The will to believe is what keeps markets going, until they go over the top
CHRISTOPHER FILDES
What a world-beating bezzle. It will go straight into the textbooks. Professors of economics will preach from it, to pupils who will have forgotten their lesson by the time the next bezzle comes round. That is the way it goes. Bezzles are cyclical. This one involves the $3.9 billion which was supposed to be in WorldCom's profits but, on a recount, turned out not to be. WorldCom's belated admission spooked the markets, and has set off a furious banging of stable doors and a torrent of preaching. Read all about bezzles in John Kenneth Galbraith's The Great Crash, his account of Wall Street's rise and precipitous fall in the 1920s. At any one time. says Galbraith, from the nation's banks and businesses, some money has gone walkies. The bezzle (his name for it) varies in size with the business cycle. In good times, when money seems to grow on trees, people can help themselves and get away with it. In bad times, trust dwindles, money is watched beadily and auditors are hawkish. The bezzle shrinks. No one at WorldCom, so far as we know, put his hand in the till, or tucked money away in the offshore entities that were so favoured at Enron. Instead the profit and loss account was dressed up so as to sustain WorldCom's favourite graph of an ever-rising share price. That suited the managers who were rewarded with salaries and bonuses and options — but it suited everyone, from shareholders to sharepushers, for just as long as it lasted. This general will to believe is what swells the bezzle and what keeps stock markets going, until, in the end, it drives them over the top.
The Lower Deep
THE bezzle at WorldCom relied on the oldest trick in the book. George Rae identified it in The Country Banker: 'If an adventure is showing a steady profit, but is enlarging with equal steadiness its debt to the bank, the probability is that outgoings which ought to be charged to revenue are being charged to capital instead. In this way the workings of the most disastrous concern can with ease and success be made to show a profit.' This was true of the Lower Deep Coal Mine, which appears in the lower depths of Rae's list of 'Securities which are not security'. It can often suit companies to capitalise their expenditure, and their auditors sometimes agree, which is why profits may be matters of opinion but cash, as bankers should know, is a matter of fact. Galbraith's classic dates back half a century and Rae was writing in the 1880s. The lessons are old ones, Only the pupils are new.
Gus in the room
ALL markets are markets in information, which is why the Treasury had the good habit of giving its aspirant mandarins a spell as the Chancellor's press secretary. The occasional lunch would go with it, and if they could cope with people like me, they could cope with most things. Thus the young Peter Middleton, who was press secretary to Anthony Barber and Denis Healey — a notable double — went on to be Permanent Secretary and nowadays is the chairman of Barclays. I first came across Gus O'Donnell when he was Nigel Lawson's press secretary. Now he in his turn is stepping up to the Treasury's top job, and at 49 still has plenty of time to chair a bank on his way through. He has already moved into 10 Downing Street and out again, rightly feeling that it was time to get back to a serious job, and is one of the few mandarins who speaks the same language as Gordon Brown, or at least can decode it. As an old Whitehall hand puts it: 'Gus will be in the room.' Neither of his predecessors could count on that. This Chancellor has split the press secretary's job in two, and tends to concentrate his fire on the Westminster lobby. He seems to think that he is assured of the markets' goodwill. I count on Gus to talk him out of it.
Salami tactics
ANOTHER slice off the top at Equitable Life, where policyholders who want to get out must now forfeit one-fifth of their shrunken values. A year ago I was deploring their plight: 'Their experience bears out the old maxim that the first loss is the cheapest.' First came a penalty for leaving, then a higher one, then a slice off the top and another penalty. Some of them suspected that leaving at this price might still be cheap. So it has proved. Their new board had to regain their confidence, and might have opted to be bold and to make one deep cut pay for all, or try to. Sentenced to suffer the death of a thousand cuts, they may prefer to save what remains of their skins,
Merde alors
CONNEX South East regrets to announce that your trains tonight will be delayed. The bailiffs are in — well, not yet, but Vivendi, which runs them, is struggling to stay on the rails, and in the driver's cab Jean-Marie Messier has been clinging to the dead man's handle. The French have flair, and few things can come unstuck so spectacularly as a French national champion. Credit Lyonnais, the state-owned bank that tried its luck in Hollywood, ended up £10 billion in debit. Vivendi, the water company with ideas audessus de sa Aare. went to all stations to Catford, and also to Hollywood and many other glamorous destinations, such as television studios and mobile telephone networks, but might just as well have stayed in its primary business, which was sewage. Even the French sport of chortling at the excesses of Anglo-Saxon capitalism may need to have its rules rewritten. France Telecom was slightly privatised, and has since lost fourfifths of its market value, mostly because it bought Orange, which, predictably enough, turned out to be a lemon.
On the windy side
HEREs an offer I can refuse. This is the latest prize draw: 'If you fail to return your £6,500 claim form below, you will be saying "I can't use any more money."' Send in your cheque with the form, of course. I hear sad tales of gullible people who do. They get lured into sending bigger and bigger cheques in search of the ever-elusive cash prize. The Department of Trade and Industry now plans to warn us that offers like these are not all that they seem. They are, I suppose, on the windy side of the law, but that is the best that can be said for them. Bin them.
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