This week in financial history is a parade of bad news and scandals for the most part. The last decade in particular has been rich with examples of accounting trickery and outright corporate robbery. We'll look at a few of those stories that occurred in this week. (Missed last week's article? Check out Wall Street History: Disney, Kodak And Astor.)

IN PICTURES: Biggest Stock Scams

Dow 14,000
The acceleration of the DJIA was on display when it broke the 14,000 barrier on July 19, 2007 - a mere four months after breaking the 13,000 barrier. One thousand points in four months worried some people, as the last such acceleration was a 1,000 point jump between March and May 1999. In both cases, the acceleration was a direct product speculative bubbles and the end came within a year. There is always a sense of excitement when the Dow breaks new ground, but an accelerating Dow has also become an indicator of just how much "irrational exuberance" is moving the market.

$4 Billion Lost In the Wash
On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy. This move came a month after the company disclosed it had inflated profits by nearly $4 billion through deceptive accounting. Worldcom was realizing its profits every quarter, but spreading its debts over decades.

Coupled with this liberal interpretation of accounting rules was a liberal hand with executives. The company granted sweetheart loans to their management and companies involved with management to the tune of hundreds of millions. The $4 billion restatement was eventually realized as an $11 billion dollar fraud - and it sunk the company. With $107 billion in assets, Worldcom was the largest U.S. bankruptcy ever. Since then, it has been surpassed by the $639 billion bankruptcy of Lehman Brothers in 2008. (Want to learn more? Check out Case Study: The Collapse of Lehman Brothers.)

A Free Yuan?
On July 21, 2005, China announced that it was dropping its peg to the U.S. dollar in favor of a floating rate based off of basket of currencies. The yuan (RMB) had been pegged around 8.28 to the dollar since 1994. However, China's focus on a gradual revaluing has meant such a slow readjustment that, five years down the road, we are still waiting for the RMB to take flight.

An International Conspiracy
On July 22, 1944, the Bretton Woods conference in New Hampshire created the International Monetary Fund. The IMF was intended to create an international system of stabilizing currencies to make international trade work better. Bretton Woods also established the dollar as the international standard and gave America powers to dictate international finance. The fixed rates of currency built into Bretton Woods quickly proved troublesome, as have all attempts to impose a static system on international finance.

Bretton Woods collapsed in stages from the '60s on, but the IMF remains. Its continued operations have proved controversial as it seems less ready to support international free trade than it is to provide support to failing dictatorships that make token gestures towards capitalism. And, after all, free trade is something that occurs naturally when legislative barriers are lowered, not when a supranational organization adds more rules to the mix.

Freddie's Birthday
On July 24, 1970, Freddie Mac (Federal Home Loan Mortgage Corp) was signed into existence by Nixon to keep money flowing to mortgage lenders by widening the secondary market for mortgage loans. This strategy was meant to support homeownership and the construction of more rental housing. Freddie Mac joined Fannie Mae to add some more competition to the market.

Both companies became GSEs - companies held by private shareholders but designed to carry out a public mandate. Unsurprisingly, their government mandate came with an unstated U.S. backing to the debts they incurred carrying out the mandate. In 2008, this backing became explicit as Freddie and Fannie both entered conservatorship under the FHFA.

Brotherhood Gone Bad
On July 24, 2002, The SEC filed charges against the Rigas family for their part in bringing down the bankrupt cable giant, Adelphia. The name Adelphia uses a Greek word meaning, "brotherhood," and it was apt for a company where almost all the top positions were held by members of John Rigas's family. The company granted $2.3 billion worth of off-balance sheet loans to Rigas family members - a staggering figure for a company already heavily indebted.

In addition to the loans, many of the company's purchases, office furniture to car leases, were made from businesses owned by Rigas family members. Many of these purchases struck the shareholders as overpriced, meaning the Rigas family was milking wealth out of their own company for personal gain. This self-dealing was compacted by the fact that the company inflated the number of cable subscribers, essentially making the modest operating income a lie.

Earnings had to be restated three years back and the controversy forced John Rigas to step down as CEO. John, Michael, and Timothy Rigas were arrested and paraded in front of the media in a high-profile perpwalk, but only John and Timothy Rigas were actually jailed. In the eyes of the shareholders, Adelphia's brotherhood turned out to be one of thieves rather than a founding family with their business's best interests at heart. (What other old scams are due for a comeback? Check out 5 Forgotten Financial Frauds.)

That's all for this week in financial history. Next week we will celebrate an important birthday, lament CEO compensation and much more.

Catch up on your financial news; read Water Cooler Finance: Goldman Fined, Financial Fixes And Apple's "Apology".

Related Articles
  1. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  2. Economics

    Lehman Brothers: The Largest Bankruptcy Filing Ever

    Lehman Brothers survived several crises, but the collapse of the U.S. housing market brought the company to its knees.
  3. Economics

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  4. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  5. Stock Analysis

    The Top 5 Technology Penny Stocks for 2016 (QTM,AMKR)

    Discover why the technology sector is vital to investors, and learn more about five of the most promising technology penny stocks for investors in 2016.
  6. Investing

    2 Opportunities Amid Today’s Market Volatility

    As you prepare your portfolio for the market volatility ahead this year, here are a few investing ideas to consider.
  7. Economics

    Davos 2016, Day 1: No Crash, But Robots Are Taking Over

    Lagarde says chill out, Biden wants to rescue the middle class.
  8. Economics

    A Brief History of International Trade Agreements

    Since the mercantilist era, world trade has become increasingly multilateral, but since WW2 there has been a definite rise in regional trade agreements.
  9. Markets

    What Saudi-Iranian Tensions Mean for Oil Prices

    The recent break in diplomatic relations between Saudi Arabia and Iran adds complications to the already chaotic environment of Middle East geopolitics. 
  10. Investing

    India: A Bright Spot in Today's Global Investment Landscape

    India, the best performing economy of 2015, has all it takes to maintain high growth momentum and ensure high returns for investors in the future.
RELATED FAQS
  1. Does working capital include stock?

    A certain portion of a company’s working capital is generally composed of earnings; however, current short-term assets that ... Read Full Answer >>
  2. What are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
  3. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  4. What is the difference between wash trading and insider trading?

    Wash trading is an illegal trading activity that artificially pumps up trading volume in a stock without the stock ever changing ... Read Full Answer >>
  5. What are the advantages and disadvantages of the International Monetary Fund?

    Established following World War II to help with post-war recovery, the International Monetary Fund (IMF) serves as a lender ... Read Full Answer >>
  6. How did Enron use off-balance-sheet items to hide huge debts and toxic assets?

    Prior to its infamous accounting scandals and collapse, Enron used off-balance-sheet special purpose vehicles (SPVs) to hide ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center