Worse and Worse for US Economy

WorldCom filed for bankruptcy protection on July 21, which has stirred the whole world for its gigantic illegal financial scandal. The sum the company is seeking to be protected is the record amount in US history. Many predict that WorldCom’s filing will deal a severe blow to the US economy that has already been reeling from recession.

▽ Filing of Bankruptcy Protection = At around 9 p.m., July 21st, WorldCom filed bankruptcy under Chapter 11 of the Bankruptcy Law in the federal court in Manhattan, New York.

Last May, WorldCom’s reported amount to the Securities Exchange Commission came to $ 103.9 billion. It exceeded Enron by $ 40.5 billion in terms of the amount sought for protection, which filed bankruptcy for the same reason of a financial scandal to protect its asset of $ 63.4 billion.

The Wall Street Journal reported on July 22, 2002, that WorldCom, in the petition it filed with the court, alleged, “The Board of Directors determined that filing bankruptcy under Chapter 11 will benefit our creditors, employees and other parties involved.

If the court grants the bankruptcy petition, WorldCom’s debt of $33 billion will be frozen for some time and every civil action, pending or not, against WorldCom will also be automatically stopped. WorldCom, in the meanwhile, has to submit to the court, within 120 days of filing, a redemption schedule. But WorldCom’s business activities will not be affected.

The main creditors of WorldCom, CitiGroup, GE Capital and JP Morgan will supply a bailout fund of 2 billion dollar, taking its asset as a collateral.

WorldCom is expected to sell, excluding core assets such as the long-distance company MCI and Internet provider UUNet, its assets such as WorldCom-owned telecommunication companies in Mexico and Brazil for survival.

▽ Impact and Ripple Effect = WorldCom’s filing of bankruptcy was heralded when it transpired that WorldCom concealed its loss of $1.2 billion by window dressing as profits its cost of 3.85 billion dollar.

After the revelation, WorldCom has faced a serious management crisis. The SEC filed a suit against it, and WorldCom became unable to take out new loans. Therefore, it was unable to pay back the $2.65 billion. Its stock price, which was $60.00 a share in the late 1999, plummeted deep down this year and now means only sheets of paper. Its bankruptcy will give a devastating impact on the New York stock market, where the major indexes are hitting the lowest in 4 years, and the banks. It will also deal a fatal blow to the US telecommunication industry, which has been in the red due to the severe competition and the price-lowering war.

WorldCom’s filing will probably pull down the stock prices of the lending banks and the companies which supply parts to WorldCom. And the weakening dollar will be another victim.

According to the Bloomburg, WorldCom’s creditors including banks and investors are sure to sustain a loss worth 1 billion dollar.

The largest public mutual fund of California government workers’ 401K will lose all the money it has invested in WorldCom. The mutual fund has invested 345 million dollars in WorldCom’s bonds and 236 million dollar in its stocks. The Fund filed a lawsuit, on July 16th, against WorldCom alleging that WorldCom defrauded it and its investors by saying in last May, “Our financial status is sound.”

Ki-Heung Han eligius@donga.com