People's Democracy

B S Rao

FINANCIAL fraud seems to be sweeping across the capitalist countries of all shades. New cases of scandals, bankruptcies, transfer of funds, accounting frauds etc., by multinational companies (MNCs) are cropping up daily in the USA and other countries. Till recently the people were told of Enron and its bankruptcy. Now, new cases of WorldCom, Xerox, Global Crossing, Adelphia Communications Corp., Tyco International Ltd., Dynegy Inc., etc., are surfacing. All these companies used financial gimmicks to inflate their cash flow and profits in order to jack up their share prices and thus accumulate wealth. The investors are confronted with large, well-known companies, disappearing almost overnight. In the process not only small investors but supposedly smart, sophisticated investors have been fooled as well.

In addition, obstructing justice, misleading clients, removing inconvenient CEOs and so on have become the order of corporate governance in all capitalist countries. These unfolding corporate scandals are weighing heavily on the stock market, the dollar and the US economy.

On the other hand, after September 11, the costs of fight against terrorism, internal security, new problems in insurance, tourism, aviation and other industries, have added to the burden of America’s capitalism. Investor confidence in American capitalism in the wake of above scandals and burdens, is on the decline.

Recently released documents reveal that Enron, an American multinational company, carried out elaborate schemes that defrauded California consumers of at least $ 30 billion when California and several neighbouring states were suffering from acute energy crisis. They resorted to black marketing by starving the consumers of power, in the so-called competitive market economy of the US. The documents revealed that Enron bought power in California, sold the power out of the state and then bought the power back and resold it into California. This allowed Enron to circumvent price limits intended to hold down costs – in the market driven economy. The buying rate was 250 dollars per megawatt in California and resale in neighbouring states at 1200 dollars per megawatt.

The Enron bosses became infamous for hiding mountains of debt through financial interplay among all the firm’s divisions and offshore companies. Thus they kept the companies’ share prices artificially high to continue accumulating money. Just before Enron stock plummeted on the market, the bosses dumped their shares to avoid losses. At the same time, chief executive officer Kenneth Lay, a close friend of president George W Bush and a big contributor to his campaign, lied in a videotaped message to Enron employees about the company’s health. The company savings plan mandated that employees buy Enron shares. Thousands of Enron workers lost their life savings as also jobs, while the executives held on to their fortunes.

Now, the case of WorldCom Inc. came to light wherein the Securities and Exchange Commission (US) filed fraud charges against the company. WorldCom admitted to have inflated cash flow by 3.8 billion dollars in order to distort the stock market. The strategy of WorldCom was to book operating costs as capital investments to enable the company to hide expenses and inflate its cash flow and profit. Investors normally believe that cash flow is a more reliable indicator of a company’s financial health and invest in such companies. Thus the American MNCs played the game of "confidence tricksters". WorldCom operates from 65 countries.

After the fraud came to light, WorldCom’s net worth came down from 115 billion dollars in 1999 to less 1 billion dollars in 2002. Its share price has come down to as low as 26 cents from a peak of 62 dollars. The second largest US long-distance carrier says it would retrench one-fifth of its workforce i.e. 17,000 employees.

In India, the recently privatised VSNL is likely to suffer a loss of about Rs 575 crores if WorldCom files for bankruptcy and is unable to pay its dues.

Xerox Corp, another US company, declared that it would restate revenues over a five-year period, thereby accepting improper accounting. After the disclosure, the shares of Xerox plunged by 31 per cent in Europe. The company has now admitted that it made "improper payments" of around Rs. 3.00 crores in a single year to Indian government customers.

Some MNCs are slashing their costs in order to show profits and push up their stock price. But these strategies are affecting inventories, employment and spending on modernisation or new equipment. The decline in the stock market is also affecting the revenues of the government, as capital gains taxes fell. All these factors are indicators of a drag on the economy. Ultimately, the economic burden of frauds and scandals is falling on the people. Facing big budget deficits, the state and local governments are resorting to enhancing taxes, slashing payrolls and curtailing purchases.

Huge investments have been made by firms and individuals alike in USA, in the belief that speculation in share prices would bring profits. Similarly, many foreigners – politicians, businessmen and MNCs - had shifted several trillion dollars into US financial markets in the hope that currency-adjusted rates of return (as a result of devaluation etc) are best against the US dollar. Huge amounts of foreign capital have flooded into America for several political reasons as well and the marshall plan.

Reports suggest that after years of pumping trillions of dollars into the US, foreign investors are now feeling uneasy and thinking of pulling back. The mounting waves of scandals in the corporate US have sullied the image of openness and accountability in business. US is no more considered the best place to invest, according to several investment firms.

The huge blow to the confidence of foreign investors in the US economy will have serious repercussions because of huge deficit in its trade with the world. To cover that deficit, America must attract an average net inflow of 1.3. billion dollars per day. Even a modest decline in the flow can weaken the dollar and drive up the prices of imported goods.

The impact is quite discernible as the value of dollar fell to its lowest levels since March this year. According to many western economic experts, if these trends of capital flight into USA were reversed in the light of bankruptcy in Enron, WorldCom etc., America’s model of capitalism might be in serous trouble.

As the crises in the US economy are developing, the value of dollar came down by 10 percent against yen and 12 percent against the euro during this year.

Further, it is a reality that success of capitalist economic reforms i.e. privatisation of economic resources in favour of MNCs, depends on the politicians promoting it remaining in power. Therefore, a lot of funds from MNCs seem to have gone to politicians in power; these transferred funds are shown as profits or investments (instead of as losses); and innocent investors are cheated in the process.

The murky political nexus throws up instances such as George Bush does not want to disclose his Enron documents, or George Fernandes about his defence deals. The officials of the MNCs are always tight-lipped. This capitalist totalitarianism is propagated as "democracy" by the capitalist media.