- The Washington Times - Sunday, September 21, 2003

As MCI/WorldCom completes the final stages of the bankruptcy process this month, the outcome will either reaffirm the federal bankruptcy code’s long-standing policy of favoring reorganization and rehabilitation over liquidation, or fundamentally undermine it.

Hanging in the balance is the fate of creditors holding billions of dollars of claims, who have voted overwhelmingly to support MCI’s reorganization and 55,000 innocent employees who dedicated themselves to reorganization of this once-great company.

On one side stands the company once known as WorldCom, which, after filing for bankruptcy protection last year, is poised to re-emerge into the local and long-distance telephone marketplace as the newly renamed MCI.

On the other side are MCI’s competitors — Verizon, AT&T; and SBC — which, at every turn, have attempted to abuse the bankruptcy process to harm MCI and avoid meeting it on the telecommunications battlefield.

The federal bankruptcy code was crafted to salvage value from financially tragic events, giving companies a “second life” in the competitive marketplace. As chairman or ranking member of the Banking Committee in the U.S. Senate, I always viewed the core goals of the bankruptcy process as preserving jobs and maximizing return to creditors and others with financial stakes in a company.

WorldCom resorted to bankruptcy protection and reorganization in the wake of its accounting fraud problems. As the first steps in its recovery, WorldCom fired the handful of rogue executives responsible for the fraud and replaced the CEO, CFO and entire board of directors.

Furthermore, the company has developed and voluntarily implemented new policies and procedures — including oversight by the former chairman of the SEC, state-of-the-art board of directors’ guidelines, and an extensive corporate ethics program — that make it a model of corporate governance.

The federal judge overseeing the SEC’s litigation against WorldCom recently opined that never has a company “so rapidly and so completely divorced itself from the misdeeds of the immediate past and undertaken such extraordinary steps to prevent such misdeeds in the future.”

Clearly, what happened at the old WorldCom was wrong, and the small group of executives who were responsible should be punished. The challenge now is to protect the innocents — the creditors and the employees — who are currently involved with the company. This will only result in a benefit to the public at large by virtue of promoting competition — exactly what MCI’s competitors are desperate to avoid.

MCI’s current creditors — including vendors, individual and institutional investors, pension funds and banks — were the true victims here, lending over $40 billion directly to the company based on false financial reporting. These funds were used to build the infrastructure and business that MCI’s competitors seek to have liquidated. They hope to acquire these valuable assets at fire sale prices at the expense of those who paid for them — the creditors.

MCI’s employees were also true victims, as the reputation of the company they built has been destroyed by a few rogue managers.

And, if MCI’s competitors are successful in their campaign to have the company liquidated, consumers will be victims. The former telephone monopolies will be free to raise prices in a world without their most fierce competitor.

To this end, AT&T;, Verizon and SBC have waged a relentless smear campaign to derail MCI’s progress and to try to kill the company during the final phases of its bankruptcy case — a most vulnerable moment — before it can return to the marketplace. In filing after filing and through the media, these competitors have tried to influence the bankruptcy proceedings, and the perception of MCI’s customers and the public at large — all in order to avoid having to compete with the company for long-distance business.

If these competitors succeed, the policies underlying the bankruptcy code and our capital markets will be severely undermined. Lenders and investors will be less willing to commit capital if, because of the transgressions of rogue managers, they have limited ability to recover value for their claims.

Such action would also provide precedent for transforming bankruptcy proceedings into mini-trials, where instead of focusing on a company’s outlook for the future, bankruptcy courts will be compelled to make their determinations on the past bad acts of a few, to the detriment of many who had no role or knowledge of their bad acts.

Meanwhile, the assertion that MCI will emerge from bankruptcy debt-free — and be able to compete more effectively than its competitors as a result — is false and not supported by any financial analysis.

Contrary to public claims by its competitors, the bankruptcy process will not allow MCI to wipe away its debts. In fact, under the current plan, the company will actually emerge from bankruptcy with higher debt-to-capitalization than its peers. Like Verizon, AT&T; and SBC, MCI will price its services to obtain the best possible return on its capital in the marketplace.

Those who hold financial stakes in MCI were victimized once. If MCI’s competitors succeed in derailing the bankruptcy reorganization, they will be victimized again with no chance to recover anything. More importantly, the fallout will impact the bankruptcy code — and all companies seeking its protection — for years to come.

Jake Garn, former chairman of the Senate Banking Committee, works with the MCI/WorldCom creditors committee.

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