Month: August 2004

  • Who is Gary Winnick (and why I am writing about him?)

    You may not know Gary Winnick, but at one time the fund manager who looked after your pension probably knew his name.

    For over two decades, Gary Winnick worked at the sharp practice end of capitalism. In the 1980s he worked with Michael Milken Drexel Burnham Lambert (Drexel) selling junk bonds. These were used to finance some of the most savage slash-and-burn management takeovers in modern history.

    Here’s a simplest version of it

    The ability of a company to get credit to grow depends on a number of factors including market sentiment towards the company, its industry sector and its credit rating. Junk status when a company is viewed to have fallen below investment grade material by a credit ratings agency such as Standard & Poor or Moodys.

    A bond is piece of paper that can be bought and sold like a company share, however it is really an IOU, a company sold the bonds to raise money and promised to pay a set amount of interest on that money and repay it at a set time in the future. They are used by companies and governments to borrow money (you may have heard of them mentioned as gilts or t-bonds, in the UK premium bonds are a government loan but with the interest divided out via a lottery selected by a computer called ERNIE), government bonds are commonly used in a portfolio as a low risk strategy or to hedge against interest rate declines.

    From a practical point of view junk status means that credit becomes more expensive, the company is considered to be a higher risk loan. Consequently, companies seeking credit and having junk status generally had a low share price and relied more on the bond markets to provide their capital requirements. Investors generally seek a higher return for higher risks so bonds from junk status companies (junk bonds) are also known by the more benign name of high-yield debt.

    Anyway, somewhere along the line some bright spark (possibly Milken himself) realised that just because a company had junk status, it did not mean that it would disappear overnight. Many large household names and solid industrial performers had junk status, because they were steady but unspectacular performers. This meant that there were bargains to be had. Investments providing high returns because of an unfair high risk status. Junk bonds became the new HOTNESS.

    The outcomes

    – There was blood in the water and Milken was eventually prosecuted for massive corporate fraud, after Ivan Boesky ratted him out rather than take the full rap on a number of insider trading charges

    – Many companies were gutted by modern-day robber barons who borrowed money to buy companies, and then paid back the debt through the placement of junk bonds and asset stripped the company. Books that outline this include Barbarians At The Gates

    – Savings and Loans scandal – S&L are kind of equivalent to mutual building societies in the UK and Ireland. During the 1980’s, they were deregulated and their money poured into the stock market. This deregulation fuelled a feeding frenzy causing many S&L collapses due to fraud and speculation. Since there were regulations still on what S&l’s could invest in, merchant banks put together complex financial instruments (derivatives – so called because they are derived from something else, like orange juice and pork belly futures in the film Trading Places) that would allow them to get into the ‘high-yield debt’. Initially the idea of these derivatives was to bind just enough government investments like T-bonds (treasury bonds) into the deal so that credit ratings agencies like Standard &Poor would not rate the derivative as a junk status investment. These instruments (known as derivatives) were very arcane and complex making it virtually impossible to understand their true investment value or how they would be impacted by changes in the market. Think of the childrens story The Emperors New Clothes. If you would like to know more read Liars Poker by ex-derivatives trader Michael Lewis. The S&L mess was bailed out by the Fed.

    Global Crossing

    Gary Winnick parted company with Michael Milken before Drexel flamed out and set up an unspectacular investment company called Pacific Capital. In the mid 1990s, Winnick saw the telecoms gold rush and founded Global Crossing.

    The telecoms goldrush came about due to a number of factors:

    – Deregulation allowing competition in the telecommunications sector

    – The rise of the Internet created an increased demand for new networks

    – Sustained economic growth in the developed world and a collapse in some emerging markets and Japan meant that there was too much money chasing too little investment opportunities. Gary Winnick raised and destroyed some 20 billion USD. Much of which would have come from pension fund managers in the US and Europe, or was invested into similar companies like Worldcom or RSL Communications (RSL COM).

