Corruption and Consumer Confidence


     
   

    In 2001, it became apparent that telecom companies were not the great investment that they had seemed. The dot-com revolution vanished. Dot-com companies that had seemed to be amazingly successful rapidly disappeared, one after another.
   Investigations of these dot-com companies revealed that the premise upon which they were based was fallacious. The dot-com companies promised us a "new economy". Instead of looking a price-to-earnings ratios, and conventional measures of stock success, it was time to throw all that out the window. However, in 2001, we learned that the "new economy" was just smoke and mirrors. There was no real value there at all.
   Then, the telecom sector fell. This made sense, since it was intertwined with the dot-com sector. And then of course, the Enron debacle.
   The Enron story made it shockingly clear that there was a huge problem in the economy. The Enron company committed fraud on a vast scale. And, all of the safeguards meant to protect us against such fraud vanished. The SEC did nothing, Arthur Andersen did nothing. And the ratings companies did nothing.
   Since then, it has been revealed that many other companies used the same approach as Enron. Adelphia, one of the nation's largest cable providers, had an amazing setup. The Adelphia company lent billions of dollars to the owners of the company, the Rigas. Then, the Rigas invested this money in Adelphia stock. All of this was done without the knowledge of Adelphia shareholders. When Adelphia stock fell, the Rigas could not repay the loan. Finally the public found out about this loan. The Adelphia stock dropped to nothing, and investors lost billions.
   Similar tales have been told about Tyco. Lucent has also experienced a creative accounting scandal. The table below, taken from the June 9, 2002 NYTimes, shows the performance of the funds most widely held by Merrill Lynch investors. This performance is over the year 2002. I've listed the first couple of funds, but you can get the idea.
AOL Time -41.7%
AT&T -34.0
ATT Wrls -43.6
Avaya -43.0
Cisco -14.5
So, we can see that these stocks have dropped a huge amount. It's not because of 9-11, either. It's because of accounting scandals and corruption.
   Another important marker of the corruption in our economy is the California energy crisis. During the energy crisis, Governor Davis bought billions of dollars of long-term contacts in electricity. He believed that he was rescuing the state from a real crisis. However, subsequent investigations have shown that there was no real crisis. Companies such as Enron and Perot Systems cleverly manipulated the system in order to make it seem like a crisis existed. They robbed the taxpayer of vast sums of money.
   This is a note that I saw on an Internet posting, after the stock RFMD dropped by 33% in one day.
   Ok, this market is dead..dead. I'll never put another cent into it. The fundamental nature has changed. It is no longer a long market..it is a daily market. I used to laugh at my parents for buying CDs and putting money in savings at 3%. They now have 1 million in cash (that has continued to grow the last three years) and I have 40k, from an initial 225k investment three years ago. All the while, my dirt bag ML broker kept telling me not to sell each time I told him we should get out. I feel like the world's biggest sucker. This is the beginning of the end for the NAS & DOW..1929 was easy compared to this market.
   Actually, I can agree with this position. I'd like to point the finger at President Bush, but I can also say that many of these problems developed under President Clinton. Obviously, this is not a problem that occurred overnight. It's not a Democratic problem, or a Republican problem. But the fact is that this is much worse than a recession. This is a case where the system no longer works. We can have no confidence that anyone in this capitalism system is doing their job- from the executives, to the boards, to the regulatory agency.
   So listen to me, all you politicians. It's not enough to put a few guys in jail (although I don't see a sign that this will happen). It's not enough to blame Enron, or Arthur Andersen. I am requesting an entire overhaul of the capitalist mechanisms. I want a careful examination of why this entire system is broken. And, I will only vote for the politician that promises to address these issues, whether he is a Democrat, Republican, or independent. After all, what's the use of electing a Democrat who has a better tax plan, if the money will be wasted anyways? By the way, President Bush will definitely not get my vote. He has done nothing to address these serious problems in the economy.
  And listen to me, all you companies. You will not get $1 of my investments, until you show some corporate responsibility. I refuse to invest in companies that have no respect for the shareholders.