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Wall Street disaster
Gary North's REALITY CHECK
Issue 153 June 27, 2002
ROTTEN TO THE CORE
The latest Wall Street disaster, WorldCom, became an
instant Evening News scandal. From the economic summit in
Canada, the President of the United States called it
"outrageous" and pledged that the government would bring to
justice the perpetrators of corrupt business practices. No
reporter or commentator added, "Just like the government
brought bin Laden to justice." Bringing people to justice
is easier said than done. Trying to do it will create
side-effects. (Side-effect [noun]: "an effect that the
action-taker doesn't plan for or like.")
So, WorldCom and Arthur Anderson did the dance of the
decimal points. They somehow mistook a $1.5 billion loss
for a $1.5 billion profit. They just sort of forgot that
increasing corporate debt by a few billion dollars isn't
the same as making a profit of a few billion.
Who did they think they were, Social Security Trust
Fund administrators, where a $20 trillion unfunded
liability is never put on the official accounting books,
where the "trust fund" is filled with unmarketable
government bonds, where a $100 billion annual increase in
the liability (cash accounting, not accrual) to future
retirees in what is called an off-budget government program
is counted as income in the government's on-budget
accounts, and is used to reduce the official debt in the
Federal budget? The government must bring these miscreants
What happened at WorldCom was business as usual. But
we are asked by TV's talking heads to believe that it's
unusual. As usual.
The United States Government sets the example for the
business world. The voting public takes the following
information for granted in those rare instances when a
government press release like the following makes it to
page 4 of the local newspaper. Rep. Stephen Horn, a
Republican House member, in 1999 (when a Democrat was in
the White House) issued a press release. He is chairman of
the House Committee on Government Reform. ("Government
reform" is an oxymoron for real morons.) He offered these
Agriculture -- In FY 1997, the department
erroneously issued about $1 billion in food stamp
overpayments, amounting to approximately 5
percent of the entire food stamp program. (GAO
Defense -- The department spent nearly $40
billion on programs for 15 overseas
telecommunications systems that cannot be fully
used because the department failed to obtain
proper certifications and approvals from the
host-nations, according to a 1999 inspector
general audit. (DOD OIG Report)
In September 1997, the Defense
Department's inventory contained $11
billion worth of unneeded equipment.
Over the last three years, the
Department of the Navy wrote off $3
billion of inventory lost in transit.
During a five-year period, defense
contractors voluntarily returned $4.6
billion in overpayments the department
failed to detect. (GAO Report)
The Defense Department spent an
estimated $54 million on newly
developed indoor firing ranges that are
not being used. (DOD OIG Report)
Education -- In FY 1997, the Federal Government
spent more than $3.3 billion in loan guarantees
for defaulted student loans, according to a GAO
audit. In addition, the department had over-paid
102,000 students Pell grants totaling $109
million. The audit also found that 1,200 students
falsely claimed veteran status to increase their
eligibility to the program, costing taxpayers
$1.9 million. (GAO Report)
And so on, year after year, decade after decade. It
never changes. Nobody bats an eye. "Who cares? It's only
tax money. There's more where that came from!"
The statistical difference between the U.S. government
and WorldCom is this: when WorldCom did it, the news
finally became public, long after WorldCom's share price
went from $60 to less than $1. The stock market told
investors, day by day, year by year, that something was
rotten at WorldCom. All the way down, the economic experts
could have done some digging and found out what was wrong.
They didn't. Now they howl about the awfulness of it all,
how there is corruption in high places.
The corruption is in higher places than WorldCom's
corporate offices, and lower, too. The corruption is basic
to the government, and it is basic to the hearts of the
voters, who use government coercion to steal from each
other to fund their government welfare benefits, including
lifetime retirement and free medical care. They scream
"foul play!" only when it turns out that they, not the guy
behind the tree, is required to pay for these benefits.
This screaming has only just begun. It will not end
for a generation.
Corruption is universal. Our society has become
rotten. We have corrupted ourselves, and we have voted out
of office any politician who dared to tell us what the
system has become. We have voted for politicians who
campaign for office on the basis of how much money they
will take from rival voters and hand to their constituents.
This is considered normal. A national politician, such as
Ron Paul, who identifies the rot for what it is, and
refuses to vote for any program that is not authorized by
the U.S. Constitution, is regarded by the press as an
ideological crackpot, a man so out of touch with modern
times that he actually votes to uphold the provisions of
the Constitution that he took an oath to uphold.
Obviously, he is a nut case. After all, all those other
politicians took the same oath, and they vote for these
And then, when the rot is occasionally exposed on Wall
Street, the reporters go to the Head Accountant in Charge
to ask him what he thinks of all of this, who tells them
it's outrageous. It isn't outrageous. It's business as
HOW BAD IS IT?
For several years, I have exchanged e-mails with a man
who runs the Central Fund of Canada, a small investment
company that invests solely in gold bullion and silver
bullion. Its share price is up this year, as you might
imagine. He has been in the fund management business for
something like 40 years. He has warned me repeatedly about
the accounting practices that govern funds and publicly
traded companies. He told me at least two years ago that
today's practices would have landed the accountants and
fund managers in prison back when he started out. Well, it
may land some of them in prison this time. One or two of
them. Mid-level guys. As examples.
Arthur Anderson is dead and gone. The Big Five
accounting firms are now Big Four. Arthur Anderson's
partners are in disgrace. Arthur Anderson was WorldCom's
accounting firm. Also Enron's. Also Global Crossing's.
