Who's Watching the Watchdogs? ---another classic!
By Ben Stein
Special to TheStreet.com
01/31/2002 12:49 PM EST
As I write this, we are witnessing the cratering of yet another immense (or formerly
immense) New Age company. This time, it is Global Crossing (GX:NYSE - news -
commentary - research - analysis). I believe this is a scandal so much worse than
Enron that it deserves far more attention than it's getting. Here's why, point by
point.
1. It is a perfect example of a company that never
had a decent business model or a chance of
making a lot of money, but nevertheless raised a
fortune in the markets, had its stock hyped like
crazy by the underwriters and others, and became
a big and representative part of the bubble.
Global Crossing had a silly idea: that in a world of
zero profit margins in telcos, it could spend tens of
billions for a new telco and make money. Sparing no expense for hype, Global
Crossing sucked in a ton of money from investors. In a better world, analysts
would've been warning from day one that it stood a scant chance of ever making a
dime. That is, the rise and fall of Global Crossing is an object lesson in the utter
inability of analysts to spot an obvious loser.
I have some personal experience here because I was persuaded to buy a very
small amount of Global Crossing (against my better judgment) by the wild
enthusiasm of the analysts at a very big brokerage house. If a buyer as skeptical
as I am was persuaded, the hype was fantastic (although I blame myself for not
seeing through it, as I often do).
Who's Watching?
2. The accountants here were seemingly totally asleep at the switch. They allowed
Global Crossing to count as assets fiber-optic cable and the expense of laying it,
even when it was clear that the cable had almost no economic value.
Usual accounting rules require that if an asset has clearly lost its value, it should
be written down at once. A giant trans-Atlantic cable with no chance of making
money in a world ultra-glutted with fiber optic is a perfect case of an asset whose
value has become highly questionable.
Nonetheless, Global Crossing's auditors allowed the company to carry its cost as
an asset, thus giving investors the impression that it was (and is) solvent, when in
fact it was totally underwater (no pun intended) for at least 18 months. Even now, in
bankruptcy, Global Crossing is listing its assets as about $10 billion more than its
liabilities because it continues to carry that nearly worthless cable (and some
acquisitions) at the full price it paid for them.
Thus, Global Crossing is a perfect example of how auditors have failed to serve in
their watchdog role. I absolutely do not mean to tar all accountants with this brush,
because most do a good job, but all too many mistakes have been made.
3. By the way, those of us with longer memories than a day know how all this --
the Enrons and Global Crossings of the world -- happened. After getting sued (and
rightly so because of the Drexel and savings-and-loan debacles) and having to pay
out a few billion because of aiding and abetting fraud, some large accountants
persuaded Congress to pass the Private Securities Litigation Reform Act in 1995.
In a nutshell (and among many other provisions, none
of them good), this very largely relieved accountants of
the necessity of doing a straight count by making
shareholders' lawsuits against them for securities
fraud almost impossible to prosecute. Because there
had never been much threat to falsifying auditors from
a totally supine Securities and Exchange
Commission, their only danger came from private
class-action lawsuits by investors.
Once the accountants, their insurers in Connecticut and their pals in Congress
realized it was cheaper to persuade Congress to help them rather than to do their
work decently and honestly, it was "Katie, Bar the Door" for the accountants. They
could and did get paid billions for "consulting," which was all too often the brown
paper bag into which they got paid for allowing management to dupe the
shareholders and markets.
So if you want the genesis of these huge accounting disasters, you can look to
cost-benefit analysis by the accountants and insurers and terrible misconduct by
Congress. Global Crossing is an example of the legislative process gone horribly
wrong, with voters being betrayed for amazingly small amounts of cash into
campaign funds. Again, I want to make clear that there are legions of fine
accountants and fine accounting firms, even some of the big ones. But far too
many just bought their way out of responsibility.
Emerging From the Ashes
4. Gary Winnick, who founded Global Crossing, was a former Drexel player. He left
Drexel with hundreds of millions. Now he has taken close to three-quarters of a
billion dollars out of Global Crossing, while individual investors were often left with
nothing. True, he can say he sold for diversification purposes or tax purposes or
whatever he wants. He has good lawyers and PR people.
But at the end of the day, he's a billionaire out of the wreckage of a public
company, with that money coming from investors who trusted him to lead the
company he founded honestly and successfully. Clearly, he failed them while
making himself staggeringly rich. He owns a $90 million home described as the
most expensive home in America, while his investors were sometimes ruined.
This is sickening and even obscene. If he thought Global Crossing was such a
mess that he wanted to cash almost $750 million out of it before the fiber-optic
cable was even finished, in my humble opinion that suggests that he knew the
company wasn't a real operating entity but a financing vehicle only (or so it appears
to me). He by definition had to have known far more about it than the markets, and
he obviously profited hugely from that knowledge while ordinary investors, hyped
out of their minds, got shafted. To me, Winnick's cashing-out while his
stockholders withered on the vine is a perfect example of the betrayal of trust.
There are other issues as well, such as the involvement of major political players of
both parties in the management and looting of Global Crossing. But these have to
be developed by someone other than me, because I am friends with some of these
people and don't want to mention their names in print. But the sad truth is that
Enron is not the political scandal the media make it out to be. Politicians were not
bribed in Enron. I very much fear they were in Global Crossing, and further
investigation is a must.
It is all a very good lesson in the value of skepticism, diversification and general
wariness of analysts and highfliers. Far worse, it is a terribly discouraging story
about the failure of two major sentry groups -- many accountants and many in
Congress -- to act for anyone but themselves. Quis custodiet custodies? Who
watches the watchmen? Obviously no one. |
