SPIFF*

July 1, 2002

Doth any man doubt, that if there were taken out of men's minds, vain opinions, flattering hopes, false valuations, imaginations as one would, and the like, but it would leave the minds, of a number of men, poor shrunken things, full of melancholy and indisposition, and unpleasing to themselves?So much of what goes on in the world is nothing more than fraud and buncombe.

Francis Bacon

But without it, what would be left?

That is the problem, dear reader. For, take away the spiff, the vanity, and the pretensions and do you have any world at all? Strip off his Armani suit and his Brooks Brothers underwear...and what corporate chieftain wouldn't look ridiculous?

Sometime in the late '90s, Gary Winnick - chairman of $47 billion Global Crossing - did something unusual. He decided to take time off from touring art galleries with David Rockefeller, playing golf with Bill Clinton, and enjoying the Malibu beach, just a few doors down from legendary screecher, Babs Streisand...and learn a little about the business he was in; he bought a video describing how undersea cable was laid.

That was all Winnick needed to know about laying cable. For he understood what business he was really in, and it had nothing to do ships or optic fiber. Winnick was doing nature's work: separating fools from their money. And he knew he was good at it.

Winnick was supposed to know the undersea cable business. Then too, the people from whom he raised money were supposed to be the best pros on Wall Street - those who managed big money. If they didn't know how to place money so as to get a decent return, what did they know? And the people who put money in their hands were supposed to know what they were doing too.

But that is one of the great marvels of life...Not that fools and their money are soon parted, but that they ever get together in the first place.

It is a bright, sunny Monday morning in Paris. Here at the Daily Reckoning office, we gaze out the window. The people in the hotel room across the street are still sleeping. The curtains are still drawn. The woman on the top floor apartment is sunning herself...after watering the plants on the balcony. And, on the other corner, alas, there is no sign of the young woman who was walking around in her underwear last week...

Life goes on, we note, for no particular reason...other than the vanity of it all. One lie replaces another like cars along a Paris street; a parking spot rarely remains open for very long.

"The sad fact is, Global Crossing had a decent shot at survival," says a FORTUNE article on Gary Winnick. "It planned to build an undersea broadband network that would link continents together and serve global carriers like Deutsche Telekom and AT&T. Early estimates of construction costs were around $2.7 billion..."

Whose fault was it, dear reader? Winnick...who had the gumption to ask for the money? Or, the goof-balls who gave it to him? They might have ponied up the $2.7 billion, and maybe Global Crossing would still be in business. Instead, they kept shoving big bills in Gary's pockets - until he had raised $20 billion.

"Like so many other telcos..." continues FORTUNE, "Global Crossing got carried away on the tide of easy money. It raised more capital than it needed and built a network with more capacity than the world demanded. By the time Global Crossing collapsed, its long-term debt had ballooned to $7.6 billion (total liabilities were $14 billion), and it simply didn't have the cash to make its interest payments."

There are few things, as Mae West observed, of which a man can have too much and suffer no harm. But too much money is a clear and present danger to a man...or even to an entire economy. Telecom was not the first, nor will it be the last industry to be ruined by an excess of good fortune.

What happened to the $20 billion Winnick raised? He spread the money around - acquiring other overpriced telecoms, giving Wall Street a way to earn massive fees by keeping the money coming his way. "From 1998 through 2001," say the FORTUNE editors, "the top Wall Street firms earned more than $13 billion in telecom underwriting and investment-banking fees."

And so both the spiff and hokum whirled around. Salomon's Jack Grubman talked up the stock. Investors bought it for more than it was worth. Winnick bought other telecoms for more than they were worth. Everybody made money.

But it was an empty vanity. People don't really get rich by spending money on things they can't afford at prices that are too high. All they do is move money around... and waste much of it. In the telecom sector alone, far more dark fibers were put down than the world really wanted. And when the end of the bubble finally came - investors found that they were out $2.5 trillion, an amount equal to one quarter of America's entire GDP.

Not all that money disappeared. By the time Global Crossing declared bankruptcy, Winnick had sold $735 million of stock...and received another $15.8 million in other spiffy emoluments. Winnick must have felt pretty smart - he had done what he set out to do; relieve the patsies of the burden of wealth.

LUSTING AFTER SPIFF

I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.

For man also knoweth not his time; as the fishes that are taken in a net, and as the birds that are caught in a snare; so are the sons of men snared in an evil time, when it falleth suddenly upon them.

Somewhere in Ecclesiastes

We sense a change of Biblical proportions coming on.

