NYT -- Even the Smartest Money Can Slip Up
December 30, 2001
Even the Smartest Money Can Slip Up
By RIVA D. ATLAS
"The more intense the craze, the higher
the type of intellect that succumbs to
it."
Benjamin Anderson,
"Economics and the Public Welfare," 1949
The year just ending has been painful for most
investors. It has probably hurt even more for
some big names who achieved fame on Wall
Street for being a bit smarter than the average
guy.
If 2000 was the year when lucky young
Internet millionaires lost it all, 2001 was the
year when the smart money looked a lot less
smart. Many investors whose names have for
years graced the Forbes 400 list of the world's
richest people lost hundreds of millions, if not
billions, of dollars.
Many of the superrich, in fact, got into trouble
the same way so many little guys do: they got
carried away by an investment fad at its very
top, making ill-considered deals at the height of
a market mania in 1999 and 2000 whose flaws
became apparent as the economy softened.
Others failed to diversify, or neglected to take
profits in good times, holding on too long as
highflying stocks plummeted to the single
digits in price. And many who controlled
companies were slow to cut back on debt
when times were good.
Though it's painful for any investor to nurse
losses, it's even more embarrassing for these
investors — people like the Bass brothers of
Texas and Paul G. Allen, the Microsoft
(news/quote) co-founder, and Craig O.
McCaw, the cellphone pioneer — whose
humiliation is often public.
One such investor, Abraham D. Gosman, a
real estate and health care entrepreneur whose
businesses have fallen on hard times — but
who is hardly a household name — filed for
personal bankruptcy protection in March. Soon
after, he was mentioned by Senator Herb Kohl,
Democrat of Wisconsin, as a deadbeat debtor
who had shielded assets from creditors.
Two companies that Mr. Gosman once ran —
Innovative Clinical Solutions, which provides
support services to health care companies, and
CareMatrix (news/quote), which operates
housing for the elderly — had filed for
bankruptcy in 2000. Proposing an amendment to the bankruptcy reform bill, Mr.
Kohl said Mr. Gosman, once a member of the Forbes 400, had personal debts of
more than $233 million but, thanks to favorable debtor laws in Florida, was
hoping to hold on to his 64,000-square-foot mansion in Palm Beach. Mr. Gosman
has valued the property at $40 million to $50 million, according to a recent court
filing. A lawyer for Mr. Gosman did not return calls.
Most of the other centimillionaires or billionaires who got into trouble this year
did not fall as far as Mr. Gosman, proving again that the rich do differ from
everyone else. Many still seem to be quite wealthy — though it is difficult to
determine exactly where they stand. The rich are notoriously private and quick to
punish advisers who do not maintain strict confidentiality about them. Virtually
every money manager interviewed for this article declined to comment on the
record, though some willingly described the behavior of customers.
"These guys are deal junkies," said one Wall Street investment banker who asked
not to be identified because some of his clients were suffering. "But it's not like
they bet their last nickel or anything."
The fate of the Enron Corporation (news/quote) provides one example. As it
plunged into bankruptcy a few weeks ago, employees were left largely without
pensions because the company's 401(k) plan had invested heavily in Enron stock.
But the Belfer family of New York, one of the largest individual shareholders,
with stock once worth some $2 billion, retains substantial real-estate assets that
cushion the blow.
Paul G. Allen, who founded Microsoft with Bill Gates but left the company years
ago, also had considerable setbacks in his investment portfolio this year. But he
still ranked third on Forbes magazine's survey of the rich, published in October,
with a net worth of $28.2 billion.
Mr. Allen suffered big losses on his stake in RCN, a telecommunications
company. In February 2000, he invested $1.65 billion in RCN, taking a stake in
the form of preferred stock convertible into 26.6 million RCN shares. Today, the
stake is worth $79 million.
Fortunately for Mr. Allen, his nest egg includes some 138 million shares of
Microsoft, worth almost $9.4 billion. A spokesman for Mr. Allen's investment
firm, Vulcan Ventures (news/quote), declined to comment.
Mr. Allen's debt status is unknown. But some of these financiers — like
overextended individuals struggling to pay their credit card bills — simply took
on too much debt during the good times of the last decade.
Just last month, chemical companies controlled by Jon Meade Huntsman, a
prominent donor to the Republican Party whose son is a deputy United States
trade representative, announced that they could not make interest payments on
junk bonds due this month and in January. The companies, which include the
Huntsman Corporation and Huntsman Polymers, carry more than $2 billion in
debt and have been hit by rising costs, a result of industry overcapacity and a
spike in energy prices, particularly natural gas, in 2000 and early 2001.
