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CNN Live Today
Interview with Andy Serwer
Aired June 26, 2002 - 14:02 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
KYRA PHILLIPS, CNN ANCHOR: Now to the latest financial earthquake rocking corporate America.
WorldCom calls it shocking. President Bush says it's outrageous. And the accounting firm Arthur Andersen, remember them, says it's of great concern. They're talking about a $3.8 billion mess; a misclassification of ordinary expenses which would eat into profits as capital expenses, which wouldn't.
Paying the price are 17,000 WorldCom employees whom the company is laying off immediately in a desperate bid to recoup costs. Also losing their jobs are WorldCom's chief financial officer, Scott Sullivan, and comptroller David Myers. Sullivan is fired. Myers quit.
The company says it has no plans to follow Enron and Kmart into bankruptcy court, but analysts say it can't be completely ruled out.
WorldCom is based in Clinton, Mississippi and operates one of the world's most extensive phone and data networks.
Speaking today at the G8 Summit in Canada, President Bush communicated this message loud and clear.
(BEGIN VIDEO CLIP)
GEORGE W. BUSH, U.S. PRESIDENT: I am deeply concerned about some of the accounting practices that take place in America. Today the revelations that WorldCom has misaccounted $3.4 billion dollars is outrageous. We will fully investigate and hold people accountable for misleading not only shareholders but employees as well.
(END VIDEO CLIP)
PHILLIPS: So, you're not a WorldCom shareholder, you don't use MCI, which WorldCom owns. Does this 10 figure foul-up effect you? Very possibly.
"Fortune" magazine's Andy Serwer joins us now from New York to tell us how.
Andy, let's get right to it. How does it effect us?
ANDY SERWER, "FORTUNE": Well, Kyra, it effects every American who has money in the stock market, and of course that includes people who have 401K's, retirement money, counting on living on a fixed income when they're in their later years, because it's impacting investor confidence.
And we've seen this week after week with this wave of scandal that has rocked corporate America and Wall Street, and it is -- there really is no end in sight, which is sort of the worst part of it right now.
PHILLIPS: All right. We're talking ordinary expenses versus capital expenses. Let's talk about this a little bit.
SERWER: Yes. Well, that's a little arcane and very hard to understand very quickly, but what it means is the company should be expensing these things right away, but instead it did it over a period of years, to make profits look fatter, better.
What this is really all about, Kyra, let's face it, is greed. It's about making profits look better than they were, at WorldCom, which makes the stock go up. And the reason these guys wanted to do that is because they get paid based on profits going up and the stock going up. Their compensation is based on profits increasing, and they also have stock options which pay off, if WorldCom stock had risen a lot.
Unfortunately for everyone, the opposite has happened.
PHILLIPS: And look, Andy, we're feeling the effects still from 9/11. There were some signs of hopes, up and down, now you've got this. How is it going to effect the economy? Is it just going to get even more unstable?
SERWER: Well, you know, it really does have a tremendous impact in terms of what we call the wealth effect. Americans feel less wealthy when the stock market goes down. And, of course, they really are less wealthy.
We're testing those lows. In some cases, the market has gone below the lows that we saw in September, right after 9/11. You know, it really looked like we were bouncing back nicely in the winter, but that had a lot to do with government spending, a mild winter, and we sort of recovered there. Now we seem to be sliding back down, especially when it comes to the stock market.
People are taking money out of the market, putting it into cash, and also putting in to new homes and secondary homes. That's why that housing market is so strong.
PHILLIPS: Is there any way, as an investor, to avoid being effected tremendously by something like this? I mean, how do you check up on companies? What are the red flags that something like this could happen?
SERWER: Well, I'll be honest with you. It's very hard to find these things, as an average investor, before they occur.
There are a couple of really good rules.
Number one: don't invest in a company that you don't understand. Don't invest in a company whose business is something you can't explain to your children or your great-aunt or your uncle or your grandfather. A lot of people get caught up in the hype.
Also, if a company seems to be changing its business, beware. That's what happened with a lot of these utility companies and phone companies. They were rock solid companies, then they got into all kinds of different businesses, like Enron did.
And I think most importantly, when a company reveals that it has an accounting problem or there's a scandal, I really suggest selling the stock. The company executives will come out and say don't worry, we can fix this, we're going to take care of everything, but nine times out of 10 there is more trouble and the stock will continue to go down.
Even if you've got a bit of a loss, it's probably better just to be able to sleep at night and get the thing out of your portfolio.
PHILLIPS: Yes, there's a lot of people not sleeping now.
SERWER: You bet.
PHILLIPS: Andy Serwer, thank you so much, Andy.
SERWER: Thanks.
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