Globalisation: Corporate collapse - what Worldcom means for capitalism
From Workers Power (GB) Issue 266

"Is this a great time, or what?" That was the advertising sting of American telecoms company Worldcom during the dotcom boom. As the corporation grew from its humble origins to become the USA's biggest telephone company, its slogan seemed to sum up the mood of American capitalism. It had shrugged off the Asian economic meltdown of 1997 and stock markets were booming. There was a "new paradigm" of high productivity, low inflation and a communications revolution that would make sure the "great time" went on forever.

Now Worldcom's words have come back to haunt the capitalist system. The company - already in deep financial trouble - admitted a $4bn fraud and faces bankruptcy. It shares were once worth $180bn. The day before the fraud came to light they were worth $2.5bn. The day after, even that figure had fallen by 90 per cent.

Coming on top of the scandal at Enron - and less well publicised scams at American big names like Tyco and Global Crossing - the Worldcom fraud had even hardened pro-capitalists shaking their heads in disbelief. Confidence in America as a place to do business - and the whole "Anglo-Saxon" model of capitalism, has been shaken to its foundations.

While stock markets did not crash in the immediate aftermath, confidence crashed. People who make their money buying and selling the debts of troubled companies - so called "junk bonds" - ran for the exits. Systemic failure, while not probable, is now pencilled in as possible in the scenario planning of the giant finance houses. Because nobody knows how many more Tycos, Enrons and Worldcoms there really are.

Worldcom's collapse puts the lid on a whole phase of capitalism in which a cyclical upswing had been mistaken for a permanent improvement. It wasn't just the bank accounts of the rich that felt the benefits: their ideology, their self belief, also gained a massive boost. Now, as boom turns to bust, the whole ideology of capitalist triumph generated in the late 1990s is falling apart.

Worldcom was the brainchild of one Bernie Ebbers. A former basketball coach and nightclub bouncer, his life before Worldcom had much of the feel of an Elmore Leonard novel. Then, on the back of a hotel serviette, he and finance wizard Scott Sullivan had the idea for a giant telecoms company. America already had two already. But deregulation - the breaking up of state-approved monopolies - had forced them to fragment. So Ebbers, started building the new company by acquiring bits of the old ones and stitching them together with Internet Service Providers. After 60 acquisitions, Ebbers had built a new monopoly: he controlled about two-thirds of all US internet traffic, including the "original" Internet company Compuserve.

Where did Ebbers' money come from? The giant investment bank Salomon Brothers. How could they make money by buying other companies - in a market where the value of internet and telecoms companies was already starting to inflate? By doing fancy accounting deals at the point of acquisition, whereby they took a big loss all at once and everything else looked like profit. Why did nobody spot this might be a scam? Their accountants were Arthur Andersen, the now disgraced Enron auditors, who specialised in "aggressive accounting" practices like this. Why did the stock market not smell a rat? The guru of telecoms analysis in the USA, one Jack Grubman, worked for Salomon Brothers.

Ebbers biggest acquisition was of the company MCI. That had been built up in the 1980s by financier Michael Milken, who invented junk bonds then went to jail when it was discovered he was a fraudster. Some of Milken's key acolytes stayed on within MCI. Milken ally Bert Roberts was chairman of Worldcom, and did deals with Milken even after he left prison. But to the press Ebbers was a hero. With no hint of irony at all, telecoms expert George Gilder wrote in the Wall Street Journal:
"Mr. Ebbers will be the salvation of the Internet ... Like John D. Rockefeller and Michael Milken before him, Mr. Ebbers has shown the magic of entrepreneurial vision and guts ... He is a hero of the dimensions of Rockefeller and Mr. Milken."

The hype around Worldcom wasn't just the icing on the cake. It was essential to its business model. Because while internet traffic and telecoms calls were growing, and Worldcom was laying down thousands of miles of fibre-optic cable to carry it all, the price of data traffic was falling. Only if Worldcom could go on growing faster than prices fell could it make any money. And it could only go on growing if its share price kept rising faster than the companies it wanted to buy. It would use its shares as a kind of paper money to buy smaller companies.

According to Christopher Byron of the website MSNBC:
"It was obvious from the start that WorldCom could grow only to the extent that rising stock prices made the takeover value of its own currency more valuable. But the acquisition of MCI - which heaped all MCI's debt atop all of Worldcom's, then added $6.1 billion more in the financing - meant the stock price would quickly collapse once the market as a whole began to weaken."

And that is what happened. There was too much cable, too many debts, not enough Internet traffic. Even before April 2000, Worldcom's share price began to slide. But meanwhile, the rest of the financial world had been going even crazier.

Worldcom was at least a real company. It owned the basic infrastructure of 21st century economy: the high speed telecommunications lines. But from late 1998 to mid 2000 there was an irrational mania for companies that were very unreal. Bankers and a large part of the American public poured money into Internet businesses.

