Marketplace: News Archives

Monday, April 8, 2002
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It's Monday, the 8th of April. I'm David Brancaccio. A doomed mood has turned into harsh reality at Enron's accounting and consulting firm, Arthur Andersen. Today, the layoffs began in earnest, with 7,000 jobs to go -- cutbacks that will take place over the next several months. From WBEZ in Chicago, Reporter Jesse Hardman has this report that Andersen's headquarters is expected to take heavy hits.

Hardman: "Many of the 7,000 cuts are expected to come from the audit and administrative services staff at Anderson's downtown Chicago headquarters. Chicago-based employees were told in an e-mail today to check their voicemail when they get home from work. Waiting for them could be some very bad news.

Anderson has struggled to recover from its connection to the collapse of energy giant Enron. The company was indicted March 14th on a criminal obstruction of justice charge. The Justice Department accused Anderson of destroying Enron-related documents while that company was facing its own federal charges. Since then, Anderson has seen a rapid exodus of its major clients.

To keep from drowning completely, the company has tried to sell off some if its assets to long-time competitors, like Deliotte and Touche. Anderson says it plans to help fired employees find other jobs and offer some benefits, based on position and length of service.

In Chicago, I'm Jesse Hardman, for Marketplace."

Eaton: "The latest in the Enron scandal focuses on guilt by association. Seattle attorney Steve Berman, who represents Enron employees, says it was only a matter of time before the banks and law firms that did business with Enron were included."

Berman: "It became clear to us as we investigated this that there is no way a scheme this complicated, involving as many financing vehicles and partnerships that it involved, could have been accomplished without the willing assistance of investment banking firms, who helped structure these deals, and the outside lawyers."

Eaton: "The suits claim several Wall Street investment firms helped conceal Enron's precarious financial condition through hidden loans and false investments. Additionally, Berman says, they deceived investors with rosy assessments of Enron."

Berman: "They had financial stakes in various deals with Enron, which they haven't disclosed, and at the same time, if not all of them were out there, their analysts were encouraging investors to buy Enron stock."

Eaton: "If successful, the combined lawsuits could reap in as much as $40 billion in damages -- a far cry from Arthur Andersen's $300 million settlement offer. And that's exactly why these lawsuits are naming banks, says University of Texas law professor Robert Prentice, even though it would be much easier to concentrate on Enron and Arthur Andersen."

Prentice: "If the people who it's easy to prove the case against don't have much money, then you gotta decide, do you think we can build a case against some other defendants who aren't as obviously liable, but may be culpable?"

Eaton: "That includes deep-pocket firms such as JP Morgan Chase, Citigroup and Merrill Lynch. And it's a legal battle, he says, that may make it all the way to the Supreme Court.

In New York, I'm Sam Eaton for Marketplace."

Enron's collapse and Andersen's implosion have triggered calls for tougher business regulation. Marketplace commentator and law professor David Skeel argues critics are pointing in the right direction, but proposing wrong solutions.

Skeel: "Time was what investors left watching over Wall Street to accountants and securities analysts. They were the ones who were supposed to be combing through the fine print.

But it turned out that not everything was above board. The Enron and Global Crossing scandals brought a dirty little secret to light. It turns out that accountants and securities analysts have powerful incentives to pretend that everything is rosy at the companies they scrutinize. The incentives are consulting and lending contracts worth millions.

So now the watchers are being made to watch. Some lawmakers and legal experts are calling for Congress to force the Big Five to spin off their auditing from their consulting business. Similar proposals are being floated for the securities business. That's not a good idea. Here's why:

Auditing firms offer at least some consulting services, like tax advice, for good economic reasons. They're a natural extension of what they do. For example, auditing companies have people on hand who understand complicated tax issues. They couldn't begin to provide competent audits without them. Making auditing firms free-standing will only dent their size, profits and ability to capitalize on their reputation. And banks' securities analysts are just as indispensable to their underwriting business.

A few new rules, like prohibiting a Big Five from auditing the internal compliance procedures that its own consulting arm created, might make sense. But legislation can only go so far.

What many backers of dramatic reform really want is for Congress to legislate business ethics. That's impossible. Laws that try to stamp out every business temptation are doomed to fail because they can always be manipulated. One of the ironies of Enron was that regulation, not its absence, created the problem of off-balance-sheet partnerships.

Instead, regulators should forget about restructuring the accounting and banking industries, and focus on replacing the existing accounting rules with more flexible standards that leave room for business ethics to take over.

It's true that Wall Street's watchers have done a dismal job of self-regulation. It's understandable that pundits doubt these companies' claims to have seen the light. But the reality is this: the only way to ensure that the watchers are truly watching is to adopt a few, limited regulatory changes, then to rely on market pressures and a renewed commitment to good, old-fashioned business ethics to do the rest.

In Philadelphia, this is David Skeel for Marketplace. "

Music Bridge: Septembrist - Telegraph Melts

Dimsdale: "The U.S. is the single biggest buyer of Iraqi oil -- nearly half the country's 2 million barrels-per-day output. Compounding the challenge from Saddam Hussein is a new general strike by workers in Venezuela, which sends 1.7 million barrels of precious reformulated gasoline to the U.S. everyday.

