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The following article appeared in Left Business Observer #101, July 2002. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

The telecoms disaster

by Nomi Prins

Nomi Prins is a former investment banker turned journalist, based in New York.

It took a colossal $3.8 billion earnings restatement for a flailing telecom to grab a front-page headline from something Enron-related. Before June 26, if you mentioned Enron, Martha Stewart or Tyco to anyone, you got instant recognition plus mumblings about corporate corruption. When you asked whether disintegration of the entire telecom industry poses a greater threat to our economy, you got a blank stare.

That changed when WorldCom announced it had overstated earnings since the beginning of 2001. WorldCom carries half the world's internet traffic, and about a quarter of our domestic long-distance. Unfortunately, WorldCom's scam was reported by WorldCom, not the SEC investigating their books and not the Wall Street analysts. Not something that should boost confidence in the system which, the New York Times assured us recently, is working as it should.

The telecom sector is comprised of the so-called Baby Bells (the regional offspring produced by the 1984 breakup of AT&T), a collection of long-distance providers and equipment makers, plus an unregulated constellation of companies that created a stunning glut of capacity fed by a mega-glut of Wall Street money, encouraged by an army of cheerleading economists and pundits, led by George Gilder, manic prophet of the imminent telecosm. (Gilder, whose recommended stock portfolio is down over 90%, is personally broke, and has a lien against his house.) Companies bloated their balance sheets with fake trades, overstated earnings, and exaggerated c