America's largest bankruptcies

September 18, 2008

Greed, arrogance, indiscretion and a large chunk of bad luck: this deadly concoction led to America's fourth-largest investment bank Lehman Brothers biting the dust and sending tremors across the financial world. With even the giants of this world unsafe from the uncertainties and complexities of a global economy, the questions that are uppermost in everyone's mind are: who will be the next to go bankrupt and when will this fiscal tempest subside? Frankly, no one knows for sure who will be the next to go belly up or when will the world economy return to normalcy. But then for Corporate America, bankruptcies or vagaries of uncertain economy are nothing new. Over the years, the world has been witness to many an irresponsible management policy and greed that wreaked havoc on 'super' companies that folded up. In the process, billions of dollars -- both investors' money and employees' pension -- went down the drain. So here is a list of the biggest bankruptcies to hit America in the last two decades. Read on. . . 1. Lehman Brothers Holdings Inc; $639 billion The Lehman Brothers bankruptcy, is without a doubt, the largest bankruptcy ever: the size is estimated between $613 billion and $639 billion! What began life as a general store set up by three German immigrant brothers to the United States, over the years turned into one of US's largest investment banks. The amazing story of Lehman Brothers' story started in 1844, when 23-year-old Henry Lehman, son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria. He settled down in Montgomery, Alabama, and opened a dry-goods store -- H Lehman. Later, when his brothers, Emanuel and Mayer, joined him the company changed its name to Lehman Brothers. The global financial-services firm, which did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking declared itself bankrupt on September 15, 2008. Why it collapsed? The fourth-largest investment bank in the United States, and one of Wall Street's biggest dealers in fixed-interest trading, was heavily invested in securities linked to the US sub-prime mortgage market. As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4. It was the exaggerated but misplaced confidence of Wall Street's longest serving chief executive officer, Richard Fuld of Lehman, that finally led to Lehman's demise.

Over 14 years, Richard Fuld, 62, turned a money-losing bond trading shop into a full-service investment bank. An international squash player, Fuld could not master the final stroke as he failed to keep the 158-year-old banking major alive. Fuld never changed. He remained the obstinate Lehman loyalist whose pride stood in the way of the firm. If he had sold out earlier, Lehman could have survived. Fuld earned a BA from the University of Colorado and an MBA from New York University's Stern School of Business. He started at Lehman in 1969. 2. Worldcom Inc; $103.91 billion Founded in 1983 as LDDS Communications, Worldcom became America's second-largest long-distance company and the largest handler of Internet data. It is also the US's second largst bankruptcy ever at $103.91 billion! WorldCom growth was fueled primarily through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998. On November 10, 1997, WorldCom and MCI Communications announced their $37 billion merger to form MCI WorldCom, making it the then largest merger in the US. On September 15, 1998 the new company, MCI WorldCom, opened for business. Later, in 2000, MCI WorldCom renamed itself 'WorldCom'. WorldCom, plagued by the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings, filed for bankruptcy on July 21, 2002. Why it collapsed?
y The company was found guilty of underreporting 'line costs' (interconnection expenses with other telecommunication companies) by capitalising these costs on the balance sheet rather than properly expensing them, and y Inflating revenues with bogus accounting entries from 'corporate unallocated revenue accounts'.

Wall Street referred to him as the 'telecom cowboy'. Worldcom CEO Bernard Ebbers became very wealthy from the rising price of his holdings in the company's stock. By 2000, WorldCom's stock declined and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others). Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls. Ebbers was finally ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNet Technologies, Inc. Beginning in 1999 and continuing through May 2002, the company (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford 'Buddy' Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom's stock.

