Monday, July 19, 2010

US capitalism: an icon shattered?

By Shan Saeed

American brand of capitalism is under heavy clouds of despair and needs some correction before it brags about its financial supremacy before the world. It needs to reassert itself in the short-run to regain its previous status of being a global financial paragon for the rest of the world.

The world has witnessed some gory CEO’s in the history of the American economy playing with the money of American public. Peter Drucker once wrote:” This is the third or fourth time in American history when we had all this emphasis on the genius CEO. The last time was in the 1920s, and before that in the 1880s. That always is the sign of a big economic transition. But it is not going to last, because the transition to the information economy has already happened”. Any doubt on this issue is beyond question.

The bookkeeping deception, as divulged by the CEO of Worldcom looks like a good-old-fashioned fraud. So, how the book was cooked for the shareholders to make them elated and out of this world? By treating routine expenses as capital investment. Normal operating expenses must be subtracted from a company’s revenues in the year they occur. But capital expenditures can be subtracted from revenues a little at a time over many years. In short-term, that lets money to flow to the bottom and boots financial results.

It’s the oldest trick in the book and mind-numbingly simple. WorldCom is a plain vanilla trickery that is inculcated on the second day of the Accounting class. The upshot of the whole WorldCom debacle is that when even simple tricks go undetected, there is no saying where it all ends, that’s what investors are coming to comprehend.

With each new revelations and creative accounting and vastly overstated earnings is another blow to the credibility of corporate America. In a survey conducted in the aftermath of these financial scandals coming from left, right and centre, affluent Americans don’t trust the management of publicly traded companies and three-quarters have little faith in the integrity of the financial statements. Eighty million Americans have invested in the stock market.

The chairman of Securities and Exchange Commission, Arhter Levit, came under heavy criticism for not taking appropriate action during these scandals. He admitted during his interview appearing in the Newsweek, that complacency was the root cause of this problem and the regulators and financial watch-dogs should get more focused on these crucial and burning issues confronting the American public. He added that many weaknesses as witnessed in the US markets recently but the US markets are far more transparent and liquid than any other market around the world. International investors and American public have become wary of the financial markets, which are very volatile and vulnerable to external shocks.

We all remember the collapse may have been a disaster for the Wall Street but in the Silicon Valley it was a blessing. Like forest fires, business catastrophe can have the positive effect of cleaning out deadwood, making room for new growth. American President George Bush has goaded the corporate giants to become more responsible and to go by the books of law.

Now Mr Bush and others on his team have to reconfigure the entangling and baffling issues at hand. President Bush ( a Harvard Business School graduate) is demanding strict compliance with the letter of the laws and urged for a renewed commitment to vigilance on the part of all corporate directors. The mission is to restore faith in corporate America and to protect the Congress from the voters’ wrath this fall. The larger challenge for the president and the congress is to end corporate abuse without turning every CEO and CFO into a ward of the state.

We have witnessed some of the finest and visionary corporate CEOs not only in America but also around the world, including South Asia.They have contributed a lot to the corporate world and have made a name for themselves through their impeccable character, hard work and integrity. It is true that investors have been shifting assets out of the US into the European markets, pushing up Euro, but much of that is simply going into the money market instruments that is cash. However, investors have not lost faith in US stocks.

They have lost faith in stocks. Vicendi, France Telecom and Deutsche Telecom have not broken the rules but that does not make them safe heavens. Fund managers in Europe have always relied on the US markets to look at. When the bear market started 18 months ago, European smugsters said the US was in deeper trouble because of the extensive “Equity Culture” in America compared with the “debt culture” in Europe. More Americans own shares than do Europeans; they have been harder hit.

Europe learned to accept deregulation, private pensions, flexible labour markets (hassle free lay-offs), merger and acquisition rules, stock options and greater transparency in their financial reports. Europe is still in the early stage of developing such a shareholder culture and may be it does not really want one.

Yet while we may see slow liberalization. It is doubtful if Europe is ready to reverse course. It has finally learned the US does not have all the answers, but still it is waiting for better ideas to come with foreigners sending less money to the US and Americans making more investments abroad, the dollar has slid 12 per cent against major currencies since April. Famed hedge fund manager and currencies strategist George Soros predicts that US dollar would go down further by 33 per cent. One could safey bet that if an another accounting issue along with weaker than expected growth and poor profitability, we may see a vicious circle. The next in the series to come and it could be colossal.

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