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February 27, 2002
CONTACT: David Fish
(202) 289-8928

Telecom Meltdown Costly For Economy
But Some "Profited Handsomely" Lenard Paper Says

WASHINGTON, D.C. - The economic meltdown in the telecom sector has been one of the main drivers of the current recession, according to a new paper by PFF Vice President for Research Thomas M. Lenard. But while mass bankruptcies have hurt creditors and average stockholders, the study concludes, “a few investors in the new competitive telecom companies have profited handsomely.”

The study, “The Economics of the Telecom Meltdown,” examines the causes and consequences of the downturn in the telecommunications sector that began in 2000. In it, Lenard concludes that ”the meltdown was caused in part by the failure of government policies that resulted in the creation of too many companies investing too much money in too many of the wrong places.” While the new rules led new firms to enter the market, he finds, “Paradoxically, the same rules that created an incentive for entry were also a significant disincentive to investment in facilities.” The ultimate result was that “IT investment spending declined, share values (particularly of recent entrants) fell precipitously, dozens of prominent firms went bankrupt, and hundreds of thousands of jobs were lost.”

At the same time, however, Lenard presents new data showing that insiders at some of the leading competitive telecom companies reaped large profits even as the companies themselves were headed for trouble. Based on data reported to the Securities and Exchange Commission, he shows that 59 insiders at seven leading competitive telecom firms sold stock worth $1.4 billion, an average of $24 million each, during 2000 and 2001. By comparison, the study reports, the current combined market value of the firms is only $1.7 billion. The firms studied included Allegiance (ALGX), Covad (COVD), Focal (FCOM), Level3 (LVLT), McLeod (MCLDQ) and Rhythms (RTHMQ).

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



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