Genius of capitalism: the sequel.

Genius of capitalism: the sequel.

Genius of capitalism: the sequel.

Moneybox
Commentary about business and finance.
Feb. 6 2002 4:52 PM

Genius of Capitalism: The Sequel

Understandably, Gary Winnick is not getting quite as much attention as Kenneth Lay—who at this point I wouldn't be surprised to hear is in Mexico having radical appearance-altering surgery. But let's take time out from Enron-o-rama to give "Win" his due by granting him a Moneybox Genius of Capitalism Award.

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The other day I wrote a columnthat considered Paul O'Neill's now-infamous "genius of capitalism" quote against the travails of Lay and "Chainsaw Al" Dunlap. You will recall the thrust of O'Neill's remark was that those who make good decisions "reap the benefits," and those who make bad decisions "pay the consequences." What O'Neill was really describing was part of the promise of capitalism. Which is fine. But to be a real Genius of Capitalism, you have to figure out how to "reap the benefits" whether your ideas pan out in the marketplace or not.

Winnick is the chairman of Global Crossing, which filed for bankruptcy last month. Winnick started building the firm in 1997 and took it public the following year; in its brief life, it went through five CEOs, lost an estimated $7 billion, and never posted an annual profit. Along the way, Winnick sold what apparently amounts to about 30 percent of his shares in the firm, to the tune of more than $600 million, prompting Fortune to put Winnick in the running for "the biggest executive rip-off of all time."

Global Crossing is actually part of a slew of telecom companies that have filed for Chapter 11 over the past year or so as the supply of fancy new wire and cable networks radically outstripped demand. Winnick's firm racked up enormous high-yield debts building a huge, 85,000-mile fiber network that famously includes many miles under oceans, connecting hundreds of cities in 27 countries. It's astonishing that this was done so quickly—and the markets were impressed enough to value the firm at some $80 billion at one point—but debt obligations grew much faster than customer interest. (Again, this has happened to other similar firms as well, but Global Crossing is the biggest to crater.) Most recently, allegations of funky accounting have arisen, though the firm waves them away as the ravings of a disgruntled ex-exec. The essence of the charge is that Global Crossing and other firms would pointlessly swap capacity on their networks: When Global Crossing "sold" such capacity, it counted toward revenue, but when it "bought" an equal amount, that would get counted as a capital expense, which Global Crossing encouraged investors to ignore in judging its results. It remains to be seen how true all this is, but I'm sure we have nothing to worry about because Global Crossing's auditor was, uh, Arthur Andersen.

Anyway, all very sad. But what of Winnick? Well, it seems unlikely that he'll be part of a reorganized Global Crossing, assuming that the company even manages to avoid outright liquidation. But he's had a pretty good run. Winnick was a player at Drexel, working with Michael Milken from 1973 to 1985; before he met Milken, he supposedly carried around a note card in his wallet on which had written his life's goal: to earn $50,000 a year. Milken helped him learn to be a little more ambitious. For his part, Winnick is credited with thinking up Milken's famous X-shaped trading desk. These days he has a four-acre spread in Bel Air, which he paid a reported $60 million for years ago, according to the Wall Street Journal. (Global Crossing company headquarters were in Beverly Hills, though the company was technically based, for tax reasons, in Bermuda.) He supposedly worked out of an office modeled after the White Office Oval Office—way cooler than an X-shaped desk, no? Speaking of presidents, the firm once paid Bush the First in company shares for a speaking engagement. (Did Poppy sell or hold? No word on that, but if he still owns his stake, and they becomes worthless post-bankruptcy, which is likely, then the current president will have another victim of the markets close to home. How much can one family endure?)

Global Crossing does have its defenders. Just the other day, George Gilder rejoined Fortune's "rip-off" charge by calling Global Crossing's work "the most efficient global buildout in telecom history." Hey, remember George Gilder? His comment prompted me to revisit the Winnick section of Telecosm, to which I am indebted for the Milken-related details above. Gilder was absolutely ecstatic about Global Crossing in that book and would doubtless argue that in the long term that aggressive "buildout" will be proved quite valuable someday as broadband demand, eventually, rises enough to meet supply. (Gilder especially liked that this was Winnick's show, even noting that one "key secret" is its management structure: "[T]he managers own the company, but outside investors command the cash flow from the high-yield issues.") As a Global Crossing spokesman put it recently, "[I]t takes the markets time to catch up to visionary ideas."

Right you are. So, in light of that, why should a visionary wait around for actual vindication from, you know, paying customers and so forth when he can "reap the benefits" of his future vindication today? Congratulations Gary Winnick: You are a Genius of Capitalism.