- The Washington Times - Thursday, June 27, 2002

Markets around the world fell yesterday as news that WorldCom Inc. hid $3.8 billion in costs gave beleaguered investors one more reason to shun stocks.

On Wall Street, where markets have been shaken for weeks by constant revelations of corporate scandals, the dollar sank near parity with the euro, the Dow Jones Industrial Average fell 200 points and the Nasdaq Composite Index plummeted below its post-September 11 low. The indexes managed to regain their composure after a tumultuous day of trading, however, and ended mostly flat.

Stocks in Europe and Asia took bigger hits as investors tried to assess the damage from an accounting scandal involving the United States' second-largest long-distance company that rivals the Enron Corp. debacle. European stocks plunged as much as 6 percent before recovering some; Tokyo shares fell 4 percent, and South Korean stocks fell 7.2 percent.

For investors who have seen their portfolios and retirement funds shrink for two years straight, this latest and largest revelation to hit Wall Street raised questions about whether and when the markets will recover.

"All this does is raise additional doubts in people's minds about the value of the information they read," said Barry Berman, head trader for Robert W. Baird & Co.

"If it happens once, it's isolated. The more it happens, the more it hurts confidence. It just has to stop. It has to be cleaned out and stopped."

President Bush, the Securities and Exchange Commission and committees of Congress yesterday quickly pledged to investigate and go after any corporate executives responsible for fraud.

But the record number of investigations and prosecutions triggered this year by such accounting practices seems to have numbed many investors, prompting them to stay on the sidelines and shun the market despite extraordinarily low prices for many stocks.

As seen in yesterday's afternoon market recovery, some investors have begun nibbling as the latest wave of selling sent many stocks tumbling to their lowest levels in years. The Dow ended down seven points at 9,120.

But most investors steered clear of the market, worried about being burned by yet another scandal around the corner. Even stock strategists who believed the market was poised for a rebound said the news from WorldCom gives them pause.

"Investors are truly in shock," said Edward Yardeni, chief investment strategist with Prudential Securities, noting that the WorldCom scandal confirms that the accounting troubles at American corporations go deep and across the board.

"Now we have to worry that there may be more accounting scandals out there," he said.

Dozens of federal and state agencies are looking into corporate accounting practices, with announcements of new investigations and enforcement actions coming nearly every day.

In addition, the probes are putting pressure on companies to come out on their own and admit errors, as WorldCom did Tuesday night when it said it discovered that company financial officers incorrectly put operating expenses in the company's capital account, hiding them from investors' view.

The revelations, investigations and court cases bringing the wrongdoers to justice are likely to take years and could hang over the market that long.

"This is bad for stocks," said Mr. Yardeni. "We underestimated the magnitude of the corporate accounting and governance crisis."

Despite the prospects for improved earnings and economic performance this year, Mr. Yardeni is advising clients to reduce their stock holdings. "The market is undervalued currently and is likely to remain undervalued for longer than we expected," he said.

Tom Carpenter, economist with ASB Capital Management, said the corporate scandals have ushered in a "regulatory reign of terror" as authorities respond to public pressure to punish the perpetrators.

Although everyone wants to see justice done, he said, the stigma on corporations and stocks is broad and is holding back investments that are badly needed to nurture the economic recovery, stifling growth the same way the regulatory crackdown after the savings-and-loan scandal did in the late 1980s.

The SEC and Justice Department already have taken the unprecedented step of shutting down a major audit firm, Arthur Andersen, after it was convicted of obstructing an SEC investigation of Enron earlier this month. Further harsh penalties are promised against Enron, its officers and dozens of other corporations under investigation.

Yet some members of Congress maintain that the agencies are not doing enough to stamp out the accounting problems.

"The SEC ought to hang its head in shame," said Sen. Byron L. Dorgan, North Dakota Democrat, at a hearing yesterday. "It's as if there's this carnival of greed, and they're sitting in their seat and eating popcorn."

Most analysts expect the WorldCom disclosure to prompt Congress to reconsider the mild accounting-reform bill that passed the House this spring and pass much tougher legislation aimed at closing accounting loopholes and cracking down on crime in the executive suites.

"Until somebody goes to jail, I'm not sure these people are going to get the message," said Sen. John McCain, Arizona Republican.

Others are hopeful that the damper the accounting crisis is putting on corporate expansion plans and the stock market will not last much longer.

"WorldCom continues the erosion of investors' confidence and adds to the fear of corporate corruption," said William E. Lauer Jr., chief investment officer for Chevy Chase Trust.

"It will take years for that confidence to come back, but it will not hold the markets down that long," he said. "Investors will realize that there are good, high-quality companies, and money will start flowing into them."

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