Chapter 11
Gimmicks, Tricks, And Lies Exposed At
Major Blue Chip Companies
As you read the chapters which follow, you will no doubt find some events which match closely with those you see happening around you in the months ahead, and some that do not. No one can predict the future with accuracy; the best we can do is to achieve safety and prepare ourselves for the coming storm.
You may be shocked to read about some events which are quite extreme. These are not purely forecasts. Rather, they represent my warning of the disasters which could ultimately befall our great nation if current policies are not reversed. I begin with the near-term outlook ...
The time is several months from now; the place, the conference room aboard Air Force One, returning with the First Family and advisors after a brief excursion abroad.
The President stares blankly out at the clouds far below. Two economic advisors chat solemnly on a leather sofa directly to his front and left. The first, a CPA and formerly the head of a major accounting firm, has just been appointed to a second-tier position at the Treasury Department. The other, although not assigned an official government post, is a trusted friend from Texas.
The two debate quietly between themselves. But as their voices become more animated, the President turns his head in their direction, reluctantly allowing himself to be drawn into the conversation. The CPA does most of the talking ...
Advisor 1: Remember back in early 2001, when we moved in? Remember the mess the Clinton staffers left behind?
President: You mean the W's missing from the computer keyboards, and taped to the walls, the scrawly messages and other pranks. Geez. I thought that was forgotten long ago. Is that what's bothering you boys?
Advisor 1: Heck no. That's history. The only reason we were harking back to it was as a subtle metaphor for the garbage that we're beginning to turn up in the economy.
The President, although barely into the dialog, already shows signs of impatience.
President: Look, fellas. You wanna gripe and groan about the Clinton scandals of old, go ahead. But I have to keep my focus on what's happening overseas.
Advisor 1: No, no, no. This is different. It's not about the scandal — it's about conspiracy. It's not about Washington — it's about Wall Street. And we're not talking about security precautions.
Advisor 2: Yeah. I agree.
President: What in tarnation are you talking about?
Advisor 1: Stocks, the stock market! The next phase of the stock market decline could make mincemeat out of our plans and sabotage every last great thing we're doing for the people who voted for us — or didn't vote for us. We expected the WTC thing to knock the wind out of the economy temporarily. But it's not so temporary any more. And we're very worried. We're sitting here trying to figure out what the heck is going on, why the economic decline is continuing, and why it's happening so fast ... why —
President: What's causing it?
Advisor 1: Earnings. They're not just getting banged up a bit ... they're shattered. Instantly. Like a windshield in a five-car wreck. Visualize little bits of glass spilling onto the asphalt. President: OK. So some high-tech stocks are falling. So the airlines got hurt bad. Maybe some insurance companies. So what else is new?
Advisor 1: That's not what we're talking about now. What we're talking about is new stuff. Mind-boggling, absolutely mind-boggling new stuff.
Advisor 2: That's what I say. Remember that discussion we had about how companies manipulate their earnings reports? We talked about it once. But we all decided it was too dull and boring for the American public, that they wouldn't understand it. Or even if they did, they wouldn't give a damn. Now here we are ... and here it is — kicking everyone in the rear end, us included.
President: Oh yeah, right. I remember. The bogus profits. The accounting gimmicks, tricks, lies. OK. Gimme an update.
Advisor 1: The FASB, the Federal Accounting Standards Board, is finally shifting its stance, cracking down. And that's good. But what's not good is that, NOW, on our watch, it's hitting the fan. The shift is hitting the fan. The crackdown — and, more importantly, the crash in the market — is flushing the garbage out into public view.
President: Can you be more specific?
Advisor 1: Number one. Many larger companies bought up shares in young start-ups. Then they made a killing and played up their big stock profits in their earnings reports.
President: And all this was hidden?
Advisor 1: Quite the contrary. CEOs and their PR flacks always made a big point of bragging about how well they were doing. Intel and Yahoo did it. So did some big banks, like Morgan (now Morgan-Chase).
They did it in investor conference calls. They did it in their press releases on the Business Wire, to Bloomberg, CNBC, Reuters. But did they make it clear that a huge chunk of those profits were portfolio profits? Did they put it in the headlines? No. Did they put it in the body copy? No. In the text anywhere? No. Where did they put it? Buried in the financials, in 8-point footnote text.
So the investor came away thinking that the companies' core operations were driving earnings skyward ... when it was really their stock market profits, which had nothing to do with their core operations.
President: They say we're good at spin. Hah! Sounds like we're amateurs compared to those guys.
