Award Winning Blog

Wednesday, February 11, 2009

The Non-Lesson From Telecom Frauds

Does anyone remember how Worldcom, Qwest, 360 Communications and other telecommunications carriers overstated revenues by booking capacity swaps as current income? Like their Enron counterparts, telecom managers came to understand that there was more bonus money and stock appreciation in creating esoteric capacity swaps then in stimulating demand through enhanced service.

History repeats itself as though we learned nothing from previous frauds. It appears that little difference exists between a creative financial “instrument” that repackages real estate debt and one that repackages telecommunications capacity swaps. The underlying financial transaction—to fund a telecommunications transmission facility such as an overseas fiber optic cable, or to fund home purchases—becomes a long embedded element to a more recent repackaged or re-sliced financial instrument. With such repackaging ventures can prime their financial pumps and profit statements by recycling and reselling.

To my mind little difference exists between the false stimulus of buying, repackaging and reselling real estate debt and telecommunications transmission capacity debt. With each reprocessing of the properties, processors can expand the debt load based on the artificial increase in apparent demand for the financial instruments, never mind that demand for the underlying property may not have changed, or may have been goosed upward on fraudulent grounds.

The non-lesson: if smart people can artificially inflate demand for telecommunications transmission capacity and debt instruments, the same or similarly smart people can do the same thing for real estate.

3 comments:

chris said...

The smartest guys in the room rely on non-compliance and regulators asleep on the job. WorldCom - where I worked - was all about a longterm strategy of non-compliance, which is why the CFO, General Counsel and CEO were but the tip of a very ugly iceberg. To describe interconnection payments as CAPEX - well as with all recent scandals, it comes down to wilfully incompetent internal and external auditors! "Off with their heads"

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