Searching for symptoms of Enronitis has become all the rage. "The one constant in the market is the herd mentality," says Mike Kinneally, chief investment officer at Bank of America Asset Management. "Misery loves company."
Tyco appeared to be a classic case. Within four weeks its share price halved, bond prices would drop by $6 and recover again within one day, and prices on the default swap went from as tight as Libor plus 115 basis points to L+1150, with the widest trade struck at L+875.
Enronitis simply provided an excuse. Such wild gyrations in prices were actually caused by decisions made by its executives and their advisors, Goldman Sachs, decisions which betrayed a fundamental misunderstanding of the changing focus of the markets to companies with huge debt loads and potential accounting irregularities.
The diversified manufacturer with interests ranging from fire alarms to financial services and undersea telecommunications systems to healthcare, had looked for shareholder value by expanding rapidly by acquisitions - making it just the sort of company that will face trouble in deteriorating markets. Tyco's debt load made matters even worse. The company had a total of $23 billion of debt at the start of the year, including $4.5