    – Companies pay to get their credit evaluation from the likes of Standard & Poor and Moody

    Grow and the profits will come became a mantra for bankers, VCs, analysts and business leaders due to cheap capital and as a way of keeping the castle in the sky; making it exceptionally easy to sell in a new business strategy

    The telecoms market came apart because:

    – Too much telecoms capacity was supplied as companies rushed in to profit from the gold rush. Global Crossing and its peers built out network capacity first and thought about getting customers later

    – Technology, competition and excess supply drove down prices to make the industry less profitable

    – Many of the companies had the same disease of corporate corruption and creative accountancy that occurred in the 1980s in S&L and junk bonds; inflating the value of deals, booking sales before the money was in (when is a sale a sale is a question that has been of interest to accountants for years) or fabricating them as inter-carrier deals

    – Accounting techniques were shockingly useless allowing Winnick and Co to distort reality

    – Equity analyst hyped stocks that they privately admitted were dogs

    – High yield debt was being used to finance a low-yield industry

    – Much of the growth was promoted through equipment-vendor financing, which allowed the likes of Lucent, Nortel and Cisco to bill higher than normal growth-figures and artificially inflate share prices. A friend of mine who was a telecoms analyst at a brokerage in the city of London at the time of the bust was afraid that Cisco would get severely damaged because of vendor financing. He outlined an allegation that new IP-based carriers were being set up by people close to the Cisco channel, financed by equipment for equity as part of a glorified Ponzi scheme to inflate the value of Cisco

    In Global Crossing, Winnick managed to extract his own position two weeks before the firms lawyers stopped internal share trading due to the companies terminal financial decline. Winnick is back in court this week and you can read all about it here. Many see Gary Winnick as a criminal, he sees himself as a business visionary. More on telecoms here and finance here.

  • Thumb Drive Gospel

    To understand the thumb drive you have to understand computer memory. In the beginning there was memory, and it was called flash. It was small, expensive but convenient and the geeks saw that it was good.

    What is a thumb drive?

    Research done at Microsoft recently found that much of the time the most effective way of moving files around was via the sneakernet. A thumb drive is a small pocket sized device that have no moving parts and can store almost as much information as a CD-R. They use flash memory to hold the data and connect to a computer via a USB port. They generally can get on to all but the most locked-down computers and can be used to remove or transfer computer files. I use a 256MB Sony MicroVault.

    Why do I need a thumb drive?

    Your work computer doesn’t have a CD writer and you want to move a presentation or work on it at home. You could run an FTP server and move the files electronically, but this could be hacked, it is also hard for your average user to set up and relies on your broadband service provider to not fall down at the wrong moment. Its cross platform, I can use mine on my Mac and PCs at work

    Cover thy ass

    A friend of mine recently ended up in court. The wrangle ended in their favour but it could have been avoided. At the time, redundancies were on the cards and they had developed a business plan in association with another friend regarding the possibility of setting up a new business. The time past and all that was left of the idea was a pipe dream on an spreadsheet that was stored on a network drive that had backed up their email account. Years later when their employer wanted to get rid of them, they used the file as evidence in a legal move to get them out the door. Anything like this, do on a thumb drive if you have to use a work computer at all. More related posts here

  • Five star living

    Trendwatching is back with a pattern that they call five star living, where property developers and high-end resort or hotels sell a home away from home to the super dumb but loaded.

    They put a whole pile of luxury living brand experience about it, but what they are seeing is the window dressing not the trends in five star living. Five star hotels are capital intensive and unless you have high occupancy all the time, expensive.

    Apartment complexes can draw on the service aspects of five star hotels; but farm off a lot of the capital risk to apartment purchasers and still charge them for premium rate services. Five star living is about hotels hedging their bets in a post-September 11 world. I realise that this is a less romantic and stylish explanation of this trend, but its all about the money.

    Mandarin Oriental have built suites in their Hyde Park hotel which would be a great example of five star living. Luxury brands like Giorgio Armani have extended into interior design to try and capitalise on this trend in combination with luxury property developers. 

    You also have people like the Trump Organisation extending themselves from real estate into hotel services and tourism in the opposite direction with its golfing themed resorts. More five star living related content here.

    Apple spoof product lifecycle article which can be found here. Its funny because there are a lot of underlying themes which are close to the truth as consumers see it.

    Finally, the New York Times have got a great interactive presidential election guide that they are going to keep updated. So go to this link, have a play and bookmark it until November. Interactive data like live dashboards in business allow you better understand the data. It makes for shareable content and is sticky in nature.