Commentary

Shooting the Economic Wounded

This article was published by Copley News Service, May 7, 2003.

America’s series of corporate scandals have demonstrated the power of the market to discipline errant businesses. Market forces can also rehabilitate firms, unless Uncle Sam decides to shoot the economy’s wounded.

Enron’s financial improprieties broke in late 2001, destroying the energy company and its auditor, Arthur Andersen.

The next scandal overwhelmed WorldCom, a leading telecommunications firm. The company is in bankruptcy attempting to reorganize.

Will the company survive? The market has yet to render a verdict.

But nine of the usual left-wing suspects — including the Communications Workers of America, Gray Panthers, and National Consumers League — are pushing the Bush administration to bar WorldCom from receiving any federal contracts. So is the American Association of People with Disabilities.

The coalition wrote to Stephen Perry of the General Services Administration excoriating WorldCom as the “scandal kingpin.” The groups want to break up the company and sell off its subsidiaries.

This follows a call last year by the United Church of Christ for the FCC to strip WorldCom of its licenses and authorizations for long distance and Internet services. Clerics and disability activists apparently know more about corporate organization than is commonly thought.

This is not just an academic economic debate. Given Uncle Sam’s important role as a telecommunications consumer, such a step would imperil the firm’s survival. And by restricting competition for federal contracts, killing WorldCom would hike taxpayer costs.

Obviously, WorldCom is culpable for gross misconduct in overstating its earnings. The market rightly judged the company harshly. Credit dried up and suppliers cut shipments. So WorldCom went into Chapter 11.

However, today’s WorldCom is not yesterday’s WorldCom. CEO Bernie Ebbers, CFO Scott Sullivan and four others were immediately dismissed; inquiries by the Justice Department, the SEC and the media have identified no other miscreants.

The issue of disbarment should turn on whether the company can be trusted to fulfill future contracts. Obviously, there are no guarantees, but, explained U.S. District Court Judge Jed Rakoff, who approved WorldCom’s settlement with the SEC: “The company has made laudable progress in moving towards a much more positive position and a correction of past mistakes.”

A new study by Peter Ferrara for Americans for Tax Reform makes the same case. Argues Ferrara: “The company has since hired highly experienced and competent top management with an established record of integrity. It has adopted all of the new practices, procedures and training programs, and embraced all of the oversight controls, sought by the SEC.”

As Ferrara notes, though WorldCom is the largest bankruptcy in history, at the time of its filing last year, the firm’s net worth was $66 billion. That’s quite different from Enron, which possessed few assets and made its money trading, which depends so heavily upon reputation. Indeed, in terms of net worth, WorldCom is far better off than the airlines that have been jumping into or nearing bankruptcy.

Many companies, such as Southland Corp. (which runs 7-11 stores) and Texaco Oil Co., for instance, have emerged from bankruptcy as viable concerns. About 70 percent of bankrupt firms survive at least five years.

Whether or not WorldCom will be among them obviously cannot be known. If the company fails, the economy will survive: There is excess telecommunications capacity and economic failures allow the redeployment of resources to other productive uses.

But there’s no reason to impede the company’s survival. In WorldCom’s case, more than 20 million customers are served by and 63,000 people work for the company. They, and the firm’s shareholders, will be the losers if WorldCom goes under.

Why are leftish lobbies targeting the company? Its competitors, notably the Baby Bells, would prefer to destroy it, eliminating a competitor and picking up its pieces at distress prices. So they have been pressing to terminate WorldCom’s existing federal contracts and ban any new ones.

But what is the interest of lobbies for the disabled and elderly, and WorldCom’s other critics? The only logical explanation is professional courtesy.

Ferrara points out that WorldCom’s workers have rejected union representation. That is an unforgivable offense for the Communications Workers of America, which represents the employees of the Baby Bells. Apparently CWA has enlisted its political friends to help.

Similar ties are evident in the case of the United Church of Christ. Executive Director Robert Chase serves on the board of the Telecommunications Research and Action Center, chaired by Sam Simon, a Baby Bell lobbyist. Through his firm, Issue Dynamics, Simon represents all four Baby Bells.

Corporate misbehavior needs to be punished and it has been in the case of WorldCom. The market forced the firm into bankruptcy; corrupt executives lost their jobs and have been prosecuted.

The company still might not survive. But government shouldn’t make that decision. WorldCom’s future should be left up to the marketplace.

Doug Bandow is a senior fellow at the Cato Institute.