, and then goes to the bank. He comes back with good news. You're off the hook. He fixed it.
You're so excited, you rush right out and buy Uncle Art a big screen TV.
Can you guess who Worldcom's accounting firm was? Can you guess how this news slipped out so closely on the heels of Enron?
I'm guessing someone copped a plea bargain.
So now you wake up one day at the crack of noon, put on your $100 slippers and your $300 bathrobe, trudge downstairs to sit on your $900 leather Lay-Z-Boy, open up the day's paper and there's a picture of Uncle Art on the front page of the business section. He looks... rather morose.
Soon you get a another phone call. Only this time, it's not "Mr. White," it's Detective Green (no quotes). Turns out Uncle Art has been doing some funny business with his clients' money. And it appears he recently took delivery of a big screen TV. And it seems your signature is on the receipt.
Do you know anything about this? Could you come down to the station, you know, just to chat?
See, another difference between Worldcom and Enron was that while the numbers shuffled were far greater in the Enron fiasco, the non-auditing fees paid to Andersen by Worldcom were much, much higher. It smacks of kickback. And since Andersen is in the toilet anyway, Worldcom might as well go down with it. At least one Andersen partner avoids jail time.
So again, we question why this would happen. What makes a company, or rather, a series of companies, decide it's better to cook the books than tough out the downturn?
Well, take it back to your friends and the house just one more time. The average American household has a record $8,000+ in revolving credit card debt.
Now we come full circle. Just as we scaled down from billions to hundreds to make our example work for you personally, scale that $8,000+ revolving debt figure back up to corporate size. That's a big number.
And now not even Uncle Art can help them out.
Joe Procopio trades in pop culture and tech culture, allowing him to poke fun at so many things. He's written for a number of online and offline publications from the late, lamented Smug to the fancy-pants Chicago Tribune and also for television. He's a novelist, a shredder, a joker, and a family man. Scoff at joeprocopio.com or follow on Twitter @jproco.
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IF YOU LIKED THIS COLUMN...
7.1.02 @ 12:25a
Good day and welcome to 1922.
History is cyclical, friends.
7.1.02 @ 12:50a
Joe, there's a big difference between having $8000 in (legal) credit card debt and (illegaly) upping profits by $3.8 billion.
That's like making $100,000 year, but saying you make $1 million a year on the bank loan application so you get buy the $2 million home you can't afford.
7.1.02 @ 12:52a
I just laugh. I don't make enough to play the market, outside of my 401(k) stuff (which is, itself, petty). I feel bad for the little people who got screwed and swindled by their bosses' greed, but I have no pity for those caught red-handed.
The most regrettable thing is, none of these robber-barons will suffer much. That just seems to be the way it is with high dollar white-collar crimes. Nobody gets sent to Oz for insider trading or securities fraud. My idea of justice: liquidate what remaining assets exist, including the personal property of those determined to be responsible, and then divvy the cash among those who got axed.
For a more primal form of justice, turn a couple of Worldcom big wigs loose in an arena filled with newly pink-slipped MCI operators.
7.1.02 @ 8:14a
Hey Matt, point taken - some of this is tongue-in-cheek after all. However, you're comparing apples to oranges. You have to go debt for debt, not debt for revenues. So illegally upping your own bank statement, like I mention in paragraph five, would be akin to what Worldcom did. Sorta. Get it?
In asking not "How did this happen," but "Why did this happen," the root of the reasoning is the same. Rampant corporate debt, combined with ever-increasing pressure to beat estimates is my guess (and a lot of other people's) as to what makes a CFO play with the eraser.
Before the bubble burst, companies were consistently beating Wall Street estimates by a penny or two. Those numbers were just as rigged as today's numbers. The difference is that the gap between debt and revenue is now so deep that the methods to get these numbers to jibe are getting more and more desperate.
7.1.02 @ 12:25p
The most regrettable thing is, none of these robber-barons will suffer much...
Depends on the prosecutor, Russ. For example, Bernard Ebbers, recently ousted Worldcom CEO, has an internal investigator, the SEC, and Congress up his ass. He has already invoked both Jesus Christ in his defense and a half-hearted paraphrase of "I am not a crook."
If that unholy trio gets what they want, Ebbers could end up doing hard time, and rightfully so.
7.1.02 @ 1:19p
Congress has been up a lot of asses in its time, and what's come of it?
7.1.02 @ 2:05p
Ah, Jael, things have changed since Milken. You've got Paul Polishan at Leslie Fay serving nine years. Patrick Bennett at Bennett Funding hooked thirty years. Or how about Stuart Winkler at A.S. Goldmen, trying to kill the presiding judge in his case? He's done.
Congress, in an election year, can get surprisingly punitive. Especially on those cases in which they don't have their fingers in the pots. While no one can touch Enron, Worldcom didn't seem to have paid as much tribute, putting Ebbers, Scott Sullivan, and maybe even Sidgmore in a rather sticky sling.
7.2.02 @ 2:48p
So, what about someone like Martha Stewart? Did she act on insider information? And what should happen to her if she did? And if we get her, can we go after Oprah next?
7.2.02 @ 4:00p
She so did, and we should hang her from the highest tree with a braided rope of double top-stitched designer rickrack.
7.2.02 @ 4:28p
Oh. Absolutely. more designer rickrack
7.8.02 @ 3:15p
Next is Merck reporting 12 BILLION in revenues that it never collected. This just keeps getting better (unless you work for Merck).
7.8.02 @ 3:38p
And Ebbers and Sullivan have taken the fifth.
7.10.02 @ 3:22p
Now Qwest (which for some reason always reminds me of "Quisp"). Under investigation by the SEC, criminal charges pending, stock plummeting.
7.10.02 @ 3:31p
Anyone actually tempted to buy Worldcom? At 22 cents a share, who cares if you lose it all?
7.26.02 @ 10:42a
Dude, what about Nortel for less than a buck?
7.29.02 @ 8:14a
The most regrettable thing is, none of these robber-barons will suffer much...
It's coming after all...
I hadn't really had a chance to comment on this, but really - any of you who bought a stock, a mutual fund, or any of those things got a "prospectus." I have to tell you, no matter how many charts and graphs are in there, don't let the fancy outsourcing fool you. Anyone can make BS look important if they go into Kinkos.
7.29.02 @ 10:21a
Dow up 250 in an hour this morning. Is this the upturn? Doubt it.
7.29.02 @ 11:05a
You know, it's a good idea to have investments and to "make your money work for you." But this crash hurt b/c people thought it was a party that wasn't going to end. But it's not true.
Markets go up, markets go down; only the cold hard cash you can squeeze in your fist mean anything at the end of the day. The numbers, tickers, graphs, and all that stuff - that's not your money. If it goes, you smile and wave because it was never really yours, no matter how attached you were to it.
Investing doesn't come with training wheels. If you can't take the bumps in the market, get a FDIC insured account.
8.8.02 @ 4:55p
If you had bought $1000 worth of Nortel stock one year ago, it would now be worth $49.
With Enron, you would have $16.50 left.
With Worldcom, you would have less than $5 left.
If you had bought $1,000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10 cent deposit, you would have $214.
Based on the above, my current investment advice is to drink heavily and recycle.