On March 15, 2005 Bernard Ebbers was found guilty and convicted of fraud, conspiracy and filing false documents with regulators - all related to the $11 billion accounting scandal at the telecommunications company he founded. He was sentenced to 25 years in prison. The others, including , Sullivan were also found guilty of fraud and were served sentences. 3. Enron Corp; $63.39 billion Fortune named it 'America's Most Innovative Company' for six consecutive years. It was on the Fortune's '100 Best Companies to Work for in America' list in 2000. It was hailed by many, including labor and the workforce, as an overall great company, praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud. Enron Corporation, the Houston based energy giant was originally involved in transmitting and distributing electricity and gas throughout the United States. It remains US's third largest bankruptcy till date: $63.39 billion. The company developed, built, and operated power plants and pipelines. It owned a large network of natural gas pipelines which stretched ocean to ocean and border to border. Enron filed for bankruptcy on December 2, 2001. Why it collapsed? It was discovered that many of Enron's recorded assets and profits were inflated, or even wholly fraudulent and nonexistent. Debts and losses were put into entities formed 'offshore' that were not included in the firm's financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to take unprofitable entities off the company's books. 4. Conseco Inc; $61.39 billion From a small company set up in 1979, Conseco became one of the largest US home lenders and personal insurers by the late 1990s. Unfortunately, it collapsed under the weight of debts caused by it ambitious expansion and mounting bad loans. At $61.39 billion, Conseco filed for what is US's 4th largest bankruptcy petition. The Carmel, Indiana-based company has struggled since piling up massive debts in a 1990s acquisition binge under flamboyant founder and chief executive Stephen Hilbert, capped by a disastrous purchase in 1998 of loan firm Green Tree Financial. That deal exposed Conseco to a mountain of bad loans -- largely on mobile homes and manufactured housing -which worsened as the economy turned sour. Conseco piled on even more debt and made problems for itself in the late 1990s by aggressively accounting for gains from securitizing its loans. It later abandoned that practice under pressure from investors, which led to a restatement of several years' profits. That shook Wall Street's confidence in the company, and eventually led to Hilbert quitting in 2000.

The bankruptcy was filed to the United States Bankruptcy Court for the Northern District of Illinois on December 18, 2002. 5. Texaco Inc; $35.89 billion Founded in 1901 in Beaumont, Texas by Joseph S Cullinan, Thomas J Donoghue, Walter Benona Sharp and Arnold Schlaet upon discovery of oil at Spindletop, Texaco began its journey as the Texas Fuel Company. For many years, Texaco was the only company selling gasoline in all the 50 states of America. Its logo features a white star in a red circle (a reference to the lone star of Texas). On November 19, 1985 Pennzoil, another oil company, won a $10.53 billion verdict from Texaco. over the later's controversial acquisition of Getty Oil. It was the largest civil verdict in US history. To obtain the billions required to pay the verdict, Texaco sold 50 per cent of its interests in marketing east of the Mississippi and Texas and its three Gulf Coast refineries to Saudi Aramco. Texaco also withdrew from marketing gasoline in the Chicago area by selling its service stations and distribution facilities to Mobil in an exchange agreement. On April 12, 1987, Texaco filed for bankruptcy, but continued to function under protection of US bankruptcy laws. Texaco was an independent company until it merged into Chevron Corporation in 2001. The curreent CEO is David J O'Reilly 6. Financial Corp of America; $33.86 billion Not enough material is available about the reasons that led to its collapse. It filed for bankruptcy on September 9, 1988. 7. Refco Inc; $33.33 billion; Oct. 17, 2005, Founded in 1969 as Ray E Friedman and Co, Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts. Prior to its collapse, the firm had over $4 billion in approximately 200,000 customer accounts, and it was the largest broker on the Chicago Mercantile Exchange. The firm's balance sheet at the time of the collapse showed about $75 billion in assets and a roughly equal amount in liabilities. Refco entered crisis on October 10, 2005 when it announced that its chief executive officer and chairman, Phillip R Bennett had hidden $430 million in bad debts from the company's auditors and investors, and had agreed to take a leave of absence. Apparently, Bennett had been buying bad debts from Refco in order to prevent the company from needing to write them off, and was paying for the bad loans with money borrowed by Refco itself. Between 2002 and 2005, he arranged at the end of every quarter for a Refco subsidiary to lend money to a hedge fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group Holdings.

Bennett's company then paid the money back to Refco, leaving Liberty as the apparent borrower when financial statements were prepared. On October 20, Liberty announced plans to sue Refco. on October 12 Bennett was arrested and charged with one count of securities fraud for using US mail, interstate commerce, and securities exchanges to lie to investors. Refco filed for Chapter 11 bankruptcy on October 17, 2005. On July 3, 2008,Bennett was sentenced to 16 years in Federal prison