my doxy

Orthodoxy is my doxy; heterodoxy is your doxy.
--William Warburton

Commentary on politics, finance, and sometimes other tidbits when I can't restrain myself.

This page is powered by Blogger. Isn't yours?
Tuesday, March 18, 2003

WorldCom writedowns--dumb money or victim of technology

Brad DeLong references the New York Times discussion of WorldCom's recent writedown of $80 billion, including $35 billion in tangible assets. The basic question is: why was capital so badly misallocated?

Gretchen Morgenson in the Times doesn't appear to have a view on that, except that it was "dumb money". DeLong seems to think it was technological change, specifically the advent of DWDM. It could have been either of these things, but if we look at when WorldCom actually spent the money, we have to lean toward the "dumb money" argument, probably with some fraud thrown in. WorldCom had capital expenditures of over $31 billion from 1998 to 2001. Using Google, we can determine that Ciena complained in early 1998 their orders were going to be weaker because "WorldCom's long-distance capacity deployment currently is ahead of schedule due to aggressive DWDM rollout during 1997." So we can't really believe this was unknown to Worldcom while they were spending that additional $31 billion.

Of course, we also know that WorldCom charged billions of dollars of current expenses to its capital accounts, so the numbers I am using for capex may be inflated relative to what WorldCom actually bought, but it still appears that the bulk of WorldCom's capital investment was made after they knew about DWDM. Dumb.