A Sad Chapter (11) In History
By Kathy Kristof
2002
may well go down as the year of the fallen giants.
A weak economy and
widespread accounting irregularities conspired to fuel 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 recently.
The number of public
companies filing for Chapter 11 Bankruptcy Court protection was
actually higher in 2001 (257 versus 186 as of Christmas 2002).
But when measured by assets, the 2002 filings bloated by big
names such as WorldCom Inc., Global Crossing Ltd., Kmart Corp.,
Conseco Inc., Adelphia Communications Inc. and UAL Corp. shattered
last year's record by 42 percent. In fact, five of the 10 biggest
bankruptcies of all time occurred in 2002.
The trail of wreckage
has left business experts nervously discussing the consequences
of such massive failures on the U.S. economy and investor confidence.
"Bankruptcies
have a ripple effect, touching suppliers, customers, banks and
other relationships," said Samuel Gerdano, executive director
of the American Bankruptcy Institute. The Alexandria, VA, group
is made up of attorneys, auctioneers, bankers, judges and others
involved in the Chapter 11 process.
In many ways, 2002
merely marked an extension of a trend that started in 2001. Over
the last two years, companies with $626 billion in assets have
filed for Chapter 11, according to 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 reorganization proceedings.
Meanwhile, the prognosis
for next year is equally bleak.
"We polled our
members earlier this month, and a healthy majority felt that
2003 would bring bankruptcies to another new record," Gerdano
said.
The surge in corporate
bankruptcies is largely blamed on the 1990s "bubble"
mentality that inspired banks and investors to pour money into
companies that didn't always have the soundest business plans.
That, in turn, encouraged some corporate managers to overextend
themselves as they grew and acquired new businesses.
Accounting scandals
at companies such as WorldCom and Adelphia also figured into
the debacle.
"We are in the
classic post-bubble period," said James A. Pressler, associate
economist at Northern Trust Co. "It's only exacerbated by
the fact that the WorldComs and Enrons the big, supposedly successful
companies were humbled overnight."
Going forward, economists
fear that U.S. debt levels remain troublingly high, with consumer
indebtedness and personal bankruptcy filings at or near postwar
records. Consumer debt is considered an important factor, even
in corporate bankruptcies, because consumer spending accounts
for two-thirds of economic growth.
If consumers aren't
financially healthy enough to head to the mall, corporate profits
are likely to languish. That has a negative effect on everything
from employment to the stock market. Indeed, some experts already
are singling out the retail sector as a potential hot spot for
bankruptcy filings next year.
"Most people don't
understand how each dollar spent in one industry trickles down
into other industries, affecting everything from plant services
to advertising," said Jack Kyser, chief economist at the
Los Angeles County Economic Development Corp. "I think this
recession has really put pressure on a lot of companies, particularly
small and mid-sized companies, that they were just not prepared
for."
Michael Brown, spokesman
for Consolidated Freightways Corp., which was once California's
biggest trucking company, can attest to 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 to
be too little, too late. Consolidated filed for bankruptcy protection
in September.
"We felt we were
doing a lot of the right things to take advantage of it when
the economy began to take off," Brown said, "but by
September it became apparent to us that we were not going to
be able to recover."
The only bright spot
on the horizon: Bankruptcies often soar at the tail end of an
economic downturn, noted 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," Schlossberg said.
"The problem is that this train has a long tail."
Editor's Note: ©
2003 Tribune Media Services, Inc. Los Angeles Times staff writer
Kathy M. Kristof, author of "Investing 101"
(Bloomberg, 2000), talks about a wide range of personal finance
issues, including the impact of new tax legislation and credit
cards, with examples and real-life stories to solidify her analysis.
She offers specific, actionable advice knowledge about handling
finances successfully. She welcomes Bull and Bear reader comments
and suggestions but regrets that she cannot respond individually
to letters or phone calls. Write to Personal Finance, Business
Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012,
or e-mail kathy.kristof@latimes.com.
