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American Morning
Interview with Jim Surowiecki
Aired June 27, 2002 - 07:06 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.
BILL HEMMER, CNN ANCHOR: The Security and Exchange Commission, the SEC, taking WorldCom to court. The long-distance provider fighting for its life, slipping toward the possibility of bankruptcy. More layoffs looms, and we talked about it yesterday, and investors face massive losses too. This after revelation that WorldCom cooked the books to the tune of about $4 billion. Now, the government is going on the offensive here.
(BEGIN VIDEO CLIP)
HARVEY PITT, SEC CHAIRMAN: We are filing today an action against WorldCom, charging it with fraud. And we are seeking orders that will prevent any dissipation of assets or payouts to senior corporate officers, past or present, and preventing any destruction of documents.
(END VIDEO CLIP)
HEMMER: This is only the latest in a string of scandals that have battered the stocks markets, severely undermining investor confidence. Some person recommended that this is the final nail in the coffin of confidence.
Jim Surowiecki of "The New Yorker" is our guest this morning to talk more about this -- good morning.
JIM SUROWIECKI, "THE NEW YORKER": Good morning.
HEMMER: We've got a mess on our hands here.
SUROWIECKI: Yes.
HEMMER: Let's go to the very beginning here, because you have a rather interesting theory as to how we got here. Your theory says what?
SUROWIECKI: Well, I think a large part of what happened is that during the late '90s, CEOs essentially became superheroes, and people sort of treated them as if they could do no wrong. They were on the cover of, obviously, business magazines, but also you know, they were men of the year, et cetera, et cetera. And CEOs started to think to themselves that they could do no wrong, and that whatever they would do would turn out all right. And I think that that has a lot to do with the scandals that we have seen at places like Enron, Tyco and WorldCom.
HEMMER: All fair -- and we have a couple of those covers we are going to share with our viewers now, in fact, that have come out recently -- that even though CEOs may be treated like celebrities, it doesn't mean we have to go in and buy their companies.
SUROWIECKI: No. And actually I think investors have a great share of the responsibility for what happened. I mean, it's a classic bubble situation. In the late '90s, everyone thought that, you know, you were going to get rich by investing in the stock market. And when you think that, you stop looking as hard as you should at these companies.
HEMMER: You are saying that the expectations began to rise.
SUROWIECKI: Yes. And expectations began to rise, and it became hard for companies to live up to them. I mean, if you look at what WorldCom did, a lot of what WorldCom was trying to do was live up to expectations that it had no hope of fulfilling.
HEMMER: Change the scenario. If WorldCom were producing drill bits, and they weren't in the technology sector, with the tech boom of the late '90s, so many of these companies felt the obligation to say, yes, we are growing at 35 percent too, just like the other guys.
SUROWIECKI: Exactly.
HEMMER: You can buy in our company.
SUROWIECKI: Exactly.
HEMMER: And that just feeds it, right?
SUROWIECKI: Yes, absolutely. It keeps feeding on itself. And the funny thing that happens in a bubble is that instead of people's expectations slowing as they make more and more money, they keep rising. So people kept expecting faster and faster growth, and there was no way for these companies to provide that.
HEMMER: Why was this not seen? Why was it not stopped?
SUROWIECKI: Well, I think one of the simplest answers is that everyone was making money. I mean, if you think about what people felt like in 1999, in a way, it was sort of like a collective hallucination. I mean, no one really wanted to wake up. But I would also say that businesses thought they were getting -- going to be able to get away with stuff that, you know, because essentially, accounting gimmickry, all of this kind of stuff, the regulatory apparatus just wasn't there.
HEMMER: Are you saying then that the businesses were buying themselves time, thinking, you know, give us six months, get us into the next quarter, and then maybe we'll be able to pick up the profits and turn it around?
SUROWIECKI: Yes, I think that's exactly right. And actually if you look at WorldCom, if you look at when it started, which was, you know, supposedly only in the first quarter of 2001, I think that's a lot of what happened. You know, we'll push this stuff out. Eventually the business will come back, and then we'll be able to figure out how...
(CROSSTALK)
HEMMER: I'll tell you, Jim, I see a bigger problem in all of this. And the problem I see, and in talking with investors and analysts, is that if the world starts to look at the United States economy and says, we can't trust this country anymore with the WorldComs and the Tycos, the money starts going to other countries and other parts of the world.
SUROWIECKI: Yes, it's a huge problem. You know, the United States depends on the rest of the world to fund our operations, basically. And you know, they have always been willing to do that, because we have the best capital markets in the world, supposedly. And now, you are just seeing massive doubt about that.
HEMMER: Anyone going to be punished for this?
SUROWIECKI: Well, I hope so. I mean, I think -- you know, you have already seen Kozlowski essentially indicted and presumably going to go to jail -- Sam Waksal of ImClone for insider trading. And the SEC acting yesterday as quickly as it did is a good thing, but I think it's important people go to jail.
HEMMER: Jim Surowiecki, "The New Yorker" magazine, thanks for coming in.
SUROWIECKI: Thanks for having me.
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