Mr. Huntsman will have to offer some concession to bondholders. That may dent
his net worth, which Forbes estimated at $3.8 billion. It could also put a crimp in
his considerable donations to charity. A spokesman for Mr. Huntsman's
companies said he had donated $350 million over the last five years, largely with
profits from his chemical companies. Most of that money went to a cancer
research center he formed three years ago.
Dennis R. Washington, who made his fortune in the shipping, mining and railroad
industries and who rescued the construction giant Morrison Knudsen from
bankruptcy in 1996, suffered, too, after his Washington Group International, as
Morrison Knudsen is now known, filed for bankruptcy this year.
Mr. Washington, who was recently worth $1.6 billion, according to Forbes,
stumbled after his company acquired a division from Raytheon (news/quote) in
2000. Shortly after the deal closed, the Washington Group said Raytheon had
overstated the division's assets and understated its liabilities. (The Washington
Group sued Raytheon but has since settled the suit.)
The acquisition ended up costing the Washington Group, which had taken on
$1.2 billion in debt last year partly to finance the deal, twice as much as
expected, said Joel Levington, an analyst at Standard & Poor's.
"They wanted to take a stab at becoming one of the top-tier construction
companies in the United States," Mr. Levington said. Instead, Mr. Washington
suffered a rare setback.
Terrence Dwyer, a junk-bond analyst at KDP Investment Advisors, a research
firm in Montpelier, Vt., said, "Dennis Washington is a respected entrepreneur and
a really bright guy." But this latest deal was clearly a mistake, Mr. Dwyer said. "I
think this was an overreach."
A spokesman for the Washington Group, Brent Brandon, said Mr. Washington
had been "fighting mad" about the outcome of the Raytheon acquisition. Mr.
Brandon said, however, that the company's bankruptcy filing was hardly a
personal disaster for Mr. Washington.
Though Mr. Washington lost the $200 million his shares were worth before the
problems with the Raytheon acquisition were disclosed, he made at least that
much this year among his other investments, Mr. Brandon said. "Basically, his
net worth went sideways," he said.
Nor has Mr. Washington given up on the company. He reached an agreement
with creditors that gives him options for 10 percent of the company's stock and
could ultimately result in his buying a stake of 40 percent in the Washington
Group, which should emerge from bankruptcy protection early next year.
Another longtime billionaire and prominent political donor, Carl H. Lindner, 82,
who made his fortune in the 1970's and 80's in insurance and other investments,
was hurt this year when his Chiquita Brands, the banana exporter, filed for
bankruptcy protection. Mr. Lindner had expanded Chiquita's business
aggressively in anticipation of increasing sales in Europe. But soon after the
expansion, the European Union enacted import restrictions.
Mr. Lindner's Chiquita investment is not a majority of his net worth, but the year
has also been rough for his insurance company, the American Financial Group
(news/quote), which faces losses related to asbestos claims and the World Trade
Center attacks.
More than anything else, the treacherous telecommunications sector brought
down the wealthy. Troubles in telecommunications, which ranked second only to
the Internet in late-1990's hype, inflicted losses on several big investors who had
no previous experience in the industry but who were attracted to the big leaps
that telecom stocks were making in 2000. Other investors, like Craig O. McCaw,
who made his fortune in cellular phones but lost billions recently on two
telecommunications start-ups, should perhaps have been able to see the market
overcapacity. But Mr. McCaw and others seem to have been persuaded that they
had stumbled upon the next big thing — one that had no bounds.
In theory, these investments in telecommunications, unlike many of those in the
Internet, were backed by tangible assets that could be sold if necessary for at
least the value of the investors' original stakes. "People thought that if you put
hard assets into the ground, at the very least you'd get your money back," one
investment banker said.
In reality, there were so many telecommunications start-ups that the supply far
exceeded the demand. One company, Viatel, a seller of phone and data services,
had investors like Thomas O. Hicks, an owner of the Texas Rangers and
chairman of the leveraged-buyout firm Hicks, Muse, Tate & Furst. Viatel filed
for bankruptcy in May and could not muster any worthwhile bids when it tried to
auction its assets in August.
To financial historians and others, the fact that so many smart people were
blindsided following the crowd is not surprising. Rich people are tempted, too.
They see huge profits being made by other mortals and want in on the fun.
"If you look through history, after periods of great wealth creation, creative
destruction happens," said one money manager about the big telecom losses
suffered by some big names. "It makes sense that the people who did the best
will be the most undisciplined. You get lulled into a sense of complacency by
your success."