In the first place, the Internet was and is a revolutionary invention. But for much of its life serious capitalists had always told each other - it's a great communication tool but you'll never make any money out of it. But in the late 1990s the mass market for internet use took off - made possible partly through the falling prices that were the result of all the rival infrastructures being built. On the back of that, businesses sprung up claiming to be exploiting the internet to tap into hitherto undiscovered sources of profit. You could slash the transaction cost of buying - famously when a big business buys a pencil worth 1p it can spend between 10 and 50p making the purchase. "E-procurement" would slash costs.

Then there was "e-commerce" - catalogue selling but over the internet. That would reduce warehouse and inventory costs. "E-banking" would remove the need for all those costly bank branches and workers. And so the illusion continued. But where was the money coming from to be poured into all these businesses - many of them like Worldcom sketched on the back of an envelope? After the Asian crisis, which nearly devastated the world's stock markets, there was a concerted effort by the G7 governments to bail out the world economy. Effectively they printed money and virtually gave it away through low interest rates, debt write offs and tax cuts. So there was easy money sloshing around.

Next, Asia, including Japan, looked like a basket case. So the obvious place for investors was America. Demand for companies to invest in outstripped the number of companies in existence. When demand outstrips supply the price goes up. So the tech bubble on the stock markets began. But as well as the supply and demand factor, not to say the stupidity factor, there was an element of rationality in the dotcom bubble. The argument was that the internet really would - if not now then later - fundamentally transform the economy in the same way that railways or the combustion engine had done. If shares were trading at 40 times their "rational" value, it was a reflection of a new economic revolution, said the supporters of the new economy theory.

Endless technological innovation would - indeed had begun to - produce growth without inflation, as productivity increases picked up from the 1 or 2 per cent a year they had been since the 1970s. The theory was even supported by US government statistics. Very sceptical at first, the US department of commerce eventually came round to the productivity miracle theory. And indeed there was some truth in it: especially in the high tech industries, but also across manufacturing industry, the application of new IT and telecoms technology was lifting productivity.

But the productivity argument got lost once it became clear that the bubble was irrational. Shares plummeted in April 2000 and went on falling. It was a long slide not a crash, but Wall Street has destroyed about one third of America's wealth over the last two years.

And the share collapse inevitably spelled disaster for Worldcom. We do not know how or when they started cooking the books. We do not know how complicit the analysts and the accountants were. But at some point, collapsing profits and rising debts must have prompted Ebbers to start fiddling the figures.

And that is what is now scaring corporate America. Most of the dotcoms are long gone. But it's now clear that a lot of real live companies, dealing in real and sometimes vital commodities, used the share price bubble to fiddle the figures.

Enron used "off balance sheet" accounting. It hid its debts to keep its share price high. When found out, it collapsed - the biggest bankruptcy in US history. The Bush administration had been bankrolled by Enron and had gone along with its demands for deregulation in the energy industry. And it had been audited by Arthur Andersen.

Worldcom used simple fraud - counting short term costs as long term costs so they wouldn't show up on the profit figures. It was a previous Republican president they had to thank: President Reagan, for deregulating the telecoms industry in the 1980s. And they too were audited by Andersen.

So they're starting to ask: who else fiddled the figures to inflate the share price? It is of course not for Workers Power to speculate irresponsibly, but take the case of General Electric. GE is proud that every three months for the last 25 years its profits have increased. Increased growth, quarter on quarter, became a GE watchword and, until Enron, even sceptics treated it as a kind of friendly inside joke.

Who was worried? The company turned a profit, paid shareholders their dividends and even paid its taxes. Its chief executive, Jack Welch was the hero of corporate America. Now GE's share price is suffering badly - out of the probably irrational fear that somewhere in its accounts lies another disaster waiting to happen. Oh, and GE is the biggest company in the world. Karl Marx described the pros and cons of the financial system that grew up in the late 19th century like this. The system of stock and shares allows companies to expand in a seemingly limitless fashion. They don't have to rely on the profits generated by themselves in order to grow; they don't end up handing the company to a bank.

The rise of share-based capitalism inaugurated a century long period of breakneck growth punctuated by two long periods of near stagnation. The reason being that when growth happens, share prices grow faster than the economy; generating a boom, a bubble and then a crash. And just as a share boom allows capitalism to grow faster than is rational, it allows it to collapse more deeply than is rational too. Good companies are destroyed by bad. Wise investors wiped out by fools.

That is the essence of finance capitalism, as Marxists have been telling people for over 100 years. Capitalism without finance capitalism is now impossible: the "Anglo-Saxon" model, a religion based on the worship of share prices, is not an imposition or a corrupt excrescence: it is the core of the system.

The last two years have seen the capitalists' wealth collapse. The last six months have seen their ideology collapse. Anti-capitalists commanded the attention and derision of the mainstream establishment because they had a moral case against the system but not a rational one. Capitalism was, as Milton Friedman once said, the best way of stopping greed hurting people. Now we've got both moral and economic justification for saying: scrap this system. Is this a great time, or what?

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