Markets from Tokyo to London were shaken to the core yesterday after giant telecoms company WorldCom announced one of the most massive accounting frauds in US corporate history. The number two US long-distance carrier was last night on the verge of the world's biggest bankruptcy, far outstripping Enron, which collapsed in December.
This latest accounting scandal sent major US and foreign banking groups rushing to assess their exposure to the troubled company, which has $32 billion (€32.39 billion) debt with junk bond status.
Bond prices surged and the dollar raced towards parity with the euro, breaking through 99 cents, amid fears that foreign investors would pull out of the US equities market in a collapse of confidence in US corporate reporting.
The Dow Jones Industrial Average crashed through the 9,000 barrier within five minutes of the opening yesterday and the tech-heavy Nasdaq fell below 1,400 to its lowest point since October 8th, 1998. The Standard & Poor's 500 index fell below its post-September 11th low of 965.80 for the first time.
Wall Street staged a late recovery however after the Federal Reserve announced there would be no change in interest rates, which are at a 40-year low. The Fed injected some optimism with a forecast that economic activity will continue to increase, "supported in part by robust underlying growth in productivity".
Some unexpectedly upbeat economic data also helped the fight back. New home sales surged by a record 8.1 per cent in May, suggesting that a double-dip in the economy was unlikely. The Dow finished virtually unchanged, down just 0.06 per cent.
The tech-led Nasdaq finished at 1,429.42, up 5.43 points.
The audit committee at WorldCom, which owns long-distance carrier MCI, stated late on Tuesday that it found the firm had overstated its cashflow by more than $3.8 billion during the last five quarters.
The telecoms company, based in Clinton, Mississippi, recorded as capital investment $3.1 billion in expenses in 2001, and $797 million in the first quarter of 2002. This allowed the company to falsely show profits of $1.4 billion last year. It will restate results for 2001 and the first quarter of 2002 to show net losses.
The company grew from a small long-distance company into a telecommunications giant through more than 60 acquisitions in 15 years. Its expansion was halted in 2000 when a proposed $129 billion merger with Sprint was turned down by US and European regulators as anti-competitive.
Stock in WorldCom, which has 20 million customers and 80,000 employees, began sinking in February when it announced a $20 billion acquisitions write-down. It emerged that chief executive Mr Bernard Ebbers owed the company $366 million to cover loans he took out to buy shares. The Securities and Exchange Commission set up an inquiry into WorldCom's accounting on March 12th. Mr Ebbers was forced out on April 30th and, on May 9th, its $32 billion debt was slashed to junk bond status by Moody's and Fitch.
This meant that a lot of bad news about WorldCom had already been factored into the markets before yesterday, preventing a worse bloodletting, analysts said.
The market was also shaken by news that the SEC is making tough inquiries into how another telecom, Qwest, accounted for as much as $1.4 billion in sales of fibre-optic capacity. Qwest shares tumbled 35 per cent.
WorldCom fired its chief financial officer, Mr Scott Sullivan, and accepted the resignation of senior vice-president and controller Mr David Myers. It also announced it will cut 17,000 jobs, more than 20 per cent of its workforce, starting on Friday, in a bid to save $900 million a year.
Commercial bankers will try to keep WorldCom from filing for bankruptcy but are unlikely to be willing to risk more money on the failing telecoms giant. The company is flush with cash, with an estimated $3 billion available.
J.P. Morgan Chase Citigroup and Bank of America are believed to be among the largest lenders to WorldCom. Smaller banks are also exposed. WorldCom was in the process of negotiating a new $5 billion credit line with its banks to allay concerns about its liquidity. It is now expected to file for protection under Chapter 11 of the federal bankruptcy code.
WorldCom's stock remained halted yesterday on the Nasdaq. Its shares most recently traded at 83 cents, compared with $64.50 in June 1999.