James Grant, publisher of Grant's Interest Rate Observer and a persistent market
bear, had a similar take. "So thick in the air was the pixie dust of the new
economy that everyone breathed it in," he said. After a bull market of more than
20 years, he added, "even smart people were programmed to suspend belief."
Sid Richardson Bass and Lee Marshall Bass are another example. In the 1980's,
these brothers, based in Fort Worth, became legends thanks to their savvy
investments in beaten-down stocks like Walt Disney.
But after gazing at the much larger returns being earned in technology and
telecommunications, the Basses suddenly began to buy stakes in highfliers like
NTL Inc. (news/quote), a communications services company, whose stock has
fallen from nearly $50 a share in October 2000 to just 93 cents on Friday, and
GlobalStar Telecommunications Ltd., a satellite telephone concern that suspended
payments on its long-term debt in January and sells for 17 cents a share.
The investments were made after Sid Bass, who for years had largely delegated
his investments to others, decided to take a more active role. "Sid was feeling
kind of out of things," said one investor close to the family.
In September, to cope with a cash shortage, the Basses sold a 6.4 percent stake
in Disney for $2 billion. A spokesman for Mr. Bass declined to comment.
Speculation by sophisticated investors and financiers is hardly unprecedented: big
names in business were crushed in the 1920's, too. William C. Durant, a founder
of General Motors (news/quote), left that company in disgrace in 1920 after
losing a fortune in stock speculation. Apparently unchastened, Mr. Durant lost a
second fortune in the markets in the 1929 crash.
"He assembled G.M., but he apparently didn't have superior insight into the stock
market," said Martin Fridson, chief strategist in the high- yield bond department
at Merrill Lynch (news/quote). "Someone can have a particular insight into an
industry or investment specialty, but that talent is not necessarily transferable."
Initially, the principals of Hicks, Muse, for example, made a fortune in leveraged
buyouts in industries like food and radio and television.
But over the last few years, intense competition in the leveraged- buyout world
forced Hicks, Muse to venture into areas crowded with other investors. In 1998,
it teamed up with Henry R. Kravis and his partners at Kohlberg Kravis Roberts
and paid $1.6 billion for Regal Cinemas, one of several theater chains acquired by
buyout firms in the late 1990's. All of them opened theaters when movie
attendance was shrinking. Regal filed for bankruptcy in September, and Hicks,
Muse is likely to lose all of its investment in the company.
Then, at the peak of the market in late 1999 and early 2000, Hicks, Muse
invested $1.3 billion in six publicly traded telecommunications companies: Globix
(news/quote), ICG Communications (news/quote), RCN, Rhythms
NetConnections, Teligent and Viatel. Four of them — Viatel, ICG, Rhythms and
Teligent — filed for bankruptcy this year. Just last Thursday, Globix said it was
considering a bankruptcy filing, as well. RCN's shares trade for less than $3 a
share.
"What did Hicks, Muse know about telecommunications?" one analyst asked.
Clearly, not enough. A spokesman for Hicks, Muse declined to comment,
although Mr. Hicks has promised investors that the firm will return to its original
strategy.
The successes of some of these investors in other industries make them reluctant
to give up, even when the market turns against them.
Over the last two years, Forstmann Little, which is led by Theodore J.
Forstmann, has invested $2.5 billion in two struggling telecommunications
start-ups: XO Communications (news/quote) and McLeodUSA (news/quote). But
in early December, even after their stocks fell to less than $1, Forstmann Little
announced plans to invest more in both companies. It will put $400 million more
into XO and is offering to buy McLeod's commercial-directory business for $535
million, convert its $1 billion in preferred stock into common stock and invest
$100 million more in McLeod common shares.
The investment represents a substantial percentage of the assets managed by Mr.
Forstmann's firm, other investors said. "What is he trying to prove?" one money
manager wondered.
A spokesman for Mr. Forstmann said that "in both cases, you have sound
businesses with too much debt" and that Mr. Forstmann would be increasing his
investment only after the companies reduced their debts.
For some investors, there's no shame in setbacks. Last month, Donald J. Trump
— eyeing the depressed economy and potential new rivals after New York
passed a law expanding legalized gambling — asked holders of junk bonds issued
by his three Atlantic City casinos to renegotiate the terms of the debt, either
cutting the interest rate or delaying when the bonds are due.
In an interview last week, Mr. Trump said extraordinary circumstances called for
extraordinary measures, adding that bondholders understood that "the world has
changed since Sept. 11." It is because of the terrorist attacks that New York is
seeking the additional revenue that gambling would provide.
With so many wealthy people diminished by all of the year's events, the state has
plenty of company.
Copyright 2001 The New York Times Company |