Three years ago, when money flowed in the streets like rivulets of rum and prosperity bubbled up like warm champagne, Americans were a happy race. The sun shone down with such beneficence, it seemed as though no investment was too absurd to make a man rich. Almost any business concept or investment scheme one could think of would bear fruit, it was thought. You had only to spit the seed out the car window while you were on your way to refinance your house; like a peach pit, it would take root in no time at all.

But now the papers are all turning a little sour. A company that reports decent earnings is thought to be lying and any man who manages to get himself a little spiff is considered to be courting jail time. The heroes of today's news are no longer the captains and first mates of industry...nor the technological innovators... nor risk-taking entrepreneurs of the '80s...nor even the visionaries and hallucinators of the '90s. Instead, it is the public prosecutors, reformers and the sanctimonious I-told-you-so socialists who get the good ink.

Of the latter species, Philip Bowring kvetches for the International Herald Tribune:

"The three crises of the past year make it plain that the international financial community has learned nothing from the Asian crisis. Despite the domestic disgrace into which Wall Street has fallen, thanks to years of excessive greed leading to recent multiple scandals, the nexus between Wall Street, Washington and the International Monetary Fund may have even been strengthened.

"Just as Wall Street in the 1990s came to be dominated by get-rich-quick schemes, so international short-term capital flows have continued on a massive scale, to the benefit of no one except the intermediaries...

"How many more Argentina-style crises will it take before the world learns the wisdom of taking power away from the casino operators, the investment banks, and handing it back to elected governments?"

Bowring has a point. When it comes to separating people from their money, no institution does it better - at least not on a grander scale - than elected governments. What's more, governments do it more reliably - and much more democratically - almost everyone gets ripped off to some measure.

A casino, after all, takes only 10% or 12% to pay the electric bills and free hors d'oeuvres...and players find it entertaining enough to come back. Even the "friction" on Wall Street...the cost of all the analysts, margins, commissions, fees, and brokers' yachts...which Buffett estimates as high as 30%...is not without its socially-redeeming results. A man who invests in Global Crossing at $60 with no gun to his head might be said to deserve what he gets. And then, once his money is gone, he represents little further menace to the world economy.

But give economic power to bureaucrats...or let your neighbors vote on what you should do with your money... well, who in his right mind would do such a thing? If a man wants to suffer, he might as well smear honey on his naked flesh and lie down on an anthill.

Public officials love bear markets. The best of them stop claiming credit for the bull market and begin coming up with crackpot solutions to ease the suffering of the downturn. The worst of them get out the handcuffs and begin campaigning for higher office.

That is the case, we fear, with the attorney general of New York, Elliot Spitzer. "Not for nothing is the National Association of Attorneys General mockingly referred to as the National Association of Aspiring Governors," says a FORTUNE article. "Many a state attorney general has used the job as springboard to higher political office. Rarely, however, has there been an example as egregious and blatant as that of Eliot Spitzer, current attorney general of New York State."

Spitzer, along with the rest of officialdom, was silent when Global Crossing was at $60 a share. That was not the moment to mount a white horse and attempt to save the little guy. Whatever Winnick, Ebbers, and Kozlowski were doing to him...the poor little guy wanted more of it. But there's nothing like a bear market to change peoples' attitudes. By the beginning of 2002, the little guys were counting their losses and looking for someone to blame. Spitzer's moment had come - the elected official soon became "household."

"His most recent and notorious case - the one that made him a judicial superstar overnight - is his investigation into the stock research practices of Merrill Lynch," continues FORTUNE. "Armed with a New York State law that gives him carte blanche to bring civil and criminal lawsuits against companies that fail to disclose conflicts of interests, Spitzer seemed poised to force Merrill to separate its research and investment banking businesses, or even to spin off research entirely. In late May, Merrill agreed to settle the case by paying a $100 million fine and to reform its procedures to avoid future conflicts of interest.

"Spitzer has been lionized... for wielding the first shovel in the Augean task of cleaning up Wall Street."

Of course, money isn't the only form of spiff and Mr. Spitzer's interests are as subject to conflicts as anyone else's. The little guys vote, he may think to himself. Spitzer wants to be the next governor of New York. What better way than by getting himself on the evening news as the champion of the little guy against Wall Street? But wait, he may need some campaign money as well as some votes; better not be too rough on the big money. The best thing for Spitzer to do would be to treat the whole contest like a professional wrestling match: beat up on Merrill for the benefit of the rubes, but only for show. Merrill will reel and howl in public...and hit the mat in mock pain...($100 million sounds like real money to the patsies, but it's barely cab fare to Merrill Lynch, which takes in that much in revenues every couple of days). But soon the show is over and both wrastlers can go back to what they were doing before: lusting after spiff.

The Bear Market comedy continues...

Bill Bonner, enjoying the show...lusting after spiff, like everyone else.

The naturally occurring gold-silver alloy is called electrum.

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