Who's Watching the Watchdogs?
By Ben Stein /Special to TheStreet.com /01/31/2002
(Another great article on how corrupt the "system"
has become and how investors have been cheated and
stolen from. We are badly in need of accounting &
SEC reform. Someone also needs to come down on fat
cat & greedy CEOs. These people already make more
than 99.8% of all Americans, and yet they still want
more...and they lie and cheat to get it from the
rest of us. Winnick, Lay, Skilling, Kozlowski, etc -
their behavior is just disgusting and it appears,
obscenely common. Corporate Boards of Directors have
already proven how they are inept they are. Stein's
contempt and anger comes through clearly here at how
rampant the corruption runs at the upper echelons -
Who indeed is watching the watchdogs???? - Peter)
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). 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. |
