TCS Daily

Time to Kill, Not Coddle

By James K. Glassman - December 4, 2002 12:00 AM

With phony profits now expected to top $9 billion, WorldCom, Inc, the Mississippi-based telecommunications company, has earned the distinction of committing the worst accounting fraud in American history.

As a result, investors have marked down WorldCom's stock to pennies a share, the company has filed for Chapter 11 bankruptcy, and the Justice Department has charged five former executives with fraud.

Unfortunately, however, WorldCom still lives. Even worse, regulators and politicians are handling the company with kid gloves, deluded - in large part by WorldCom's own public-relations efforts - into accepting the fantasy that the firm's demise will cause irreparable damage to the U.S. telecommunications network.

In the latest outrage, the Securities and Exchange Commission last week announced a partial settlement that does not even require the company to admit any wrongdoing. The SEC reserved the right to punish WorldCom at a later date - perhaps with a fine - and WorldCom agreed not to violate any more securities laws (yes, I am not kidding).

At a time when Congress and the White House worry about losing the trust of investors, the SEC's soft-headed deal with WorldCom sends the opposite message: a slap on the wrist for the most rapacious corporate evildoer ever.

The priority should be WorldCom's disappearance, not its survival. The argument that the company is somehow "too big to fail" is absurd on its face. WorldCom handles only about 15 percent of all Internet traffic in North America, according to RHK, Inc., a research firm in San Francisco. If it were liquidated tomorrow, WorldCom's market share could easily be absorbed by current providers. The same is true for the company's long-distance business, which has dozens of competitors.

Maybe the regulators haven't noticed, but the big telecom problem these days is excess capacity. WorldCom's disappearance would make the market healthier, both ethically and competitively.

If the SEC is not up to the task, then one way to remove WorldCom, as my American Enterprise Institute colleague Gregory Sidak recently suggested in the New York Times, would be for the Federal Communications Commission to require the company to "show cause" why its licenses should not be revoked since, quite clearly, the company fails to meet the statutory good "character" test. If it lost its licenses and certifications, WorldCom would almost certainly be forced into liquidation - which is where it deserves to be.

The company's assets should be sold. This won't mean that thousands of jobs, millions of customers and billions of dollars' worth of equipment will disappear into thin air. To the contrary. In a free-market system, the valuable assets of a failed firm (human and physical) move from weak hands to strong hands. The great economist Joseph Schumpeter called this process "creative destruction." Zombies like WorldCom are a drag on any economy.

Instead, WorldCom is being handled in a gingerly manner that borders on farce. After the deal with the SEC last week, U.S. District Judge Jed Rakoff, complimented WorldCom on its "laudable progress" and is moving toward "a much more positive position and correction of past mistakes."

But why should such mistakes be tolerated? There has rarely been a case that deserved more severe punishment than that of WorldCom. The firm has admitted inflating profits by committing unpardonable sins like counting operating expenses as capital investments. Innocent investors in WorldCom today won't be helped by the company's survival. Their stock is already virtually worthless.

But innocent investors in other stocks in the future will definitely be helped by WorldCom's demise - which will serve as a clear warning to thousands of companies of the dire consequences of deceptive financial reporting.

The irony is that the WorldCom revelations in June were the catalyst for the Sarbanes-Oxley legislation that will likely add scores of new regulations on corporate accounting, some of them already producing adverse unintended results. We already have excellent antidotes for corporate misbehavior - if only regulators will apply them with courage and rigor.

But instead, we continue to hear such pronouncements as this one from Michael Powell, the FCC chairman: "This is a significant company whose assets are critical components of the entire network. It would be messy if they became unavailable," said Michael Powell, the FCC chairman.

Messy? Powell sounds curiously like John Sidgmore, WorldCom's outgoing CEO, who wrote in an op-ed piece, "It is in the best interest of our national security, American consumers, and the millions of WorldCom's customers and shareholders to make WorldCom's survival a top priority."

In fact, companies whose top managers lie, cheat and steal don't deserve to survive. It is better for well-functioning markets that they disappear quickly. WorldCom has already hung around for more than five months since its accounting fraud surfaced. That's far, far too long.



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