Advisor 1: No kidding! Their spin completely mesmerized — hypnotized — investors, even sophisticated investors.
President: You don't really believe they fooled the Wall Street pros, do you?
Advisor 1: You're right. Lots of Wall Street analysts were part of the conspiracy. They played along. They trumpeted the per share earnings reports as nirvana.
Here. I have some old notes on this: Yahoo, fourth quarter '99 report: Proudly announces revenues of $201 million. Yahoo fourth quarter 2000: Operating revenues up 53% to $311 million. Good, right? But then Yahoo suddenly disclosed a $163 million write-down on its stock portfolio!
President: But ...
Advisor 1: Wait, wait. Then there was HP, Hewlett-Packard, forced to take a $48 million charge against earnings due to investments gone sour .... Amazon.com, forced to write down its $57.8 million investment in Pets.com when the online pet store closed its doors ... Microsoft, stuck with $5 billion of AT&T; stock. Paid $50 a share for it in 1999, now worth less than half that much! Plus, I could name a dozen more that have been revealed in the past few months.
President: OK. I get the picture.
Advisor 1: What's important is that the CEOs are still trying to spin it — but the other way. Now they're saying: "It's fine. Core business is fine. These are merely freak events due to the WTC crisis. Nothing to worry about long term."
But investors aren't buying it. They're telling 'em the same thing I'd be telling 'em:
"What's with you guys? When the total profit picture is good, you play up the total profits and hide the fact that they're really from your stock portfolio. But when the total profit picture turns sour, you pooh-pooh the results with the excuse that it's 'just' the stock portfolio. Sorry, buster, but you can't have it both ways."
President: Number two?
Advisor 1: The second accounting gimmick that's backfiring is trumped-up sales — sales that weren't really sales to begin with, that are now going up in smoke.
Barter was the primary device. For example, Internet companies bartered ad space on their sites for ad space on other sites. Granted, this was a slick strategy to gain exposure on the Web. They didn't have to pony up millions of dollars for ads — all they had to do was offer space on their own website.
But now get this: Even though it was strictly barter, many companies still booked it as "revenue." So, to the investor, it looked like they were racking up big bucks for all that ad space they "sold."
President: Unbelievable.
Advisor 1: But it's fact.
President: Look. I know some of you guys like to play these stocks on the sly, and I know you're hurting. But I'm out of that business, have been for a long time. I don't care if some of these stocks go to zero. I want to know what this means to us.
(While Air Force One approaches the North American Continent, the two advisors remind the President of the impact these stock market disasters can have on the economy.)
Advisor 1: We've talked before about the "reverse wealth effect." But it's worse than we thought.
Consumer sentiment seemed to be hold up temporarily until the summer of 2001. But now, in the wake of the shocking events of September, it has just taken the worst plunge in a decade. Americans are obviously shell-shocked by the sudden fall in their stocks, by the gaping hole in their mutual fund statements, by the sudden rash of layoffs, and by the threat to their security. When it was just the Nasdaq, most consumers could ignore it. But in retrospect, it's now obvious that was just the first round. Now, in the second round, it's hitting their Dow stocks, their S&P; 500 stocks — everything.
So they're recoiling from big expenditures, which is gonna drive earnings and stocks into still another tailspin ... and cause an even deeper plunge in consumer sentiment.
This is a vicious, vicious cycle. It's going to have a dramatic impact on your popularity ratings.
(The President fidgets, and his body language belies deep concern. The advisors can almost read his mind. He is riding high on a wave of patriotic sentiment. But one of his lingering fears is becoming another one-term president, just like his father. The former accounting firm CEO decides to quickly change the subject by moving on to the next item on his list.)
Advisor 1: Deception number three. Lots of company insiders had huge personal stakes in their companies' shares. These guys knew that to get rich personally, they had to convince Wall Street to hype their shares; and to hype the shares, the Wall Street gurus needed strong sales figures. No ... I take that back. Not just "strong" sales. They needed rapidly accelerating sales.
So they told their salespeople to go to their customers and say: "Don't give us any cash. Don't even give us any promissory notes. Just give us some shares in your company. The equipment is free for now."
Then they're suddenly booking big sales again, Wall Street has the ammunition to hype up their stock, and everyone's in pig heaven.
President: How common was this?
Advisor 1: Rampant, absolutely rampant.
Take Lucent, for example. It lost hundreds of millions of dollars in so-called "sales" to companies that later went bankrupt.
Take Qualcomm. It lent $4.5 billion to Globalstar through vendor financing, and now Globalstar has suspended payments on its debt. Qualcomm says this will only have a "slight negative impact" on operating earnings. But $4.5 billion? Come on now!
Scores of other companies are in the same boat. This is not new news. What's new is that it wasn't just the tech companies that did this. It was being done in virtually every sector.
President: Are you done?
Advisor 1: No. I still haven't told you about the main one — the flaky, "intangible assets" that were used to bloat balance sheets. This is also backfiring smack in their faces — and ours.
President: For example?
Advisor 1: "Intellectual capital" is one gimmick. It's supposed to be tied to all those smart people a company has working for it — the same ones who are now leaving. So it's backfiring. As soon as these employees start to realize their options aren't worth the paper they're printed on, they walk.
Or they get canned because now, suddenly, they're not "capital" anymore — they're just "overhead." Poof! Intellectual capital is history.
"Goodwill" is an even bigger gimmick. You probably remember it from the old days in Texas when oil money ran dry and all those Texas S&Ls; had to be bailed out. The S&Ls weren't worth a dime — they had more debts than assets — but they were bailed out with big money. So on the balance sheet, those big bucks were recorded as "goodwill." Remember that?
President: Well ... uhm ... yes, sure.
Advisor 1: OK. Good. 'Cause then you'll understand better what's going on now — they've done essentially the same thing in this new, high-tech merger mania.
Some goodwill on the books is justifiable. But today's accountants are stuffing goodwill into the asset side of their ledgers with the sole purpose of trying to justify the outrageous prices paid to acquire other companies.
I'm not talking just little techie companies. I'm talking about almost all of the big merger-maniac firms. Those CFOs were tripping all over one another to bid outrageous prices, far more than any serious bean counter could justify. But they came up with a simple formula: Purchase price = real value + goodwill.
(The President is a bit confused and raises his eyebrows toward his old friend from Texas.)
Advisor 2: Goodwill is the fudge-factor. Whatever the difference was between what they paid for an acquisition and what it was really worth — that was mostly recorded as "goodwill."
(Mr. Bush glances back out the window. The clouds below seem nearer now.)
President: We're going to be landing soon. And you know something? We're not going to be landing on Wall Street. We're going to be landing in D.C. So give me the big picture about how this affects us in Washington, inside the Beltway.
Advisor 2: Sorry, sir. But remember how we have talked about all the wealth we have? Well, this is it.
President: This is what?
Advisor 2: The wealth, sir. These accounting gimmicks — these bogus assets and bogus earnings and bogus sales and bogus equity of the shareholders — these are big chunks of the so-called "wealth" we have in this country. We are still a rich country. But not nearly as rich as we thought.
You go to these companies, including some big old-economy banks, telecom giants, industrial monoliths — you name it — and they show you all these impressive numbers on their balance sheets ... but then, when you do on-site walk-throughs, you can't find any of the stuff. It's intangible, invisible, mostly fluff.
President: So what's happening now?
Advisor 1: Now, the gimmicks, deceptions, and lies of the past are being exposed. Everyone sees them now. That's why the stock market is plunging and confidence is disappearing, turning to frustration, anger, even anger at us!
You see, all that bogus wealth which was created under Clinton is going up in smoke — on our watch. The fat lady is singing on Wall Street. And as she sings, guess who's now on the stage — here in Washington? You. You're on the stage, and you ask ...
"Where the heck is all that wealth?"
"'Twas never there to begin with," sings the fat lady from afar.
But we can't hear her any more, 'cause now the audience is shouting. The audience — our public — is yelling out: "The emperor has no clothes! The emperor has no clothes!"
That's you, Mr. President — you're the emperor in this scene. But it's not your fault, sir. What's really happening is that the goodwill is turning into ill will.
Investors are no longer enamored with the promise; they don't want any more "intangible assets." Instead, they're starting to focus on old, supposedly outdated concepts, like "book value" on fixed assets like real estate, machinery, equipment.
Suddenly, they realize that even after they add up all the tangible assets, their once-favorite companies have little more than a tiny fraction of their share values in real, live assets.
President: Then what?
Advisor 1: Then investors realize that this wasn't pig heaven after all.
President: What was it?
Advisor 1: A pig in a poke.
President: Look fellas. I see your point. But I think all of this has a simple solution: The tax cuts and rate cuts we already have in place, plus all the money the Fed is pumping in to rally the markets in the wake of the external threats to America. And if they aren't enough, we do more. We pump money into the economy from both sides. That will overcome all of this.
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