U.S. ECONOMIC NEWS
The Wall Street 'Police Blotter'
The list of companies involved in corporate crime and corruption, as part of the systemic fraud that was used to create and maintain the bubble, is growing exponentially, and now includes even "old economy" firms like Xerox. Here is the weekly roundup:
* Xerox Corp. inflated revenue by $1.9 billion during 1992-2001, by misrepresenting the timing and makeup of equipment sales and service contracts, counting sales which should be recorded in future quarters. The world's biggest copier maker prematurely booked $6.4 billion in revenue over the past five years, recognizing revenue immediately rather than over the life of the lease; the $6.4 billion is more than twice the Securities and Exchange Commission's original estimate in April, when it fined Xerox $10 million for filing false financial reports.
* The Securities and Exchange Commission charged Worldcom with $3.85 billion in fraud in a civil suit filed June 26 in the U.S. District Court for the Southern District of New York. "From at least the first quarter of 2001 through the first quarter of 2002, defendant WorldCom Inc. ... defrauded investors. In a scheme directed and approved by its senior management, WorldCom disguised its true operating performance by using undisclosed and improper accounting that materially overstated its income ... by approximately $3.055 billion in 2001 and $797 million during the first quarter of 2002," the SEC alleged. "WorldCom falsely portrayed itself as a profitable business" and "violated the anti-fraud and reporting provisions of the Federal securities laws" by this scheme, "intended to manipulate its earnings to keep them in line with Wall Street's expectations, and to support WorldCom's stock price," the suit reads. WorldCom actually lost $662 million in 2001, and lost $557 million in the first quarter of 2002, the SEC writes.
The SEC requests that the court: Force WorldCom to file factually accurate financial reports; impose civil monetary penalties on WorldCom; prohibit WorldCom from destroying, altering, or removing any relevant documents; and prohibit WorldCom from making any extraordinary payments to any employees.
* Federal prosecutors in the Enron investigation, charged three former employees of National Westminster Bank with wire fraud in a suspected $7.3-million scam involving an Enron-related partnership, in a criminal complaint filed June 27 in Houston.
* Three current and former WorldCom executivesformer CEO Bernie Ebbers, current CEO John Sidgmore, and former CFO Scott Sullivanand Salomon Smith Barney analyst Jack Grubman, were subpoenaed by the House Financial Services Committee to appear at a July 8 hearing on accounting fraud. The House Energy and Commerce Committee subpoenaed WorldCom to provide financial records by July 11.
* Federal prosecutors are widening a probe of Martha Stewart to include possible obstruction of justice and making false statements on her sale of ImClone Systems stock. Douglas Faneuil, the assistant to her Merrill Lynch stockbroker, reversed his initial account of the transaction that backed up Stewart's claim of a deal to sell the stock when it reached a certain price. Faneuil now says that he is unaware of a pre-arranged selling agreement and that he concocted his initial story after pressure from Stewart's stockbroker, Peter Bacanovic.
* General American Life Insurance will pay $76 million to settle Department of Justice civil allegations that it altered records of Medicare claims, the tenth case since 1993.
* Tyco's ex-CEO Dennis Kozlowski was indicted on June 26 on charges that he tampered with evidence in an effort to impede a criminal investigation of tax evasion. He allegedly removed a bill of lading from a file of documents at Tyco's offices.
* Federal prosecutors are looking into Enron financing deals involving Barclays Bank, including loans structured in ways that hid them from Enron's auditors. The Manhattan District Attorney's office has opened an inquiry into transactions between Enron and both JP Morgan Chase and Citigroup, which were disguised loans.
Telecom Meltdown
This past week, the telecom sector blowout entered a new phase:
* Worldcom, the second-largest U.S. long-distance phone-service provider, spiralled toward the largest-ever bankruptcy, after admitting it had disguised $3.8 billion in expenses as capital expenditures in 2001 and the first quarter of 2002, inflating cash flow so much that the Clinton, Miss.-based company actually lost millions of dollarswhile it was reporting profits. WorldCom will restate earnings for all of 2001, and the first quarter of 2002; it is unlikely to get financing for its $32 billion in debt. The company announced that 17,000 jobs will be cut beginning June 28, and that its chief financial officer, Scott Sullivan, has been fired.
* Adelphia, the nation's sixth-largest cable television company filed for bankruptcy June 25 in Manhattan, mired in $20 billion in debt, and under investigation by the SEC and Federal prosecutors in two states, in connection with $3.1 billion in loans to the family that founded it.
