U.S. markets continued their roller-coaster ride Monday following WorldCom's declaration of bankruptcy late Sunday. The biggest bankruptcy in U.S. corporate history is adding to the woes of the beleaguered technology sector.
The Dow Jones industrial average closed down 235 points at 7,784, its lowest level since October 1998. The broader Standard and Poor's 500 index dropped almost 28 points. And the technology-weighted Nasdaq composite index lost about 37 points.
After a brief midday rally, all three indices plunged. Analysts attribute the sell-off to the ripple effect of WorldCom's formal declaration of bankruptcy, its impact on lenders and creditors, and a continued unraveling of investor confidence.
WorldCom declared more than $41 billion in debt, $10 billion more than previously estimated. At a news conference in New York the company's new chief executive, John Sidgmore, said bankruptcy was the best way for the corporation to begin rebuilding and pay employees and creditors. "I regret that we are in the position we are in today," he said. "We fought hard and frantically to avoid this but ultimately the board of directors decided that taking this action was the very best way to help the greatest number of people."
The company says it has more than $107 billion in assets. But many Wall Street analysts say that if the company tried to sell its assets in today's depressed market, the figure would be reduced to about $15 billion.
Analysts do not expect the bankruptcy to affect WorldCom's 20 million customers. But they express concern about the corporation's ability to pay its vendors and creditors.
Scott Cleland, head of the independent research firm Precursor Group, says the latest WorldCom news also contributed to the continued slide of telecommunications stocks. "It really is creating a suction that is pulling down the rest of telecoms because by law in the telecommunications act everyone is interconnected with everyone else," he said. "Internet means that everybody's connected. So WorldCom's woes are passed on to everybody else."
Mr. Cleland says Wall Street is also worried that WorldCom's efforts to restructure will lead to price wars among competitors, further weakening the telecommunications industry. "When somebody gets out of bankruptcy, they want to stabilize and cutting prices is one way to do that which then adds to a price war and adds to the woes of everybody else."
Among the few bright spots on the opening day of the trading week were cosmetics and distillers and brewers. Price increases and a new low-carbohydrate beer scheduled to go on the market in September are pushing up the price of brewers' shares, probably with a little help from the intense heat being experienced across much of the United States.
And the bond market appears to be benefiting from the turmoil. PIMCO, the biggest bond fund, says it has nearly doubled its assets of two years ago to $60 billion.