THE BIGGEST corporate fraud in history hit the headlines last week. WorldCom, the world's largest carrier of internet traffic, admitted a £2.6 billion hole in its accounts. Even larger figures are potentially involved. The firm cooked its books to appear more profitable than it was. The revelation sent stockmarkets across the world reeling.
WorldCom's share price fell from a high of over $60 to less than $2 last week. 'Panic-And It's Going To Get Worse' howled the Daily Express on its front page. Then Xerox, the giant photocopying and printing company, admitted it too has overstated its profits by £1.3 billion. These companies are not the only ones fiddling their figures.
Enron, the US-based energy multinational, was exposed last year for overstating its profits and hiding debts of $9 billion. Other major companies that have been found out recently include Global Crossing, Adelphia Communications, Dynegy and Tyco International. They are all under investigation for 'accounting irregularities'.
Firms across the US have been lying about their profits. Claimed profits are 50 percent higher than real profits. This exaggeration of profits had a massive impact on the US economy. It helped fuel a US boom, while rivals like Japan have been in recession. It helped the US ride out the crisis that hit the Asian 'Tiger' economies in 1997 and the impact of the collapse of the Long Term Capital Management hedge fund. The US stockmarket soared.
Shareholders and speculators gorged on profits they believed would just keep going up and up. Economists raved about a never ending boom. The Financial Times said four months ago, 'The US economy grew much more impressively in the last months of 2001 than initially reported, suggesting that last year's recession was probably over before it had begun.'
WorldCom has confirmed that the high profits and growth are a fake. Profit rates in the US have in fact not even reached the levels they were at in the early 1970s. This could send the US into a recession that would impact across the whole world.
'The danger is that if investors and consumers run they will take down the economy and the dollar with them,' admitted Business Week. This fear stirred George Bush into saying last week, 'Corporate America has got to understand that there is a higher calling than trying to fudge the numbers, trying to slip a billion here and a billion there, and hope nobody will notice.'
Bush made this speech, of all places, at a Republican Party fundraiser. Bush, and his father before him, got more money from Enron and the companies linked to it than from any other US firm. WorldCom gave $1 million in May to an institute run by Bush's closest confidant in the US Senate, Trent Lott.
The boss who was a fraud
THE BOSS of WorldCom, Bernie Ebbers, was the classic entrepreneur that politicians love to praise. He built the US's second biggest telecoms company in 15 years, making millions for himself and greedy shareholders. Ebbers took over a small telephone company in Mississippi that bought long distance capacity from AT&T, which was the equivalent of BT in Britain.
It then resold the capacity to local businesses at cut prices. Ebbers planned to expand the business. His company took off after the telecoms market was opened to competition. The growth of the internet led to a boom in demand for communication services. Money flowed into the industry. Ebbers expanded WorldCom with 70 takeover deals in four years.
He snatched MCI, one of the biggest long distance carriers in the US, from under the nose of BT for $37 billion. 'You can disguise an awful lot in mergers and acquisitions activity,' admitted one analyst. That's exactly what Ebbers did.
WorldCom 'reclassified' debts so they were spread out over a period of years, not months. The bosses had every reason to keep the share price high. Some 12 directors and executives owned nearly 50 million WorldCom shares. While other telecoms companies were in crisis last year WorldCom appeared to be booming.
It reported a net income of $1.4 billion in 2001 and $130 million in the first four months of this year. Now it says it lost money the whole time.
WorldCom bosses even advised the workers to buy the company's stock for their retirement plans, though they knew the share price was likely to drop. Some 55 percent of WorldCom's retirement funds are invested in their own stock. That used to total $218 million. Those shares were worth just $4.4 million last week.
Theft, fiddling and the system
THOSE WHO defend capitalism and the market say the current crisis is about a few individuals who got carried away. But the problem is more fundamental. It is caused by the way capitalism works. Companies pile in to the newest investment that promises to bring high profits. Recently that has been the telecommunications industry.
Firms expand production hoping to rake in more profit. Each wants to outdo its rivals. Share prices soar on the expectation that profits will roll in. These inflated share values mean companies can borrow heavily to expand their production even further.
But the frenzy leads to 'overcapacity'. In the case of telecoms, companies massively overestimated how much internet and mobile phone capacity would be needed. Panic replaces the old confidence. The boom can suddenly turn into its opposite-bust. Companies that borrowed money in the good times on the basis of future profits are stuck with the debt.
The Financial Times reported last year that the increase in telecoms firms' debt since 1998 has been greater than the UK government accumulated over two centuries.
Now the companies that have created this crisis want to make workers pay for it. WorldCom announced last week that it wants to sack 17,000 workers, a fifth of its workforce.
Millions of pensions will now be at risk
COULD THE WorldCom scandal happen in Britain? In 1991 Robert Maxwell, boss of the Mirror group of newspapers and a Labour supporter, was exposed robbing £400 million from the pension scheme of 32,000 Mirror workers.
The Bank of England was forced to close the BCCI bank that same year after one of the biggest frauds in banking history was uncovered. Chancellor Gordon Brown claims regulations now exist to stop such fraud. But as Sir David Tweedie, head of the international accounting standards board, said last week, 'People are saying this couldn't happen in Britain. Oh yes it could.'
Companies in Britain piled into the telecoms boom as well. Marconi, a leading British company, collapsed after it ran up debts of over £4 billion-five times what the company was worth-when it expanded into manufacturing telecoms equipment. Andersen, the leading accountancy firm that is supposed to be scrutinising companies' books, has been implicated in the scandals.
It was the accountant for Enron and WorldCom, and Global Crossing and Qwest-two other telecoms firms under investigation over profit figures. Andersen was found to have shredded documents showing how Enron hid its losses. New Labour has close ties to Andersen. The company is involved in £10 billion worth of New Labour PFI schemes. New Labour has also been pushing workers in Britain to take out pensions tied to the stockmarket.
Most company pension schemes invest in shares. A crisis on the US stockmarket means the value of workers' pensions in Britain could fall or even completely collapse.
AT MARXISM 2002, WHICH STARTS THIS WEEK
- Chris Harman on 'Is the recession over before it began?'
- A full course on Marxist economics.
Visit www.swp.org.uk/marxism for a full timetable and booking form
Chris Harman's book Economics of the Madhouse, about how capitalism works, is available at Marxism 2002 for £3.50 or, plus 70p postage, from Bookmarks-phone 020 7637 1848 or visit www.bookmarks.uk.com