* Alcatel, Europe's biggest maker of telecom equipment, will report a loss for this year and cut 10,000 jobs, amid 5.5 billion euros of outstanding debt.
Financial Meltdown
Morgan Chase, Citigroup Stocks Burned in WorldCom Fallout
Worldcom's collapse has triggered a plunge in JP Morgan Chase and Citigroup stock prices, as Wall Street insiders whisper that much bigger problems are imminent. The stock price of the $713-billion-in-assets JP Morgan Chase, America's second largest bank, fell $1.74 June 26, to a level of $31.18, a fall of 5.3%, and the stock price of the $1.06-trillion-in-assets Citigroup, America's largest financial services company, fell $2.28, to a level of $37.02, a fall of 5.8%. BothAmerica's largest banking institutionshave major financial commitments to the disintegrating Worldcom.
In May, JP Morgan Chase arranged, along with Bank of America, a $1.5-billion loan for Worldcom, backed by Worldcom's customer bills. Salomon Smith Barney, the investment banking arm of Citigroup, has advised in Worldcom's major acquisitions, including Worldcom's 1999 purchase of MCI, America's second largest long-distance phone carrier. Moreover, last year, Citigroup/Salomon and Morgan Chase were the lead co-manangers of Worldcom's $11.9-billion bond issuance, the largest bond issuance ever by a U.S. company.
But, as the April 12 EIR showed ("Meltdown of the Telecoms Threatens World Financial System"), the lending of JP Morgan Chase and Citigroup/Salomon extends to the entire telecomm sector. Between 1996 and the end of 2001, financial institutions extended $1.09 trillion in debt (bank borrowings and bonded debt) to the U.S. telecom sector. Of that $1.09 trillion, just JP Morgan Chase and Citigroup/Salomon, extended 49.3% of the total.
Further, JP Morgan Chase and Citigroup/Salomon have were big lenders to Enron. They also have considerable credit exposure to Brazil and Argentina. JP Morgan Chase has $24 trillion in derivatives outstanding, while Citigroup/Salomon has $9.2 trillion in derivatives.
America's two largest banks are both at a phase of potential implosion.
More Energy Pirates Walk the Plank
Dynegy will cut its dividend in half, starting in the third quarter, and sell stakes in assets to raise as much as $2 billion and reduce debt. Fitch downgraded the company's debt rating to "junk" status, as Dynegy said its previous earnings forecast "no longer applies." The energy pirate will either sell, partially sell, or seek a joint venture for its stake in the Northern Natural Gas pipeline and Dynegy Storage; will set an initial public offering for its Dynegy Energy Partners unit.
Williams will lay off 16% of its trading staff.
Fannie Mae Issues Wishful Study on Housing
The Harvard Joint Center for Housing Studies presented a fraudulent study June 25, claiming that the U.S. housing market is stable and will have no problems for years to come, based on the hoped-for, but non-existent, recovery. Entitled, "The State of the Nation's Housing," the study fantasizes, "With the economy emerging from its first recession in nearly a decade, the housing sector continues to display remarkable resilience. Even after the events of Sept. 11 threatened to deepen the downturn, rock-solid home prices and historically low mortgage interest rates helped consumers keep faith in the housing sector. As a result, not only home sales and production but also home improvement spending climbed to record-setting levels by year-end.... As the recovery takes hold, any pressure on housing markets from unemployment-related defaults and foreclosures should ease."
The Ford Foundation, Fannie Mae Foundation, and Freddie Mac funded the study.
Timed with the release of the Harvard study, Orawin Velz, a Fannie Mae economist stated, Fannie Mae "is very bullish on the housing market unless there is a terrorist attack.... The inventory of houses will never blow up like it used to do, like it did in the last recession." David Lereah, chief economist at the National Association of Realtors added, "There is no [housing] bubble. I'm as sure of that as I can be of anything."
U.S. Stocks: Biggest First-Half Losses Since 1970s
In the first six months of 2002, U.S. and European companies lost $2.7 trillion of market value, on top of several trillions of dollars that disappeared during 2000 and 2001. According to a Bloomberg calculation made before the last trading day in June, the Standard & Poor's index has lost 13.7% this year, the biggest first-half loss since 1970, when it declined 21%. The index was already down 10.1% in 2000, and 13% last year. The Nasdaq index has fallen 27% so far this year, and since March 2000 has lost three-quarters of its value. The Dow Jones index is down 9% this year. The combined loss in market value of the 5,000 top U.S. companies making up the Wilshire-5000 index amounts to $1.5 trillion since the beginning of the year. General Electric, Microsoft, Citigroup, and IBM alone lost a combined $300 billion in market value this year.
