- The Washington Times - Tuesday, January 18, 2005

Regarding the strategic and economic health of the nation, large slices of the U.S. government appear to be in denial. Reportedly, the White House wants no more bad news about either.

To get around this instinct to see the world as we would like it to be, not as it is, suppose that the government were a corporation — say USA Inc. — publicly traded on world stock markets. Suppose that financial analysts were completing year-end reviews of USA Inc., before the corporation’s quadrennial general meeting on Jan. 20. What picture might the analysts draw? First, analysts would note that USA Inc.’s management has based future corporate success on three bets. It has bet that long-term corporate growth will only be stimulated by taking on substantial debt. It has bet that pension reform must be the top internal priority. It also has bet that the danger from a foreign competitor warranted an expensive and very hostile takeover.

USA Inc.’s total assets number many tens of trillions of dollars. But, to assure future growth, huge amounts of new debt were purposely incurred. USA Inc. spent about $600 billion more than it took in last year, including off-budget expenses not shown on balance sheets, some for the hostile takeover and some for raising shareholder dividends through tax rebates.

USA Inc.’s trading imbalances between imports and exports hit record deficits and raised last year’s combined debt to over $1 trillion of operating loss. For the short term, this is sustainable. The serious dilemma is who has deep enough pockets to finance these enormous debts and deficits that loom for the foreseeable future, and what will that mean for long-term corporate health.

Liabilities are also alarming. Health and pension plans are underfunded by tens of trillions of dollars. The CEO has made pension reform his top priority. That requires borrowing possibly a trillion dollars to cover transition costs. Meanwhile, the most dangerous financial wolf closest to the sled, USA Inc.’s heath plan, has been deferred.

In 2003, USA Inc. engineered a hostile takeover of a Middle East consortium, Saddam Systems. Top management was so convinced of the explosive danger of the rival’s main asset to USA’s future that the takeover was tantamount to corporate survival. Hundreds of billions of dollars were spent; more will be. Yet, the basis for the takeover proved wrong. The explosive asset simply was not there. A second flaw has now disrupted the original business plan.

The consortium was to become an independent subsidiary. Management was to revert back quickly to local executives whose business sense corresponded with USA Inc.’s. That did not work either. As a result, hundreds of thousands of USA Inc. personnel are now stationed throughout the old empire to put down a workers’ revolt by former employees. Strikes, wholesale destruction of corporate property and outright violence against current management have become common. There is rumor USA Inc. is planning a hostile takeover of a neighboring competitor — Assad Ltd. — in order to protect its investment in Saddam Systems.

USA’s directors are another interesting topic. The board, so far, exercised little oversight of management’s bets about debt and the takeover. Pension reform may prove different. The board is large, with 535 individuals, often elected for reasons eccentric to managing the company. Indeed, many directors have interests in direct conflict with the company and regularly flout them. Once elected, and assuming they do not offend management, directors by and large serve for as long as they wish.

Oversight is exercised in accordance with the idiosyncrasies of the directors and not always with shareholders’ interests in mind. There is no central audit authority as required for all other public companies by the Sarbanes-Oxley Law, passed two years ago in the wake of corporate scandals on Wall Street and in board rooms of Enron, WorldCom and other now-fallen giants. In fact, the board of USA Inc. uses some 50 to 100 different audit committees and subcommittees, each with limited jurisdiction and authority. And the CEO is not bound by any rule or regulation to certify, as his private-sector colleagues must, the accuracy of balance sheets, budgets and financial data.

So what can analysts and the public do? The answer, aside from hoping the three bets pay off, is very little. In the real world, as directors and bankers for Enron and WorldCom have learned the hard way and are paying dearly out of their own pockets, imposing accountability or extracting penalties for misjudgment on USA Inc. —in either this make-believe account or otherwise — is virtually impossible. Perhaps if it were, the State of Union, as seen in corporate terms, could be re-mananged and re-engineered to the greater good of shareholders, creditors and citizens.

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