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News Release
September 30, 2002
CONTACT: David Fish
(202) 289-8928

Telecom Scandal Started in Washington
In Wall Street Journal, Eisenach Writes FCC Played Key Role

WASHINGTON, D.C. -If Congress really wants to know what caused the downfall of the telecommunications sector, it should ask the primary architect of the mess, former FCC chairman Reed Hundt. While they’re at it, members of Congress should ask Michael Powell, the agency’s current chair, why the policies Hundt adopted still remain in place. That is the view of Progress & Freedom Foundation President Jeffrey A. Eisenach, as expressed in an opinion piece published by the Wall Street Journal today.

Noting the recent scandal involving Winstar Communications, which resulted in fines being levied on Salomon Smith Barney and still more problems for telecom analyst Jack Grubman, Eisenach says there is much more to the story. “What happened at Winstar was part of a cycle of failure set in motion by federal policy. And the policies that created the problem are still in place.”

Those policies, which created a new breed of telecommunications firm (CLECs) whose existence depended on below-cost access to incumbent’s facilities and “an array of regulatory arbitrage opportunities,” set off a “vicious cycle of over-investment” and resulted in “too many firms drawing from a limited pool of financial capital, chasing too few customers and generating inadequate revenue streams.”

Hundt, Eisenach says, “consciously exploited the notoriously ambiguous Telecom Act to write regulations” in the CLEC’s favor. While regular investors lost billions, investment banks and insiders – including Mr. Hundt – made handsome fees and profits. However, Eisenach emphasized, Hundt “apparently violated no laws or regulations.”

“The real scandal is not on Wall Street, it’s in Washington, “ Eisenach concludes. In addition to investigating wrongdoings at individual companies, he suggests, “If [Congress] wants to get to the root of the problem, it would do better to call as witnesses Mr. Hundt, to explain what he was doing when he created the conditions for this mess, and Mr. Powell, to explain why he still hasn’t changed them.”

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