Railroad Shakeout A Precedent For Telecom Companies?

The crisis in the telecom sector is drawing comparisons to everything from the savings and loan crisis of the 1980s to the post-Civil War railroad boom.

More than $90 billion in fiber has been laid in the last four years, and Merrill Lynch estimates that only 2.6% of it is actually in use. With broadband prices plummeting and cash and credit drying up, the shakeout that has begun to hit carriers and service providers has already spread to telecom equipment companies, and could soon spread to the financial companies that funded the fiber boom. With telecom companies sitting on $650 billion in debt, and $14 billion in telecom bonds already defaulted on so far this year, some are worried that the telecom cleanup will rival the savings and loan crisis of the 1980s.

The fiber glut has begun to draw comparisons to the great railroad buildout after the Civil War, most recently in the New York Times and Wall Street Journal on Monday. That era led to two spectacular cycles of boom and bust, capped by economic depressions in 1873 and 1893.

The comparison is probably a fair one, at least in terms of the shakeout that investors can expect among telecom companies. With more than 400 CLECs, long-distance carriers and service providers, the telecom shakeout could be dramatic and long-lasting. It will most definitely dwarf what the dot-coms have experienced over the last 15 months. The big question mark is how much it will affect the rest of the economy.

More than 30,000 miles of railroad tracks were laid in the years after the Civil War, fueled by booming profits and cheap financing. But in 1873, the collapse of the Northern Pacific Railroad and financier Jay Cooke led to a market panic (which, interestingly, occurred during a Puetz crash window), and coupled with other liquidity and financial crises, marked the start of a depression that would last until 1878. During that time, 89 railroads went bankrupt, and the railroad build out rate fell by 80%.

But railroad investment picked up again in the late 1870s, and 74,000 miles of track were laid in the 1880s. Railroad profits boomed again, and their stocks soared. But another crisis in 1893, brought on by the collapse of England’s Baring Brothers house, a crisis in the gold standard, an agricultural depression – and overinvesment in railroads – led to another depression that would last until 1897. During that time, 192 railroad companies went into receivership. The collapse of the railroads brought down with it the steel industry, the stock market and the banking system.

But the interesting end to the tale is that in 1897, when Charles Dow first compiled the averages that still bear his name, he created two averages. One, called the Industrial Average, was made up of 12 stocks representing all industries but one. That one industry – railroads – received its own average, made up of 20 leading stocks of the day. After 32 years and two depressions, railroads remained the leading enterprise of the time.

A hopeful ending, but the process of sorting out 20 leading telecom companies will likely be a long and painful one.

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