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News Release
September 23, 2002
CONTACT: David Fish
(202) 289-8928

Bankers, Regulators Contributed to CLEC Meltdown
Bankers “Imprudent,” Regulators “Encouraged Excessive Entry”

WASHINGTON, D.C. - Investment bankers and policymakers, as well as managers, played key roles in what a new paper concludes was a “virtually inevitable” meltdown of competitive local exchange carriers (CLECs) over the past two years. “The CLEC Experiment: Anatomy of a Meltdown” is co-authored by telecommunications experts Larry Darby, Jeffrey Eisenach and Joseph Kraemer. Its release comes as policymakers and enforcement authorities are looking more closely into the causes of the CLECs’ decline.

The paper, based in part on analysis of data filed with the Securities and Exchange Commission by 24 of the CLECs, concludes that “financial market exuberance, spurred by a tilt in communications policy in the direction of the CLECs, has created too many firms, drawing from a limited pool of financial capital, chasing too few customers and generating inadequate revenue streams.” Policymakers, it says, “contributed substantially to what was in retrospect ‘irrational exuberance’ about the prospects for hundreds of new companies.” Investment bankers and CLEC managers also played major roles. “To the extent CLEC management acted imprudently,” the paper says, “bankers who advised them and investors who supplied the capital might be regarded as even more imprudent.”

The paper reports that the 24 CLECs examined “never came close, as a group, to generating net cash flow from operations, and there is no evidence from our data that they were moving in the direction of doing so.” Indeed, by 2001 the firms in the sample were “using 57 cents of every dollar raised in the capital markets to make up for losses from operations.”

Darby and Kraemer are widely recognized experts on the telecommunications marketplace, and serve as part-time Senior Fellows at The Progress & Freedom Foundation. Eisenach is the Foundation’s President and also has written extensively on telecommunications issues.

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.



The Progress & Freedom Foundation