But no one complained about Arthur Anderson until after
Enron had gone bust. No one noticed. Why not? BECAUSE
THESE ACCOUNTING PRACTICES ARE UNIVERSAL ON WALL STREET!
They are not an aberration. They are business as usual.
This is what nobody in charge wants to admit, or even
speculate about. President Bush yesterday went on about
"the many fine companies in America" and how the American
economy is doing fine. Sure it is. No problem. Those
crashing sounds are just irrelevant background noise.
Eight months ago, Arthur Anderson was seen as the
premier accounting form in America, yet it validated
practices that are now generally regarded by the public as
corrupt. The company was in bed -- at high prices -- with
at least some corrupt business partners, and now bits and
pieces of a massive, multi-billion dollar fraud is exposed.
Nobody wants to admit that Arthur Anderson was not an
aberration, for it was a representative firm. It was
untouchable. Now it's gone, along with three of its
Note: it had more than three clients. I keep waiting
for the WALL STREET JOURNAL or BARRON'S to publish a list
of all of Arthur Anderson's clients in 2000-2001 that are
listed on the New York Stock Exchange. Let me know when
you see it.
The market has now imposed negative sanctions, though
not soon enough. Can you imagine some Arthur Anderson
partner at a dinner party in New York City? Somebody asks
him what he does for a living. "I'm retired." "What did
you do?" He grows nervous. "I was an accountant." He
hopes it will end here. "Really? For what company?" He
grows evasive. "Oh, I worked for several." He hopes the
questioning will end. Then the guy next to the questioner
says, "Lay off, Charlie. The guy was a partner at Arthur
Anderson." If there were a futures market for Arthur
Anderson partners' dinner invitations, I would recommend
These men invested their careers and lives in a
company that was the most arrogant accounting firm on
earth. Today, they are seen as corrupt men. Their busted
firm is seen as the incarnation of phony bookkeeping. The
market caught up with them. Some accountants may go to
jail, but not the top dogs. The sacrificial lambs will be
the mid-level guys, not the partners. But the partners
will not escape unscathed. They will spend the rest of
their lives wondering how they were such fools. They will
spend the rest of their lives either in denial or regret.
The government will now move in and start passing laws
to tighten up the accounting industry. This will lead to
higher prices, more red tape, and the usual inefficiencies
associated with government regulation. It's as if the
politicians had never passed law after law, created layer
upon layer of bureaucracy. "What? You mean something is
rotten on Wall Street? This looks like a job for
government reform!" Reform by the guys who took corporate
money from these outfits in order to get elected.
The system was rotten all the way up the chart of the
Dow Jones Industrial Average. Hardly anybody uttered a
word of warning. When the stock market is rising, only
crackpots and worrywarts and old-fashioned analysts sound
the alarm, and they are dismissed by the reigning experts
as people of the "old era."
Old-fashioned analysts look at a price/earnings ratio
of 40 and conclude that a bubble is in progress, that the
P/E ratio is historically at 15. They keep saying this,
but the market keeps going up anyway. So does the money
supply, which lies at the heart of the stock market bubble.
The experts reassure doubters that everything is just fine.
Then comes Enron. Then Global Crossing. And now
WorldCom. These were corporate giants that have now
destroyed trillions of dollars of investors' dreams. Gary
Winnich of Global Crossing sold his shares for $750
million, but nobody asked the obvious question: "Why?"
Investors get nothing, but he retires with three-quarters
of a billion dollars. Nice work if you can get it.
Last night, I watched Susie Gharib, the co-anchor of
the Nightly Business Report, a position she shares with
Paul Kangas. Her frantic, emotion-filled questioning of
the daily "showcase them and forget them" expert indicated
that she suffers from either a type-A behavior disorder or
fear. She kept asking leading questions: "Do you think
this is the bottom?" How should he know? So, he wisely
answered: "Well, I hope so." "Shouldn't the Fed lower
interest rates?" "Well, the federal funds rate is at the
lowest level in decades." This went on for several
minutes. It was obvious that she had no clue as to the
magnitude of the tidal wave facing the stock market. She
has spent her career with a P/E ratio of 40. She doesn't
understand that bubbles eventually burst. She owes her
audience to bubble-riders. Pop the bubble, and there won't
be many viewers. Hardly anybody wants to spend time
listening to bad news about his busted investment
On the show's Website, Ms. Gharib is described as
Winner of the coveted Gracie Allen award for Best
Anchor, Gharib is known for her incisive, but
personable interviews with corporate America's
movers and shakers, a who's who of Wall Street
and Washington, and the world's business leaders.
She joined Nightly Business Report on May 1,
Are they kidding me? The Gracie Allen award? George
Burns' straight lady, who made a comedic career of asking
the craziest, off-the-wall questions in recorded history?
Now that I think of it, Gracie Allen is exactly the
person we need today. I can almost see her asking Kenneth
Lay about accounting. I can hear her asking Gary Winnich
about building asset value. Gracie, where are you now that
we need you? We are entering the Gracie Allen era of stock
market investing. The whole financial world could be her
straight man. "Say good night, Gracie." "Good night,
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Join Date: 01 2002
Location: New York, USA
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My 2 cents
Well, now I believe this is just American way of conducting business...
Things as business ethics are just fairy tale created by the corporate sharks themselves for the idiot's from the other countries to believe that honesty means anything at Wall Street. Examples are numberless...