Stardate 20020717.1705

(On Screen): For the last few weeks, the stock market has been in the toilet. Even companies and groups generally thought to be relatively safe, and not related to areas where there have been high-profile failures, have been punished.

In the wake of the scandals at Enron and WorldCom, with accounting irregularities now announced at Merck, and serious problems with Vivendi, Xerox, and a felony conviction of Big-5 auditing firm Andersen, investors are looking at the world in a much different way now. Which company will be the next to suddenly admit that it's been lying through its teeth about its financial results for the last several years? Whichever it is, whoever happens to own stock in that company at the time is going to get butchered. Better to get out of the market and sit on cash. Cash doesn't lie.

The entire concept of a stock market is based on a degree of trust. Investors expect that the companies in which they buy stock will be honest about their financial dealings, so that the investor can make a rational decision about whether the company is worth owning a piece of. Now it's beginning to look as if Diogenes would have searched in vain in the headquarters of corporate America.

I think this is a deeper crisis than a lot of people are yet admitting. It's not just that people have lost faith in a few companies; they're losing faith in the entire idea of stock trading. In the past in situations like this, the best way for a company to regain the confidence of investors was to demonstrate good financial results. Now there's a deep suspicion that anyone with good results must have gotten them by cooking the books.

There's really only one way to actually regain credibility when someone thinks you're a liar, and that's by admitting bad news and owning up to it. If you take bad news and try to spin it, you prove that you're still in that old "make it look good, even if you have to lie to do it" mentality that got us into this fix.

Motorola would have been a good place to start. It just released its results for the second quarter of 2002, and it announced a profit of $48 million.

Or a loss of $2.3 billion. It depends on which version of the financial results you look at. The $2.3 billion loss (which is truly staggering) is GAAP, Generally Accepted Accounting Practices. The profit of $48 million is SATBNUTR: Sweep All The Bad News Under The Rug. Motorola's management went through the GAAP result and found enough things that they could pretend were one-time, non-recurring, exceptional which they could just sort of pretend didn't exist, and without all those they managed to turn a profit, they say.

The strong suspicion is that they would have found that profit no matter what. By hook or by crook, they were bound and determined to find enough they could pretend were nonrecurring to make the normal operations profitable.

The reality is actually even worse: they actually lost $3.4 billion on the quarter; but some of that gets offset by reduced tax payments (now or in future) to the tune of $1 billion. Since they did $6.7 billion in business in the quarter, it means they spent $3 for every $2 they took in as revenue.

A lot of that was "restructuring charges" due to laying off 7,000 people beyond what they had previously thought they would, and closing plants and writing off equipment and non-performing assets. Management says that this finishes it, and it will be clear sailing in future.

The problem is, that's what they said at the end of the last quarter, too.

The star of the show, as usual, was Moto's semiconductor group. GAAP result was a loss of $1.3 billion, more than half the total. Even under the SATBNUTR report it lost $79 million. In fact, it's the only major segment which still lost money under benign SATBNUTR rules. Apparently even that couldn't save it: