It became the defining image of US business in 2002 – senior executives led in handcuffs from the courts, displayed in front of the world’s television cameras as a warning to other white collar criminals.
This will be remembered as the year that corporate America was humbled. A year when reputations of celebrity businessmen and women were savaged by a public seeking revenge for the trillions of dollars they had lost on the stock market.
It was also the year when once untouchable companies collapsed at an unprecedented rate. Five of the top 10 bankruptcies in US history occurred during 2002: Enron, WorldCom, Global Crossing, United Airlines and, yesterday, the insurer Conseco.
The first domino fell in the dying moments of 2001: Enron in Houston, the energy firm that through a mixture of hubris and wildly creative accounting had propelled itself to number seven in the Fortune 500 list of US companies.
When it became apparent that the business had been hiding debts offshore and inflating its profits through a series of fake transactions, it collapsed in dramatic fashion.
The extraordinary downfall of Enron had the most resounding impact and the ripples are still felt today. A new phrase, ”Enronitis”, was coined for the nervous condition of the markets, which suddenly felt they couldn’t trust the financial figures being published by companies.
The collapses have led to a period of deep introspection on the nature of capitalism in the US. Curbs on excessive pay have become a key theme, as has tightening the rules on corporate governance. The accounting industry has a new watchdog. Even the move by Coca-Cola to stop providing quarterly earnings forecasts can be traced to the events of last year. Why were earnings massaged at some of the companies now bust if not to feed Wall Street’s rapacious appetite for earnings growth.
The reforms would not have happened without WorldCom, the telecoms firm that handles half the world’s internet traffic, and became the largest ever bankruptcy in July after being discovered operating the largest alleged fraud.
Before the WorldCom bombshell the momentum for reform had been slowing. Enron could have been a rogue company rather than an exemplar of corporate America during the go-go 1990s. WorldCom proved Enron was not an isolated case and made reform inevitable.
At WorldCom $9bn (£5.6bn) of ordinary expenses was wrongly recorded as capital investment. Three people have so far pleaded guilty.
WorldCom wasn’t the only US telecoms firm to go under, weighed down by overinvestment and acquisitions as the market deregulated. Global Crossing, a company with a name that smacked of ambition, filed for bankruptcy at the beginning of the year – at the time it was the biggest filing by a telecoms company and the fourth largest in history. Its former chief executive Gary Winnick managed to cash in $734m in shares before the collapse.
In other cases – the conglomerate Tyco, Martha Stewart Living Omnimedia, the drug store chain Rite-Aid – the companies have survived but, with allegations of misdeeds, reputations have not.
Many touched by scandal including Qwest Communications, Dynegy, Williams and Rite-Aid only narrowly averted bankruptcy. Kmart, the discount retailer losing the battle against Wal-Mart, wasn’t so lucky. It filed for bankruptcy in January with debts of $4.7bn and has been forced into a number of financial restatements.
There were of course other bankruptcies, unrelated to the scandals of 2002. The most notable came in the airline industry, suffering twin black eyes from the slowing economy and the terrorist attacks of September 11.
US Airways, the sixth largest carrier in the US, filed for bankruptcy in August followed by United Airlines, the second largest airline in the world, last month. A handful of smaller airlines have gone out of business entirely.
But it is the self-inflicted bankruptcies of 2002 that will be the most keenly remembered. – Guardian Unlimited Â