WorldCom may force administration's hand

0 Comments | Insight on the News, July 22, 2002 | by Jamie Dettmer

The limited regulatory changes that President George W. Bush and his top aides advocated after the bankruptcy of energy trader Enron did little to restore investor confidence on Wall Street. And that was before the stunning announcement on June 25 that WorldCom fraudulently had disguised nearly $4 billion in expenses.

Falling stock prices and concern about the integrity of corporate accounting, of course, predates WorldCom's disclosure, which triggered stock-market plunges across the globe and sent the dollar tumbling further against the euro and yen.

While the administration backs tougher enforcement of current rules against wrongdoing senior corporate officials, even to the point of confiscating their bonuses and stock-option profits, it is nervous about sweeping legislative changes being introduced to help restore the faith of investors. That appeared to remain the position in the immediate wake of the WorldCom debacle. Speaking at the G8 summit near Calgary, Alberta, President George W. Bush dubbed the accounting practices at WorldCom "outrageous" and vowed authorities would hold accountable those responsible.

"We've had too many cases of people abusing their responsibilities, and people just need to know that the SEC [Securities and Exchange Commission] is on it, our government is on it," Bush added. But there was no hint the administration now would reverse course and throw its weight behind new laws and regulations. The WorldCom disaster may force it to do so.

Along with many other conservatives, administration officials fear that a stampede of regulations could damage the market in the long term and restrain economic growth in the short term. The administration is sticking to its line that the "real economy" soon will recover enough to nurse the markets back to robust health. But the complicated relationship between the stock markets and the real economy of manufacturing and services isn't a one-way street. Although it is hard sometimes to tell how the two influence each other, it now is becoming clear there is a risk that the stock market will derail the weak recovery.

Treasury Secretary Paul O'Neill doesn't subscribe to that view. "I do have great confidence our economy is going to go forward," he said shortly before the G8 summit in the last week of June. But while O'Neill remains upbeat, the persistently weak U.S. stock markets show no sign of a durable recovery, with WorldCom adding to the woes.

Wall Street doldrums have prompted investors to switch yet more cash into European and Asian markets. What with terrorist threats, rising government debt and lack of faith in the bookkeeping of corporate America, the United States doesn't look to be such a safe haven anymore.

The trade and current-account deficits are swelling, with both hitting record highs. The current-account deficit, considered to be the broadest measure of trade, climbed to $112.5 billion in the first quarter of this year.

To support those deficits, more than $1 billion a day in foreign investment needs to be attracted to the United States, but international investors are getting real spooked.

O'Neill has his bullish supporters. They argue that investors have not yet grasped the brighter outlook in the second half of the year for both the economy and corporate profits. "We have to separate this emotional response to the accounting issue versus the signs of economic stability we are starting to see," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum.

But, as political notebook pointed out weeks ago, the falloff in investor confidence easily could influence consumer confidence if it were to continue unchecked. Evidence is mounting that that's the case. At the end of June there were a series of gloomy economic reports. Among the most distressing was the Conference Board's report showing a significant drop in its index of consumer confidence, which fell to 106.4 in June--the lowest since February--from 110.3 in May.

That decline was the biggest drop since last autumn's terrorist attacks. The Conference Board said Americans expressed concern about finding work. In fact, the percentage reporting that jobs were hard to find rose to a six-year high.

The drop in consumer confidence is likely to affect spending, the mainstay of the U.S. economy. As if to underline this likelihood, on the same day the Conference Board reported its June figures, a separate report suggested the red-hot housing market also is cooling a bit. According to the National Association of Realtors, existing home sales fell 0.3 percent to an annual rate of 5.75 million units in May.

Coming on top of the dismal U.S. trade and current-account figures, there's little around to encourage foreign investors or domestic ones to have faith once again.

"Rising public deficits, a ballooning current-account deficit, lagging investment and a consumer sector suddenly looking shaky indicate that foreign accounts might not only be unwilling to allocate additional funds to the U.S., but might also consider liquidating assets" said Hans Redeker, global head of foreign-exchange strategy at BNP Paribas.