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.

Any Link Between Telecom Capacity Swaps and Flipping Oil Contracts?

Not so long ago employees at Enron and at numerous telecom firms learned a financially lucrative lesson: there was (is?) more money to be made in swapping capacity than in delivering it. Indeed there was plenty more money available if traders could collectively create artificial bottlenecks and shortages.

My takeaway from that experience: if traders can manipulate electrons delivering electric power and telecommunications traffic, it’s quite possible that managers of packet streams can engage in similar conduct. Packet management can represent legitimate (and lawful) network management, or it can represent surreptitious meddling with an eye toward raising the cost of doing business for competitors and favoring affiliates or third parties.

A variety of petroleum industry observers reckon that traders may have helped artificially run up the price of oil. Notwithstanding some significant confidence in marketplace forces, I am beginning to wonder whether previous attempts to manipulate the price and profitability of electricity and telecom capacity may present a model emulated by oil traders.

While not hankering for oil trading regulation, I wonder whether empirical data might corporate this suspicion.