Many oil industry analysts claim to be relatively unconcerned about Iraq's oil supply, figuring either the Iraqis will blink soon, or other Middle East exporters will step in to cover the gap. But the interruption of Venezuelan oil products is potentially more serious, according to the editor of 'Oil Daily,' Karen Matusic."

Matusic: "What you have now are blue collar workers and managers of oil company on strike. As of today, the refineries and all exports are paralyzed there. And both sides are digging in their heels. So it could be you see a new president of Venezuela, or complete chaos, there."

Dimsdale: "Given the volatility, the Energy Department is predicting the average price of a gallon of gasoline at the pump this summer could be around $1.60. Energy Secretary Spencer Abraham today reactivated a gasoline price consumer complaint line to monitor reports of price spikes during peak demand. But the manager of market analysis for the Petroleum Finance Company, George Beranek, says serious supply disruptions are so far merely speculation."

Beranek: "Its coming at a time of year here in second quarter when global oil demand is at its lowest point of the year. So its not an immediate crisis by any stretch."

Dimsdale: "Meanwhile, the Senate returns this week to take up a comprehensive energy Bill, including the controversial issue of drilling for oil in Alaska's north slope. However, a lack of consensus could scuttle the entire bill.

In Washington, I'm John Dimsdale for Marketplace."

Glaser: "IBM has a bad case of the blues. The hi-tech giant said today its profits for the quarter will be 22 percent lower than analysts had expected. That was a nasty surprise from a company that, until now, seemed to be weathering the downturn in the technology industry better than most."

Charles Ruttstein: "What we're looking at is an evaporation of underlying demand here."

Glaser: "Charles Ruttstein follows the hi-tech business for Forrester Research."

Ruttstein: "There was so much infrastructure that was bought during the e-business boom that most companies are simply trying to digest it all and so now they're not buying much more of it."

Glaser: "That, combined with the economic slowdown, has been putting a real dent in the hi-tech industry for more than a year. So why wasn't IBM having trouble before this? For starters, the company's done some aggressive cost cutting.

And it's diversified. They don't call it Big Blue for nothing. IBM still sells computer software and hardware, everything from notebooks to computer servers. But it also offers services which help customers figure how to put all this technology together in a way that meets their needs:"

Ruttstein: "Many of the global services engagements are longer term in nature. When their customers decided to begin cutting, they couldn't just turn off the spigot overnight. They waited until they got to the next phase in a project and then said, 'Okay, IBM, you can go home now.'"

Glaser: "But analysts also wonder whether IBM has been completely forthcoming about its finances. The company allegedly sold off a business recently to help it meet its profit target without fully informing investors. And there are questions about how much IBM has relied on gains in its pension fund to help smooth out its bottom line. Stacy Cowley is a reporter with International Data Group."

Cowley: "This is one area where IBM was able to tweak the numbers a bit. I have not heard anyone say it's egregious. I don't think anyone's looking at IBM and seeing an Enron here."

Glaser: "But IBM better be prepared for plenty of scrutiny when it releases its profit report next week. Today's warning was enough to drive Big Blue's stock down more than 10 percent.

I'm Cheryl Glaser for Marketplace."

Ott: "According to economist Christopher Ruhm, at the University of North Carolina Greensboro, tough economic times are actually good for you!"

Ruhm: "When the economy gets worse, we think that people get more stressed out, and yet if I were also say to you what happens when you go from working 40 hours a week to working 50 hours a week what happens to you, stress? It might also increase then!"

Ott: "Ruhm's been studying this stuff for half a decade, using all kinds of complicated economic analysis. He's found that as unemployment rises, lots of other things fall -- like obesity, heart disease, smoking and some back problems. Even the death rate drops by 0.5 percent when unemployment jumps. Why? Well maybe it's that we aren't driving to work, so car accidents and pollution levels drop -- or maybe we just can't afford to drown our sorrows in booze, smokes and fast food!

I'm Tanya Ott for Marketplace."

Music Bridge: Too Good Too Bad - Cowboy Bebop

Rundown

Old Fogey
During Japan's economic heyday, the corporate manager was the modern version of the samarai, standing tall as a symbol of national pride and economic power. But now, as Japan lingers in economic turmoil, these same men have little hope of returning to their former glory. From Marketplace's Japan Desk, Jessica Smith has the story.

Y Tu Mama Tambien
Marketplace Host David Brancaccio talks with the director of "Y Tu Mama Tambien," Alfonso Cuaron, and marketing director Bob Berney about the new marketing strategy of this breakthrough foreign language film. Turns out that this film's appeal reaches out as both a mainstream movie to Spanish-speaking Americans, and as an arthouse/foreign-language film.

Music Bridge: Watermelon In Eastern Hay - Frank Zappa

Look Ahead
Coming up on Marketplace, a look at gambling abroad.