WorldCom Bombshell Hits Pension Stock, Bond Investments

July 1, 2002 ( - As the latest wave of accounting irregularities, misstatements, and alleged fraud were vetted last week, one couldn't help but be reminded of that famous quote from Senator Everett Dirksen of Illinois, "A billion here, a billion there, pretty soon you're talking about real money."

Of course, Senator Dirksen wasn’t talking about pensions, but by some estimates, WorldCom’s restatement cost some of the nation’s largest pension funds in excess of $1 billion – at least on an unrealized basis.

No Enron

Pensioners – current and future – may well take to heart a series of reassurances from those pension funds, to whom losses of hundreds of millions of dollars still constitute a small fraction of the total assets set aside to cover those liabilities. 

Of course, WorldCom is no Enron.  First off, while there are reports of alleged accounting irregularities at the telecommunications giant, there are no “raptors,” off shore sham companies, or arrangements built on layers of over-leveraged company stock.  On the other hand, for many institutional investors, WorldCom is more than just another technology stock gone bust. 

Bond Bust

Institutional investors appear to be just as exposed to the financial impact on WorldCom bonds.  Three bond rating agencies have slashed WorldCom’s debt ratings deeper into “junk” territory, citing the increased likelihood of default. WorldCom bonds have traded as low at 11 cents on the dollar.  The pension funds bought up large amounts of an $11.9 billion WorldCom bond offering in May 2001 – at the time, the third-biggest corporate bond issue ever (see Pension Funds to Sue Banks over WorldCom Bond Losses ).

Another noticeable distinction from Enron, most pension funds were describing their WorldCom related losses as “unrealized” last week.  Still, for pension funds, the stock and bond losses – realized or not – are adding up.  According to Reuters, those losses include:

  • $565 million by the $150 billion California Public Employees Retirement System (CalPERS)
  • $300 million by the $112 billion New York state retirement system 
  • $109 million by the $100 billion California State Teachers Retirement System (CalSTRS) 
  • $75.3 million by the $42 billion Washington State Investment Board

The State of Wisconsin Investment Board says realized losses on its $58.5 billion in assets reached $29 million on WorldCom bonds and $7.3 million on stock.

In addition, Michigan’s losses in its four pension funds totaled $116 million, and the Florida State Board of Administration lost $88 million on WorldCom stock and an undetermined amount on $90 million of bonds, according to Reuters.  Virginia’s retirement system has an unrealized stock loss of $44 million in indexed funds, while Oregon pensions have reported $63 million in unrealized losses, of which $25 million is in bonds.

Bomb “Crater”

WorldCom, the No. 2 US long distance telephone company, dropped its bombshell on US investors late last Tuesday when it disclosed nearly $4 billion in improperly treated expenses – a treatment that boosted its reported cash flow.  That reporting came at the direction of accounting engineered by its chief financial officer, Scott Sullivan, according to the firm.  Sullivan was fired last week in connection with the disclosures.  

Arthur Andersen LLP, which audited the company’s books during the period when the alleged fraud took place, has said it was misled by Sullivan, who “did not tell Andersen about the line cost transfers nor did he consult with Andersen about the accounting treatment.”  WorldCom fired Andersen earlier this year – and hired KPMG LLP after Andersen’s involvement with Enron.

Accounting experts generally seem to agree that while an intensive audit would likely turn up the kind of accounting that WorldCom allegedly engaged in (the WorldCom situation came to light after the firm’s new CEO ordered a financial review), most outside auditors don’t actually perform audits based on a presumption of wrongdoing. 

Meanwhile, the list of potential frauds, restatements, and inquiries remains daunting.  And, as with Enron, pension funds seem to be increasingly willing to seek recoveries for investment losses resulting from financial misdeeds in court.

See also It’s Official: Florida Sues Alliance Over Enron

See State of Litigation