But, U.S. stocks were not alone in suffering huge losses: The Dow Jones Stoxx-600 index of leading European companies declined 18% this year, erasing $1.2 trillion in market value. Stocks of Alcatel, Deutsche Telekom, France Telecom, Nokia, and Vivendi all tumbled more than 50% since the beginning of the year. The German DAX index fell 17% in the first six months of 2002, the steepest first-half loss since 1971.
State Pension Funds Washed Out by WorldCom Debacle
State pension funds have lost more than $1.6 billion on WorldCom stocks and bonds, a development which is expected to spawn a new wave of lawsuits, on top of legal action for losses from the collapse of Enron, Global Crossing, Adelphia and Tyco. The WorldCom hit also intersects worsening state budget crises, boding ill for retirees.
"We ought to be putting some of these guys in jail," said Tom Herndon, executive director of the Florida State Board of Administration. "This is a crisis," said Iowa treasurer Michael Fitzgerald, whose fund is considering litigation for the first time ever. New York Comptroller Carl McCall said he is considering a lawsuit.
Below are the largest state pension-fund losses incurred from the WorldCom meltdown:
Pension fund loss |
($ millions) |
California Public Employees' Retirement System |
565 |
New York State Common Retirement Fund |
300 |
California Teachers' Retirement Fund |
263 |
Michigan Municipal Employees' Retirement System |
116 |
Florida State Board of Administration |
100 |
New York City Municipal Workers' Funds |
100 |
Virginia Retirement System |
44 |
Wisconsin Investment Board |
36.3 |
Iowa Public Employees' Retirement System |
33 |
Mineta Offers Amtrak Half a Loaf
Well, no one can say about George W. Bush, what was said about Benito Mussolini: That he made the trains run on time. Transportation Secretary Norman Mineta told Amtrak, the Administration will give them half of what they need to keep the trains running. Amtrak President David Gunn reported that Mineta offered the nation's passenger rail system a $100-million loan guaranteethey need $200 million, a bare minimumand told them they could make up the remainder with various "self-help type actions." One of Mineta's suggestions, was that Amtrak mortgage Chicago's Union Station, which it owns. Gunn said Amtrak officials reviewed that, and other "helpful" suggestions, but ruled them out as impractical.
At this point, intercity passenger train service in the United States is assured only until July 4, at which point the trains could stop running, unless Congress agrees to provide at least $100 million more, by a loan guarantee or an allocation, to close the remaining budget gap until Sept. 30. The deal includes conditions to hold down Amtrak's costs and increase financial "transparency."
Airline Losses Could Exceed $5 Billion This Year
UBS Warburg analyst Samuel Buttrick warned that U.S. airline losses could exceed $5 billion, which is higher than previously estimated, according to Aviation Week June 24. Losses for 2003 are now expected to exceed $1 billion. Last year, losses came in at $7 billion.
United Airlines, the world's second-largest air carrier, applied yesterday for a $1.8 billion Federal loan guarantee. The airline's "recovery plan," estimated to provide $560 million in "cost savings" over three years, takes money mainly in the form of wage "concessions."
Dollar Collapse Worries London, New York
Both the London Independent and New York Times ran articles last week on the U.S. dollar collapse. "The U.S. dollar yesterday moved to the brink of free falla nightmare scenario for the world economyafter reverberations from the WorldCom scandal triggered panic among investors," who "rushed to dump dollar assets," writes Philip Thornton in the Independent. "After years of pumping billions of dollars into the United States because it seemed the land of opportunity, foreign investors are pulling back," frets the New York Times. "The immediate impact is discernable in the value of the dollar, which has been sliding since March."
Will Congress Lift the Debt Ceiling, or Just Raise the Roof?
While the Democrat-controlled Senate has already approved a $450-billion increase in the $5.95 trillion Federal borrowing cap, the House of Representatives, controlled by the GOP, has refused to lift the debt ceiling. House Republican leaders say they lack the votes to pass the increase, adding that they want to insert a debt-limit increase in the budget for the widely-supported anti-terorism legislation. As EIW "went to press," the government faced the requirment of crediting $67 billion in interest to Social Security and other trust funds, and sending $54 billion in benefits to Social Security, veterans, and other beneficiaries on July 1-3.
But, Congressional aides from both sides say that in the interim, Treasury Secretary Paul O'Neill can "borrow" from a civil service retirement fund, which would probably provide enough additional borrowing room for another four to six weeks.
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