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Monday, 11 February, 2002, 13:27 GMT
Echoes of Enron in telecoms collapse
By BBC News Online's James Arnold
These are terrible times for American companies - so terrible, in fact, that one of the most alarming corporate collapses in US history is going almost unnoticed.
It is not really Global Crossing's commercial failures that are cause for concern, although they were spectacular enough - $7bn in losses and no profits over five years, a market value that collapsed from $60bn to about $100m, and so on.
Far more worrying is the cluster of scandals that have multiplied around the stricken firm, including investigations from the Securities and Exchange Commission and the FBI.
Since Global Crossing had its hooks as firmly into American political life as did failed energy trader Enron, the scope for yet another nasty Washington wrangle looks high.
"When the history of the great internet madness of the 1990s is written, a special chapter may be devoted to Global Crossing," The Economist wrote three years ago.
On the face of it, the firm was in a relatively solid, even boring, business - building and operating a fibre-optic telecoms network.
Starting with a cable under the Atlantic Ocean, the firm embarked on a multi-billion-dollar programme to develop a 100,000 mile network linking 27 countries.
In 1997, when Global Crossing was founded, the commercial logic of such heavy investments looked impeccable: there was a global shortage of the sort of high-capacity cable needed for data transmission, and the stellar growth of the internet promised the sort of demand that established telecoms firms were unable to understand, much less supply.
Investors agreed. Here was a firm, it seemed, that was positioned at the heart of the new economy, but with rock-solid tangible assets.
Global Crossing's shares, floated in May 1998, rose fivefold within less than a year.
So impeccable was the investment logic, however, that many other firms had the same idea as Gary Winnick, Global Crossing's founder.
Although the firm was able to charge top dollar in the early days, increasing competition - eventually becoming outright overcapacity - has sent access prices into the basement.
During 2000-01, as the company's shares tumbled, it scrambled to refinance, selling yet more equity into the depressed market.
And its trading results just got worse: in November last year, it announced a shattering quarterly loss of $3.4bn, on revenues of less than $1bn.
By early this year, the company's bankruptcy filing - allowing it to keep trading - was seen as its only option, and was timed to coincide with a $750m cash injection from its Asian partners, Hutchison Whampoa and Singapore Technologies Telemedia.
So far, so relatively unremarkable.
But Global Crossing operated in a wildly complicated business, and its accounting seems to have been equally labyrinthine.
The peculiar economics of bandwidth meant that firms could drum up the appearance of lively business by trading network access among each other, booking revenues while in many cases no money at all changed hands.
This practice, together with other potential irregularities, is now the subject of a formal probe by the SEC, as well as initial inquires by the FBI.
At a time when regulators and investors are beginning to probe the black hole in Enron's books, nervousness about any sort of book-keeping sleight of hand is high - and Global Crossing's Bermuda domicile and curious dual structure do not especially inspire confidence.
The firm's auditors are Andersen, the accountants responsible for Enron's books.
Wobbles in Washington
In another uncanny echo of Enron, Global Crossing now threatens to rattle around the political world.
The company was a disproportionately large donor to politicians - during the 2000 US elections, it contributed $2.9m to candidates and parties, more even than the famously well-connected Enron.
Global Crossing's largesse was spread evenly between parties, but was focused on politicians most likely to mould telecoms policy.
The company's main Congress beneficiary, Senator John McCain, asked the Federal Communications Commission to encourage the development of undersea cables.
The political aspect of the story is given a particular savour by the character of founder and chairman Gary Winnick.
Once a junk-bond dealer with the disgraced 1980s banking legend Michael Milken, Mr Winnick epitomised the company's high-stepping, tough-talking style.
No victim of false modesty, Mr Winnick was described by Fortune magazine as having "spent like a Roman emperor."
Now is his own company's website reticent.
"He and his wife Karen are patrons of universities, libraries, hospitals, the arts, worldwide literacy and humanitarian projects," it gushes.
To his credit, he certainly has been a benefactor.
In 2000, he gave $17m to a range of charities, notably the Museum of Modern Art in New York, and pledged $40m towards the building of the Winnick Institute, a museum and conference centre in Jerusalem.
But at the same time, he and his fellow executives profited hugely.
According to the New York Times, Mr Winnick sold shares in Global Crossing worth $734m over the past couple of years, and took annual salary and bonus payments worth close to $2m.
Mr Winnick's prosperity was mirrored - albeit on a less opulent scale - by generous pay, share and options packages for other top staff, including a $10m joining bonus for Robert Annunziata, a chief executive who joined in 1999 and lasted just a year.
Again, an echo of Enron, where senior executives were paid well and sold huge parcels of shares, while employees were left with shrivelled or vanished pension plans.
The company's fate now seems to lie with Hutchison Whampoa and Singapore Technologies Telemedia, which are still in talks over the terms of their $750m rescue package.
The two firms are owed a combined $12.4bn by Global Crossing, and so have an incentive to keep it going in some cash-generating form.
Whether that means leaving it broadly untouched, merging it into their own telecoms holdings, or breaking it up and selling the assets - worth more than $25bn - remains to be seen.
Even less certain is the outcome of the various probes into the firm, which could in theory result in criminal sanctions.
Compared with the abyss facing large parts of Enron, Global Crossing's prospects seem bright.
But for the firm's shareholders and staff - many of whom stand to lose their jobs as restructuring proceeds - that is slim compensation.
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