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At Issue

With Philip Shaw

Why Enron and WorldCom Really Matter

Thursday, August 8, 2002

It's like back to the future. This time with gusto. After sixteen years writing and broadcasting agricultural economic commentary, across North America, I'm back where I started, working for John Gardiner at www.cktimes.ca. But this time, its nothing about agriculture. I've gone mainstream. Drop agriculture from the economic. Add politics into the mix and you'll get my economic and political commentary each week. I'm ready to go. Let's go with the current rumblings in the corporate world.

There was Enron, now there is WorldCom. They said they had $3.85 billion in profits over the last fifteen months when they didn't. In fact, they lost money. It's six times worse than Enron. Gone are life savings, pension funds, and maybe even worse, the integrity of our financial world. It led to a major announcement from President Bush earlier this month concerning "corporate responsibility."

He had to do something. Enron was an energy company run amok. WorldCom, a huge telecommunications giant, helped carry almost half of the US internet traffic. Both companies came of age in the heady 1990's, when leveraged funds grew and grew in an ever expanding US economy. The latest manifestations regarding these two companies are putting a focal point on the end of those exuberant economic times. Some within these companies don't want to believe the easy money is over. Both companies had a compliant auditor who aided and abetted the dirty money.

For the apologists for the free enterprise system, the events of the last few month have been hard to take. There is no way you can defend the corporate behaviour exhibited with either Enron or Worldcom. The indefensible is just that, and these companies had a lot of it. Surely, it is not over. When Canadians check their RRSP investments within the next few months, they'll be seeing a few negatives. Simply put, WorldCom and Enron were everywhere. There was lots of exposure by Canadian banks from both of these firms. Guess who ends up paying the bill?

And then ,of course, you have what some people call the worst deal since Eve tricked Adam into the rotten apple. The zillion dollar AOL-Time Warner deal so ballyhooed last year as the beginning of the internet century has gone awry. AOL ad sales have plummeted since the merger. Subscriber growth has flat lined which must surely make their Time Warner suitors a little surly. It has resulted in AOL Time Warner stock going down 70% since last year.

There was nothing corrupt about this unlike Enron and WorldCom. However, when two media giants get together, one from the new economy, AOL, the other from the old economy, Time Warner, expectations were very high. So when things go sour, like they obviously have it only adds to the skittishness of the financial markets. The days of wine and roses, so effusive for Chatham-Kent investors in the 1990's have clearly disappeared.

Rewind to 1984 when your loyal scribe found himself in Canberra, Australia discussing the vagaries of rural sheep markets with a colleague. My colleague was working as an agricultural economist for an Australian agricultural regulatory agency. Over breakfast, he told me his job recently took him to different sales yards in rural Australia where prices were boom or bust with no in between.

It was his job to figure out why and determine if something shaky was going on. I quizzed him about sheep numbers and other price discovery criteria and he said everything measured up. But still, the price of sheep in these yards didn't quite add up. Something was wrong and it was his job to get it fixed before somebody really got ripped off.

That was a long time ago, but it is an example which I've never forgotten. Just because you have a "free market arrangement" doesn't necessarily mean that it is fair and equitable. There must be regulatory bodies in place who set up the rules for integrity in the market place. It doesn't always happen and my friend was sniffing around before another sheep farmer got fleeced.

Enron and WorldCom shared the same discredited auditor. In other words, it would be like the sheep sales yard paying my friend to look the other way. I used to think those types of things never happened in our financial world where there are government regulatory bodies which monitor the activities of business. The Australian sheep case changed my mind on that one. Enron, WorldCom and Canadian examples like Eatons and Bre-X cemented my view that our corporate sector within the free market system can't always be trusted. That's why I've always believed in a mixed economy fostered by government.

At the end of the day, many of us are standing around wondering what happened to our RRSP. With Canadian interest rates rising but still near record lows, managing even meager amounts of capital is getting increasingly difficult. But one thing most of us never questioned was the integrity of the financial system we grew up with. But the events of the last few months shatters that reality. The question now is who can you trust, do the numbers really add up and lastly, who is counting your sheep?



Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.