We have received a plethora of questions trying to put into words exactly how some of these large corporate scandals occurred. I have been trying very hard to articulate the actions of the many corporate hucksters I have reported on during my radio show. Unfortunately, many of the financial structures are quite complicated and I feel that I have been putting people to sleep in my efforts to communicate. Then, just the other day I was coming home from work when I saw a little girl with a lemonade stand. I stopped for a cool drink and asked the young entrepreneur how her business was doing?
Her reply, “It is very hot outside so I do very good.”
I continued to converse with the girl about her business and was pleasantly amazed at how bright this little nine year old was. She knew what her costs were, her breakeven point and when the best hours of operation were. Her basic knowledge of supply and demand was enough to make her business successful on a small scale. Her profits exceeded her costs. Amazed, I then got back in my car and headed home. On my ride back home I thought to myself, “What if these corporate thieves from Enron, WorldCom, Adelphia, etc. got involved in the lemonade stand business?”
Come with me everyone we are going to the corporate world of make-believe.
THE ENRON LEMONADE COMPANY
Now that Ken Lay and the boys have been unemployed for the past 10 months they have gotten bored working on their backhand. So they get some financing from Robert Rubin and their good friends at Citibank and get to work on their lemonade business. Taking off where they left off, the Enron gang signs contracts to provide customers with ice-cold lemonade every day for the next 30 years. Then they call their good old friends at Arthur Anderson who aid in intentionally miscalculating the cost of providing each lemonade. Next they book all the projected profits on those future lemonade sales as part of this year’s earnings numbers. Bingo! The Enron Lemonade Company now appears to have a highly profitable business. All of Enron’s good buddies in the brokerage business such as Merrill, J.P., and Morgan pitch in and push the company on investors all across the land. Before you know it just when the company is ready to implode like a house of cards, the Enron gang dumps all their shares and makes millions.
THE DYNEGY LEMONADE FACTORY
Unfortunately, there is just not enough money in the lemonade business right now. It looks like Starbucks Frappaccino has been cutting into Dynegy’s business. Never fear the DLF has experience in these matters. What the DLF does with the aid of Wall Street and the brokerage firms is convince investors that the lemonade business will be very profitable in the future. Then they enter into a stealth deal with the Enron Lemonade Company. The deal states that each company will purchase thousands of lemonades from each other every day. In all actuality, act as if to buy. It really isn’t necessary to go through all the trouble of actually moving all those lemonades back and forth. What this strategic partnership does is give the illusion that the business is growing like Jack’s Beanstalk, now all of DLF’s buddies on Wall Street can sell shares at ridiculous prices.
THE ADELPHIA LEMON MART
The Rigas family is now out on parole. In an effort to repair their tarnished image they decide to get involved in the lemonade business. The strategy they used in the cable business seemed to put a lot of money, cars, houses, planes and even golf courses in their possession so why not try it again. First, they enter into contracts with customers to purchase lemonade. Then they get the analysts at the big Wall Street brokerage firms to sell the public that the volume of the contracts is all that matters not the profitability. Instead of engaging in imaginary trades like their peers, they just invent lots and lots of make-believe customers. With a base of imaginary customers growing at such quick pace Wall Street has no problem in pushing ALM stock to the moon. Before you know it the boys at ALM are able to borrow another couple of billion from the company and now aside from their own personal golf course they buy themselves a South American country that they rename Fraudidor. Their first order of business is to make sure there are no extradition treaties with the United States.
WORLDCOM GLOBALCROSSING LEMONPORIUM
This company would make David Copperfield proud. Bernard Ebbers, Gary Winnick and the boys all get together at a private club in Boca Raton, Florida. After seeing the success of the other lemonade companies they decide to throw their respective hats in the ring. Unlike their peers these guys do not create imaginary sales, instead they make their costs of doing business vanish. Operating expenses such as lemons, sugar, straws etc. are accounted for in the same manner as they itemize their costs of ice machines and refrigerators. That allows a completely unprofitable business to seem as if they are rolling in cash. Once again these guys call upon their buddies at the big Wall Street firms to write puff pieces about how wonderful their business is. Before you know it Gary Winnick is putting a $100 million dollar extension on his house and Bernard Ebbers buys the state of Mississippi.
Does all this sound a little farfetched?
Well, everything we have been telling investors for years about these companies has magically come true. I was described as “Chicken Little, Economic Dinosaur, and many other colorful names from 1997-2000. To us it was not a matter of if these companies were going to fail but when. Think about this, if I had told you two years ago that a share of WorldCom, Global Crossing, Adelphia, and Enron all together wouldn’t add up to the price of going to a movie, let alone a popcorn you too would have laughed at me as well. Regrettably, for many investors, this situation is no laughing matter. Many people have been hurt and it is going to take a great deal of time to build back individuals accounts.
Let us go back to my neighborhood lemonade stand and entrepreneur. However small and insignificant it may seem, it is a better business than all of these shell operations put together. The bottom line is profitability. I would rather invest in a small, honest and profitable business than all these corporate illusions any day.