Sunday, September 11, 2011

The "Madness" of Greed

GREED did not launch with the Iraq War and will not end with the Tea Party. Free-market capitalism has a history as old as the Garden of Eden. Charles Spurgeon did not miss the mark by far when he recalled the words of the ancient wiseman: “madness is in their heart while they live” and after that “they go to the dead.” (Ecclesiastes 9:3 KJV).

That sounds like the small Mississippi start-up company--Global Crossing. Jeff Madrick describes it.

“Global Crossing was another phenomenon of the age, built on a good idea and carried to extremes by the Wall Street juggernaut… (emphasis mine).

“Global Crossing engaged in dubious accounting practices, such as swaps of financial assets, some with Enron, others with Qwest, to inflate earnings. These and other such questionable accounting practices were again approved by Arthur Anderson (Winnick even hired Andersen’s main auditor as his chief financial officer).

Global went bankrupt a month after Enron. Its executives and other insiders had already sold $4.5 billion worth of stock, far more than the Enron executives did. Winnick sold $735 million. George W. Bush made a killing as did Bill Clinton’s close friend and former chairman of the Democratic National Committee, Terry McAuliffe, who saw his $100,000 investment increase to $18 million.

All along, Jack Grubman advised on Winnick’s deals for Salomon, sat in on board meetings, and kept giving Global Crossing shares his highest rating for most of its life as a public company… (Madrick 342-43)

“Global Crossing was not Grubman’s biggest mistake. He developed a similar relationship with Bernard Ebbers, the head of WorldCom. Ebbers had started a small long-distance phone services company in Mississippi, and expanded by acquiring other small phone companies. His strength was as a salesman; his weakness was numbers.

Grubman noticed that the upstart firm, despite its small size, was expanding rapidly. He made contact with Ebbers and, as WorldCom grew, eventually convinced him to make a daring bid for the much larger MCI with Salomon’s considerable help. MCI agreed to the acquisition, given Salomon’s participation, and overnight Ebber’s WorldCom became the second largest long-distance phone company in the nation.

“As recession coupled with overcapacity began to undo the telecommunications bubble in 2000, WorldCom’s clever financial officer Scott Sullivan moved expenses off the profit and loss statement and into the company’s capital account, keeping the earnings trajectory rising--out accounting deception (emphasis mine). With rising earnings, WorldCom could claim that it was unique in avoiding the plunging earnings of the rest of the sector and it was able to sell a $12 billion bond issue through Citigroup (Solomon) and JPMorgan Chase.

As with all underwriting, the two investment bankers were obliged by SEC rules to do due diligence, providing an opinion statement that all the financial reporting was in order and reflected the operations of the firm. Neither Citigroup nor JPMorgan Chase discovered the major accounting deception, or if they had, they did not make it public. The credit rating agencies also overlooked the obvious chicanery and gave the new bond offering a high rating.

“It turned out that WorldCom had overstated its $10.5 billion of earnings in 2001 by at least $4 billion. Another $3 billion of false profits was later found. The SEC discovered that WorldCom gave Ebbers more than $400 million in personal loans, with which he bought more WorldCom stock. Grubman maintained a buy recommendation until one month before the formal bankruptcy and only a few days before the admission of the accounting chicanery.

The accounting restatements and the plunging stock prices, plus ratings downgrades (again too late to save many investors) made WorldCom’s end inevitable. Ebbers was ruined, but Global’s Winnick remained one of the richest men in Los Angelos.

“In 2002, Grubman, at the peak of his influence, despite Global’s bankruptcy and the similar fate awaiting WorldCom, denied to BusinessWeek that he had conflicts of interest… WorldCom went bankrupt in July 2002, becoming the largest failure ever until Lehman Brothers a half dozen years later” (Madrick, 343-4).

The accounts above reveal little about our national economy; they suggest nothing of the reasons for starting a business (to manufacture or whatever). What this does reveal is a vulnerable herd of valuable cattle--our cows of industry: manufacturing, technology, information, et al. It further reveals the illegal and fraudulent practices that are protected by a Congress that conspires in the crimes by refusing to regulate special-interest cowboys who enjoy raping companies for the singular purpose of reaping obscene profits (not to increase production or improve services, but desk jockeys trading deceptive paperwork--corporate raiders).

And when you see a recent President and the former head of the Democratic party reaping those “obscene profits” you understand why it is so important that government regulations be minimized--to protect and maximize the profits of select private interests (emphasis mine).

From Warner’s World, I repeat, Charles Finney hit the mark: “madness [in this case greed] is in their hearts while they live. Too bad they can’t take it with them, but then they never could …

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