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Telecom Lessons for Washington

In the past few months, we have heard growing speculation about the possibility of the U.S. federal government nationalizing the auto industry, the banking system, and the healthcare system, to help stabilize the economy and prevent further job losses. This public dialogue is extraordinary for a country that once encouraged struggling developing nations to abandon government control over key economic sectors such as telecommunications, transportation, mining, and banking in an effort to promote democracy and free-market principles.

The mounting bad news has brought back painful memories of the bursting of the telecom bubble and spurred me to ask if there are any lessons learned from that experience that could be helpful to Washington policymakers.

As an industry analyst, I followed the bubble burst in great detail. I tracked the deterioration of Tier 1 carrier bond ratings, the unprecedented explosion in carrier bankruptcies, the loss of some 1 million industry jobs, and the 50 percent decline in annual wireline capital spending by carriers worldwide between 2000 and 2003. I counted more than 165 operators that defaulted on $220+ billion worth of debt between May 2000 and July 2002. My employer at the time went through 10 major job cuts, and 70+ percent of our workers were dropped from the payroll.

Despite the impact of all of this turmoil on the lives of millions of industry workers, family members, and investors, I never once heard talk of a federal government bailout or potential nationalization of a single carrier or telecom equipment provider. Everyone understood that the route to industry recovery – no matter how painful it might be – would involve working through the bankruptcy and restructuring process and ultimately adopting better business practices.

The telecom industry that has emerged from the bursting of the bubble is one of the most competitive, vibrant, and healthy parts of the global economy today. Our industry provides the digital fuel that drives innovation and productivity up and down the economy, and it touches every life like never before.

Our industry recovered with greater stability, not because the White House and Congress decided to pick the winners and losers. We recovered not because we saddled future generations with debt so that the government could throw tens of billions of dollars our way to help us get back on our feet.

We recovered in a healthier position because Washington kept its hands off private assets and limited its role to establishing and enforcing the rules under which everyone would operate. We recovered because we collectively had the courage to let free-market principles play out.

— Stan Hubbard, Senior Analyst, Heavy Reading

Stevery 12/5/2012 | 4:10:37 PM
re: Telecom Lessons for Washington Perhaps it is clear to others, but it would help me if you defined the difference between nationalization and bankruptcy. In a non-liquidation bankruptcy, the company is operated by the government. All telecoms that went thru bankruptcy were operated by the govt.

How exactly does that differ from nationalization?
fgoldstein 12/5/2012 | 4:10:33 PM
re: Telecom Lessons for Washington A bankrupt company is not normally operated "by" the government. The bankruptcy court decides who's in charge. It could be a receiver, or it could be a creditors' committee, or a debtor, or they could leave management in place subject to court supervision.

Nationalization occurs when the government invests equity in the firm and thus owns a majority ownership stake. This is what has actually happened to some banks, but they bugger the numbers to make it look otherwise, since American executives are too squeamish about sensible solutions that look like they come from the same continent that produces their luxury cars.
rjmcmahon 12/5/2012 | 4:10:31 PM
re: Telecom Lessons for Washington This article's rhetoric is a bit worn out and tired - espousing beliefs in competition and free market principles in the face of natural monopolies doesn't pass a sniff test. For anybody that thinks that confidence in the financial system can be restored by modeling things after telco policy, well I've got some derivatives based on IRUs to sell at a great prices - just give me what's left of any of your savings.
rjmcmahon 12/5/2012 | 4:10:29 PM
re: Telecom Lessons for Washington http://www.youtube.com/watch?v...

Volcker says banks have been effectively nationalized.

Systemic flaws were:

o Financial economy fell apart impacting real economy.
o Current account deficit of 5-7% GNP was unsustainable
o Borrowing from abroad to support consumption - no savings, too little investment.
o Disequilibrium exacerbated by the generations of paper wealth
- First tech boom of late 90s in equities
- Followed by housing/low interest rates
o Financial engineers created products to sustain the unsustainable
- Subprime market from 0 to $1T
- CDS Insurance form 0 to $60T (insuring less than $10T credits)
- Credit agencies magically converted subprime to AAA
o Investment houses outside the realm of regulation - (Note: all majors are gone now, free markets at work?)
o Managers and financial engineers getting perversely overpaid. Great rewards with no penalties. Made the transparent opaque in order to make more money while hiding real risks.
Stevery 12/5/2012 | 4:10:28 PM
re: Telecom Lessons for Washington A bankrupt company is not normally operated "by" the government. The bankruptcy court decides who's in charge. It could be a receiver, or it could be a creditors' committee, or a debtor, or they could leave management in place subject to court supervision.

A nationalized company is not normally operated "by" the government. A government agency (treasury) decides who's in charge. It could be a receiver, or it could be a creditors' committee, or a debtor, or they could leave management in place subject to court supervision.

So that's why I'm trying to figure out: What exactly was Stan's objection?

Because bank nationalization has strongly resembled bankruptcy (+ recapitalization) in the past (esp in Sweden).
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