Telecom Tangle: Industry Under Fire

Feb. 20 -- Telecommunications companies have spent years wrapping their high-speed cables around the globe. But more and more, it appears they've gotten their finances all tangled up as well.

Bankrupt firm Global Crossing, under investigation from the Securities and Exchange Commission, has brought renewed attention to the business and accounting practices of the telecoms, adding to the woes of an industry already reeling from multiple bankruptcies and scant customer interest in high-speed Internet connections.

At the center of the SEC inquiry is an apparently common practice used by many telecom firms, in which they swap quantities of communications bandwidth with each other, counting the exchanges as revenue and making their balance sheets look better in the process.

But Global Crossing is not the only telecom with problems. McLeodUSA declared bankruptcy this month, Qwest recently had its credit rating lowered and Level 3 lost $3.3 billion in the fourth quarter of 2001 amid dramatic plunges in their share prices. Last year, firms like PSI Net, Covad and Winstar all filed for bankruptcy.

Why the Telecoms Bombed

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The Global Crossing case may seem similar to the Enron scandal — and not only because accounting firm Arthur Andersen has handled the bookkeeping for both firms. As with Enron, the Global Crossing controversy also involves a huge bankruptcy, a former CEO who cashed in hundreds of millions in stock options, high-level political connections, and a whistleblower memo from last August.

But the January bankruptcy of Global Crossing was not caused by startling revelations of hidden losses like Enron's. Rather, the deflation of the telecom sector has been painfully obvious to many investors and analysts for at least a year.

The essential problem is that numerous start-up telecoms spent billions laying cable across continents and under oceans in the last several years, in hopes that the dramatic initial growth of the Internet would lead to a huge demand for high-speed telecommunications networks.