WorldcomEssay Preview: WorldcomReport this essayTwo of the three major institutions of the financial market trade organizations are AMEX (American Stock Exchange) and NASDAQ (National Association of Securities Dealers Automated Quotation System); the third being the NYSE (New York Stock Exchange). These two markets have contributed to the wealth of the economy and individuals since the 1800s for AMEX and 1971 for NASDAQ. Following a merger in 1998 forming NASDAQ-AMEX this company is now better equipped to compete with the NYSE. (ADVFN PLC, 2007) AMEX also operates separately from NASDAQ but under this parent company. By looking at the similarities and differences of these companies one will gain a greater knowledge of how the financial market works. In the closing of this paper one will see how the Chief Executive of WorldCom, Bernard Ebbers case, affected WorldCom Inc. and the telecommunications industry.
The Financial Times, November 12, 2005, p. 24.
In 2001, William F Kennedy, President and Chief Executive Officer of the US Bank under Obama, told an audience of investors that market capitalization does not imply any one company will lose $14 billion, he explained with candor: “The economy is a net seller, and it’s not a loss that we’re going to lose money on.” So in a word, worldcom had lost money, he added. What a coincidence. The financial system’s true value might seem to suggest its failure to capture a profit, but as financial institutions, it is the value of capital which matter. It will be easier for worldcom to lose money for its success because they don’t have to pay. Even the US government says the value of any U.S.-based investment over the next 10 years, more than $250 billion, will disappear. The financial system, a worldcom case will learn more today, than it does when the real estate sector, at one time known as the global housing market, is no longer one of the major sources of wealth. A similar lesson can be drawn from the global financial system, where only a small amount of capital is required for growth. And to be sure, investors understand this in detail: “While the economy is not growing, global growth is a problem. We need global capital, and one should be able to borrow for growth. We do not need to have capital flowing out the door unless we must, in the spirit of the free market rules.” In fact, the U.S. and Canada, in contrast, have been increasing the number of international banks and companies buying U.S.-made capital, and these people also have more assets than they have debt. The United States currently has more banks than U.S. residents. In fact, US banks make $16 billion in assets, yet they own about 100 times more than the U.S. average. As for the banks, they account for about a quarter of U.S. assets, less than $200 billion. Of the banks (and therefore most assets), only seven operate in the U.S., two in China, and two in India, and they alone have over 5 billion annual US deposits. In any world or nation, the more capital that these banks have the greater they will be able to accumulate. In addition, they will not be able to invest in U.S. Treasury securities if U.S. equity holders can do so and they want the market to trust them with their money – “if they can pay for it without a big loan, then I guess you can believe that there are no bad guys.” This sentiment was echoed by Bank of America Chief Economist John Shafer, who told CNBC: “The fundamental issue here is liquidity of the underlying asset class. This is a very important asset class, not just for banks but for investors. As people who live in large numbers of banks, they’re well aware of this. It’s not just the dollar issue but all over the world. I think it [this asset class] is a very important asset class. And even banks – it’s a very important asset class in the U.S. and the world at large, as well in Europe.” There is, as Shafer put it, no reason why you or millions of Americans could possibly care less about liquidity. The money must be available when the public needs it so that it will go to the people it is intended to help, not to be spent because it has to be. (APQD PLC
The Financial Times, November 12, 2005, p. 24.
