BANKRUPTCIES Accounting scandals, economy turned 2002 into a record year

A poll suggests that 2003 could be even worse.
LOS ANGELES TIMES
The year 2002 may well go down in history as the year of the fallen giants.
A weak economy and widespread accounting irregularities fueled what by one measure has been the biggest year ever for corporate bankruptcies, with the value of 2002 filings soaring to a record $368 billion as of Dec. 25, BankruptcyData.com reported.
The number of public companies filing for Chapter 11 bankruptcy protection was actually higher in 2001 -- 257 versus 186 so far this year. But when measured by assets, the 2002 filings -- bloated by big names such as WorldCom Inc., Global Crossing Ltd., Conseco Inc., Adelphia Communications Inc. and UAL Corp. -- shattered last year's record by 42 percent.
That left economists and business experts nervously discussing the "ripple effect" of such massive failures on the U.S. economy and investor confidence.
$626 billion in assets
Over the last two years, companies with $626 billion in assets have filed for Chapter 11, said Christopher Stuttard, editor at BankruptcyData.com, a Boston-based Web site that tracks corporate filings. That dwarfs the cumulative asset total of all the corporate bankruptcy filings logged during the previous decade, although it's worth noting that assets listed in court filings often bring pennies on the dollar when they are sold during bankruptcy proceedings.
"This has been the biggest two years ever," said Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va. "Bankruptcies have a ripple effect, touching suppliers, customers, banks and other relationships."
The prognosis for 2003 is equally bleak, experts said.
"We polled our members earlier this month, and a healthy majority felt that 2003 would bring bankruptcies to another new record," Gerdano said.
'Bubble' mentality
The surge in corporate bankruptcies is largely blamed on the 1990s "bubble" mentality that inspired banks and investors to pour money into companies, which encouraged corporate managers to leverage company assets to grow and acquire new businesses, noted James A. Pressler, associate economist at Northern Trust Co. Accounting scandals at companies such as WorldCom, Adelphia and Enron Corp. -- briefly the biggest U.S. corporate bankruptcy ever when it filed in December 2001 -- also figured in the debacle.
"We are in the classic post-bubble period," he said. "It's only exacerbated by the fact that the WorldComs and Enrons -- the big, supposedly successful companies -- were humbled overnight."
Michael Brown, spokesman for Consolidated Freightways Corp., which was once California's biggest trucking company, said that although the company began to falter two years ago, it had positioned itself to prosper from the predicted economic recovery. But the upturn proved too little too late. Consolidated Freightways filed bankruptcy in September.
"The trucking business is a leading economic indicator," Brown noted. "We felt we were doing a lot of the right things to take advantage of it when the economy began to take off, but by September it became apparent to us that we were not going to be able to recover."
A bright spot
The only bright spot on the horizon: Bankruptcies often soar at the tail end of an economic downturn, said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco. That could mean that the worst is over, even if there are still some bad times to come.
"Bankruptcies are more the caboose than the engine. The problem is that this train has a long tail," Schlossberg said. "Layoffs, even among companies that are surviving, are higher than they would normally be at this point in the cycle. The stock market, which usually leads the economy, is still adrift. Companies are still shell-shocked."