the CAMP ENRON Report


CAMP ENRON:
... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.


For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003

NOTE to READERS:
(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


OUR DEPARTMENTS:

the COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.


For brief orientation, see this
Welcome to CP


CAMP ENRON:
... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

OTHER GOOD STUFF:
Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Tuesday, July 02, 2002

 
--- WorldCom Damage Control: Report! ---

Try as I do to avoid forming any opinion of the market's one day performance -- yesterday, today, or tomorrow -- I confess surprise that WorldCom's $4B "kerplunk!" made so little splash last week.

There are several parts to last week's story. WorldCom was already beaten down (from $180B to yesterday's $180M in market cap). The sharpest jolt was to the credit markets, not equities. Many of the consequences were indirect. And, in my opinion, much of the financial community was still running on laughing gas. Not so this week.

The good news is that WorldCom debt -- around $30B -- is broadly syndicated. Nobody holds as much as $1B worth. Few creditors hold more than $100M. (California -- wouldn't you know it -- looks to win top honors, with over $800B combined debt and equity exposure.)

The bad news is that WorldCom debt -- around $30B -- is broadly syndicated. If it all goes gunnybag, hundreds of creditors -- banks, pensions, insurance companies, funds -- would take individual losses of $10M and up. Some of those stakeholders turned bagholders may also suffer additional losses via the "stupidity tax" of civil litigation from their stakeholders.

Banks could call the loans and take down WorldCom in a heartbeat ... but CEO John Sidgmore doesn't think they will, and neither do I. All they'd get by pulling the plug is a heap of worthless paper, plus domino effects on the rest of the market including other bank customers, which might make more paper worthless in the funny way these things circle a few times before they come home to roost.

Bankers will calculate what they can salvage, and -- if it works out -- persuade bigger fools to cart away the remaining ten-billion pound steaming pile in a billion five-pound bags. In any case, the outcomes from here on out are in the province of game theory, not factor economics.

Who else gets hurt? Vendors -- of hardware, software, ordinary goods and services (notably EDS today, stuck with the problem of valuing an 11-year IT outsourcing contract). Employees, and contractors, and temps. Customers, who may see customer service go from bad to worse, and legitimate claims harder to settle (though major customers may negotiate rich concessions from the desperate vendor). Other carriers, who are at once vendors and customers and swapmates and financiers. Unrelated legitimate new ventures, who'll see capital markets go from rotten to stinking rotten. And charities. And "multiplier effect" successors in concentric rings around all of the above.

Will it all come out in the wash? The optimistic case (championed by CNBC's Larry Kudlow) is that after ALL the telecoms go bankrupt. We'll be left with all of the same companies, services, customers, and a mountain of costly facilities, minus the mountain of debt. But the other half of the problem is that same mountain of facilities ... dark fiber, excess bandwidth, the legacy of "get big fast" and winner-take-all franchise economics. It's not going away, and while it exists the competitive market value of any strand of lit fiber is approximately zero.

When your basic stock-in-trade is essentially free, it gets hard to fund network operations, marketing, customer service, legal, government relations, R&D, and still have something left over for risk-adjusted return on capital. It's like going to the beach and selling sand by the spoonful. Sure, the cost of goods sold is favorable, but SG&A will kill you. You need to set up a booth, and hoist a banner, and hire some college kids to man the booth ... and you need cups and spoons, and price sheets, and you still need to get the crowd to buy sand from you and not from the booth next door. Too much silicon dioxide in supply, not enough carbon-based demand units. Yeah, yeah, I know, in Marketarian Utopia there's no such thing as a surplus ... fine, let 'em eat sand!

Capital markets are having a hard time with this one. The Guardian says US scandals shake the Square Mile. On CBNC, David Faber reports illiquidity verging on panic, especially in the high-yield debt and credit hedge markets. ("High yield" == "high risk", which is what a lot more debt became this week). The spread between bid and ask prices widens. Buyers and sellers lose confidence, both fearful the other guy knows something they don't. Risk-takers arbitrageurs have no place to lock in wins by selling back risk.
For broader perspective, New campers are encouraged to read our Camp Enron Economic Impact Statement. [I haven't reviewed it since January myself ... I'm saving that for a special occasion.] Direct damage aside, global capital markets will be less efficient until we get over this. It may take us decades to get over it. And this is only the tip of one rather large iceberg ... around the next bend we may see a whole ice shelf breaking up.
We live in an age of innovation. Truly revolutionary technologies are rolling off the drawing board and piling up in the limbo between the research and commercialization. We'll need new societal, institutional and transactional frameworks in order to exploit this backlog. Information technology is chock-full of economic potential, but the more obvious inventions need a host of new, non-obvious inventions to make them practicable ... and those inventions need mad money to make them happen. Lose our nerve now, and we lose a lot, for a long time.