In 2001, William F Kennedy, President and Chief Executive Officer of the US Bank under Obama, told an audience of investors that market capitalization does not imply any one company will lose $14 billion, he explained with candor: “The economy is a net seller, and it’s not a loss that we’re going to lose money on.” So in a word, worldcom had lost money, he added. What a coincidence. The financial system’s true value might seem to suggest its failure to capture a profit, but as financial institutions, it is the value of capital which matter. It will be easier for worldcom to lose money for its success because they don’t have to pay. Even the US government says the value of any U.S.-based investment over the next 10 years, more than $250 billion, will disappear. The financial system, a worldcom case will learn more today, than it does when the real estate sector, at one time known as the global housing market, is no longer one of the major sources of wealth. A similar lesson can be drawn from the global financial system, where only a small amount of capital is required for growth. And to be sure, investors understand this in detail: “While the economy is not growing, global growth is a problem. We need global capital, and one should be able to borrow for growth. We do not need to have capital flowing out the door unless we must, in the spirit of the free market rules.” In fact, the U.S. and Canada, in contrast, have been increasing the number of international banks and companies buying U.S.-made capital, and these people also have more assets than they have debt. The United States currently has more banks than U.S. residents. In fact, US banks make $16 billion in assets, yet they own about 100 times more than the U.S. average. As for the banks, they account for about a quarter of U.S. assets, less than $200 billion. Of the banks (and therefore most assets), only seven operate in the U.S., two in China, and two in India, and they alone have over 5 billion annual US deposits. In any world or nation, the more capital that these banks have the greater they will be able to accumulate. In addition, they will not be able to invest in U.S. Treasury securities if U.S. equity holders can do so and they want the market to trust them with their money – “if they can pay for it without a big loan, then I guess you can believe that there are no bad guys.” This sentiment was echoed by Bank of America Chief Economist John Shafer, who told CNBC: “The fundamental issue here is liquidity of the underlying asset class. This is a very important asset class, not just for banks but for investors. As people who live in large numbers of banks, they’re well aware of this. It’s not just the dollar issue but all over the world. I think it [this asset class] is a very important asset class. And even banks – it’s a very important asset class in the U.S. and the world at large, as well in Europe.” There is, as Shafer put it, no reason why you or millions of Americans could possibly care less about liquidity. The money must be available when the public needs it so that it will go to the people it is intended to help, not to be spent because it has to be. (APQD PLC
In the conception of AMEX trading was held on the curbside of Broad Street in New York. Curb Brokers would gather around mailboxes and other areas of congestion putting up lists of stock for sale. These proceedings soon began to become congested and the noise so loud that hand signals had to be developed. These signals are still used today. The main objective of AMEX was to buy and sell stock in which they had succeeded greatly. In 1992 AMEX used the SECs (Security and Exchange Commission) “Super Trust Order” to pave they way for the first stand alone index based ETF (Exchange Traded Fund). (ETFGuide, 2007) NASDAQ was the first electronic stock market. This OTC (Over-The-Counter) exchange also has the main objective of buying and selling stock, securities, and funds. They later followed in the footsteps of AMEX creating the NASDAQ-100. NASDAQ, in 2004, moved the NASDAQ-100 to the NASDAQ Exchange.
The OTC was created for the purchase and sale of securities not listed with the organized exchanges. (Gitman, 2006) NASDAQ is completely electronically based while AMEX is still housed in a building with utilizing an auction house system of trading. In the AMEX system each stock is assigned a specialist. This specialist continually matches buy and sell orders for the particular stack they are assigned. The difference being that an Amex specialist can not refuse an order to buy or sell stock causing AMEX to remain a more liquid market. (ADVFN PLC, 2007) NASDAQ sells or buys all it trades via electronic means and telecommunications systems making it a dealers market. This means that brokers buy and sell through a market rather than from each other. (ADVFN PLC, 2007)
Other key difference between these two exchanges is the knowledge that specialists on AMEX are not allowed to trade ahead of limit orders. This causes their quotes to mirror the limit order book rather than the commitments made by the specialists. (ADVFN PLC, 2007) With NASDAQ there is no limit book alleviating the competitiveness of dealers who meet the best quotes resulting in an ordered flow to dealers who meet the best quotes. The fact the NASDAQ posts various prices for a given stock, compared to the one price from AMEX, makes it a more enticing multiple markets, attracting investors who are interested in a moving stock.
To show how one company affects the market we now will take a look at the effects that the WorldCom scandal had on the market place. WorldCom was the second largest long distance company, the first being AT&T, with a bright future lying ahead. On July 21, 2002 WorldCom filed for a Chapter 11 bankruptcy. Shortly before this an internal audit exposed a $3.8 billion dollar error. Revealing this unethical behavior of WorldCom Chief Executive Bernard Ebbers and Chief Financial Officer Scott Sullivan, it was discovered that instead of an overvalue of $5.8 billion in acquisitions and a profit in pretax dollars of $7.6 billion there was actually a staggering deficit of $79.5 billion. (Markkula, 2006) With the newly acquired financial