Worldcom's Wrong Numbers

Two of America's favorite financial fantasies came to an end last week. "Who Wants to Be a Millionaire," once the hottest show on television because it let us all dream about becoming rich overnight, went off the air after its last regularly scheduled episode. And WorldCom, once the hottest stock on Wall Street, whose doubling-every-year performance created dreams of wealth, had its last episode, too. WorldCom hasn't been formally canceled--but the show's over. It's only a matter of time before the reverberations from WorldCom's staggering $3.85 billion wrong number force the company into bankruptcy court--it could be the biggest case ever--where it's likely to be sold off in pieces.

So say goodbye to the nation's second largest long-distance company, whose role as the biggest carrier of Internet traffic once made it a quintessential New Economy company. Its stockholders will be wiped out. Its bondholders and other creditors will suffer heavy losses, because in a market glutted with dead and dying telecom companies, WorldCom's assets are worth far less than its $30 billion-plus of debt.

The company's announcement, made late Tuesday by its recently installed chief executive, struck a nerve in Washington to a degree not seen since Enron leaped the species barrier in January and became a national scandal rather than just a business-page scandal. Congress is gearing up once again for an Enronesque spectacular, with televised hearings and denunciations of financial sinners. The Securities and Exchange Commission has sued WorldCom for accounting fraud, and lawyers representing investors and employees, 17,000 of whom lost their jobs last week, are circling, too. It will be all WorldCom all the time, at least for a while. (It may even give Martha Stewart a break by diverting some attention from questionable sales of her ImClone stock.)

Even President George W. Bush, who believes that there's nothing fundamentally wrong with corporate America (just a few "bad apples"), thought it was time to say something strong last week. Unprompted, he called WorldCom's accounting misdeeds "outrageous," and scheduled a Wall Street speech for July 9 to reassure the financial markets and to demonstrate his outrage. A major reason that Bush has moved beyond his "bad apples" remark--his aides say that he talks about the problem constantly in private--is, obviously, politics. The sour stock market, the recurring scandals and Republicans' ties to big business have made our M.B.A. president vulnerable to attack by the Democrats. Dick Cheney, our ex-CEO vice president, is also vulnerable. Cheney was chief of Halliburton, a big oil-services company, before leaving to join Bush's presidential bid. Halliburton is currently under SEC investigation for accounting changes during his tenure.

In March, President Bush outlined a 10-point plan he claims will make CEOs more accountable. But the list of thorny business issues keeps growing. One involves U.S. companies' moving to Bermuda to duck U.S. taxes. The Treasury Department opposes bills, sponsored mostly by Democrats, to close the Bermuda loophole. It says wide-ranging tax reforms are needed rather than a quick fix. But House Majority Leader Dick Armey says closing the loophole "is akin to punishing a taxpayer for choosing to itemize instead of taking the standard deduction." As if deducting real-estate taxes on your house is the same as giving up your U.S. citizenship (but not your residence) to reduce your tax bill. Bush also appears steadfast in his opposition to proposals to count the value of stock options as a corporate expense, a key reform proposal backed by Alan Greenspan, Warren Buffett and green-eyeshade types at Standard & Poor's.

The fallout from WorldCom isn't just political. After WorldCom's new CEO, John Sidgmore, announced late Tuesday that the company had uncovered the huge misstatements, soothsayers predicted that it would undermine the faith of investors, foreign and domestic, in U.S. financial markets. But after dropping sharply in early trading Wednesday, the market recovered all its losses, then posted big gains on Thursday. The market dipped a bit on Friday, which some people attributed to Xerox's agreement with SEC to restate $6.4 billion in revenue from previous years. Despite all the shocks, it seems that bargain-hunting buyers have staved off a market meltdown, at least for now.

One confidence-shattering aspect of the WorldCom scandal is how unsubtle it was. By the company's account, chief financial officer Scott Sullivan, who was fired last week, began treating certain corporate expenses as capital investments last year. Expenses are charged against profits immediately, but capital investments are spread out over lengthy periods, sometimes as long as 40 years. This change made no difference in WorldCom's cash situation, but it allowed the company to show hefty profits last year and for the first three months of this year, rather than the losses that it would have otherwise shown. Enron, by contrast, had sophisticated sleight of hand of the highest order, with all sorts of "special purpose entities" and partnerships flying around.

It isn't clear why WorldCom's misstatements weren't caught almost immediately by its outside accountants, a firm you may have heard of before: Arthur Andersen. Had Andersen not already been destroyed by being convicted of obstruction of justice last month, WorldCom, with its inevitable stockholder and creditor lawsuits, would probably have been its coup de grace. Andersen issued a statement saying WorldCom wasn't its fault, because it had been misled. WorldCom executives declined to be interviewed by NEWSWEEK.

Even without this scandal, WorldCom was probably doomed. Its stock, with a total market value of as much as $180 billion three years ago, when its stock hit $64.50, closed at just 83 cents on Tuesday, before its news broke. That's because WorldCom's raft of problems--massive debt, a sagging telecom industry and the company's $366 million loan to former chairman Bernie Ebbers to keep creditors from seizing his WorldCom shares--had long since undermined the market's faith in what had been one of the hottest stocks of the 1990s.

In case anybody needed reminding after the Enron implosion, WorldCom's collapse shows, once again, how dangerous it is to entrust too much of your wealth--or your retirement--to a single stock. The S&P 500 is down a gut-wrenching 35 percent from its high in March 2000. But former superstar stocks like Enron and WorldCom are down almost 100 percent. Even General Electric, a well-regarded company, is down 52 percent from its high in August 2000. And, finally, the lasting message of WorldCom and Enron and "Who Wants to Be a Millionaire" is a universal one. Fantasies are fun, but not if you plan your life around them.