World dot Bomb|
stirling s newberry email@example.com
Say it after me: "George Herbert Hoover Bush Jr."
In 1998 I wrote how a liquidity crunch was placing Alan Greenspan in a bind. On one hand the interest rates were correctly set for the US economy, on the other hand, the Fed had to ease in order to fight the financial crisis sweeping through Russia and the Pacific Rim. His swift coordinated action bailed out a stock market that had unwisely loaned out a trillion dollars to a hedge fund, and a string of mercantilist economies that had grown corrupt and rigid. At the time, my warning that the flood of money into the US economy needed to be blunted by fiscal policy - raising taxes and spending on important infrastructure - was ignored. No one wanted the game to be raided. The result - a massive bubble fuelled by pyramids of fraud and hidden leverage.
But the Republicans in congress did not want the country to be governable, and they pursued destructive vendetta after destructive vendetta to stop the Clinton Administration from acting. To them, where Monica's lips went was the major law enforcement challenge of the late 1990's. Those of us who said otherwise were not listened to.
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Today, after the closing bell, a major hole has been torn in the fabric of the financial web of deceit and lies - WorldCom announced that their CFO had committed $3.8 Billion - with a "B" - worth of fraud over the last 6 quarters. But the number is not so shocking as how it was done. This did not involve clever off book partnerships which could fool even industry insiders and skilled accounts. Instead, it involved simply moving money from recurring costs - such as repairs - and declaring it had been "CAPEX" - Capital Expenditure. This fraud is so blatant that there is no way that WorldCom's auditor - Arthur Andersen - can claim ignorance. Even as AA's lawyers fight to get one "death sentence" reversed, another crime, at least as large, becomes visible.
What will this do?
First, since WorldCom's loans are based on their earnings, they had to file with their banks saying that they are in violation of their assurances. Essentially, they admit they lied on their loan application. Because they did, they are legally in default - and cannot get the $5 Billion worth of financing they need to keep operating. This means they will have to file for bankruptcy.
It also means that they will have to restate their "Earnings Before Interest, Taxes, Depreciation and Amortization" - called "EBITDA" - the measure of how much money a company is taking in. This means that any sales of WorldCom stock from anyone who might have known of the fraud are now insider trading, and illegal. It also means that their taxes are fraudulent, and they will be forced to pay additional taxes as well.
It means that Anderson will be hit with millions in fines and there are criminal charges in the offing for those involved with WorldCom.
But it means more than that. Most trading on the New York Stock Exchange is done in blocks - not one stock, but a group of 4 or more stocks sold together. Fund managers do not buy a company, they buy a "sector" a group of companies doing the same kind of business. This is to diversify. If you think automobiles are doing well, then you buy the automotive manufacturers and parts manufacturers, because it is hard to tell which one will do the best, but if the sector is doing well, all should benefit. Tomorrow expect all telecommunications stocks to be hit hard as fund managers shuffle out. Even the normally restrained Financial Times is predicting a hit to markets when they open.
The fraud was so blatant that it will call into question every company listed in the US - this was no sly scam, it was brute force lying, of the kind that will call into question the entire auditing process. It calls into question the still high valuations of stocks, it calls into question the US financial system as a whole. It is not the first revelation of this sort, and I promise you, it will not be the last.
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So why is this article in Democrats.com, and not some financial outlet?
Because the Rise of WorldCom is a virtual catalog of breaking the rules that were established by FDR in the wake of the Crash of 1929 and banking collapse of 1933. The years of cries for "deregulation" have shown themselves to be simply a cover for theft, fraud, insider trading and corruption. A sound financial system doesn't come from turning the stock market into a racket - and yet that is exactly what Phil Gramm's creation of "regulatory black holes" has done.
If you think that the fall of the #2 long distance carrier in the United States is bad, consider that WorldCom tried to buy the #3 carrier Sprint. There were screams from the right that preventing that deal was bad for business. Right now almost 1 home in 3 is connected to a long distance carrier that is bankrupt - it could have been 1 in 2.
If you think this was unavoidable, ask yourself where were the analysts, the journalists, the auditors when this was going on? The concentration of media, accounting and brokerages has lead to a groupthink chorus. When the most left leaning of the cable networks is CNBC - which is in partnership with the Wall Street Journal - you know that the information stream, which markets depend on, is corrupt and unreliable. It was only two days ago that a leading analyst cut WorldCom from "hold" to "under-perform". A stock swoons by 95%, and still there were "buy" ratings on it.
The progressive collapse of the financial system is a visible reminder of why Liberalism, and the form of the Democratic Party that was the standard bearer for it, is important. Liberalism means having tough financial laws, and enforcing them with vigor. It means having a cop on the beat, not just of Main Street, but on Wall Street. It means having regulators who are told to sink their teeth into companies books, it means having a corporate tax system that will rigorously enforce the rules on large corporations. It means having a can do culture in government - rather than the "don't touch" culture that the Republican Party presents.
This is not merely a matter of who is in the White House, it is a matter of the rhetoric of government and the attitude of the media. The media is not a form of sports reporting - handing out what people want to hear to partisans of one side. The media is part of the structure of any modern economy and government, and has to be feared, rather than loved. The government is not a way of legitimizing inequality, but a means of enforcing fair and open rules on all players. We should be reminded that it is not "pro-bussiness" to be anti-regulation, it is being soft on crime. Crime that is about to hit every American in the wallet as surely as if they had been mugged.
What has to happen?
- There needs to be mandatory enforcement of accounting practices by the SEC. It has to be the law, not some voluntary guideline, and it has to be enforced under penalty of law. A man who steals $54.95 at gunpoint can get the death sentence in this country - why should a man who steals $3.8 billion with a spreadsheet be exempt?
- There needs to be the break up of media monopolies, and the return to the old concept of the public airwaves being used for the "public good". The hoary terms of licensing of broadcasters needs to be revived from being nearly dead letter. The rules need to be reset to the limits that existed in the 1930's on station ownership, newspaper ownership and broadcast rights. If the phone company can be corrupt and go belly up - so can the television networks or newspaper chains.
- There needs to be tough prosecution of this wave of racketeers. In the 1930's the President of the New York Stock Exchange was sent to jail for his role in corruption. If it could be done then, it could be done now.
- The world of "grey lending" needs to be brought under control. In the 1930's the banking system was made sound with the FDIC, and banks were put on a short leash. It is clear that over the years the desire for illegal lending has found ways of turning companies like Lucent, Enron and Adelphia into banks in all but name. Former CEO of WorldCom Bernie Ebbers owes $400 million to WorldCom, the Rigas family owes over $3.1 Billion - billion with a B - to Adelphia.
- The wave of "deregulation" needs to be reversed. Instead, we will not have financial recover until the world on paper matches the real world.
- There needs to be accountability for brokerages and their analysts. We trust them to read between the lines, not be sniffing the lines handed to them by corporations.
It's time for Democrats to declare that being tough on white collar crime is not being "anti-business", it is time for Democrats to reaffirm our basic belief that only when there is, in FDR's words, "a sensible system, sensibly trusted by sensible people" will there be real, sustainable economic growth. The Republicans will try and blame everyone but themselves and the criminals who use corporations as their weapon of choice for robbing the public.
We haven't had sense in the financial markets, the financial press, the financial system and the financial culture for years now, and we have to get it back, or they will be talking about the Crash of '03 for generations to come. And it may be too late for that already...