by Coll, Steve;
“It is true, isn’t it, Mr. McGowan, that in 1969, when MCI got authority to construct and operate microwave towers between Chicago and St. Louis, the thought never occurred to anyone there that you had the right to provide MTS-type, ordinary long-distance services. That’s true, isn’t it?”
“I do not remember any discussion of that entering into any plans. I mean, it was clear we all knew that we were building a system which had all the elements of communications that could be used for any type of service … but certainly I do not believe that was in the plans in 1969.”
“All right. In any event, along comes 1969 and you get your application granted and the commission sets the notice of inquiry into the Specialized Common Carriers proceeding to define your franchise, and it asks for comments from all interested parties; is that correct?”
“Yes, they did.”
“Mr. McGowan, you know very well you walked into the commission and you said, ‘All we want to do is provide point-to-point private-line service,’ didn’t you?”
“If somebody used the term the way you are trying to define it, that is incorrect.”
“All right. Let’s take a look at some of the things you told the commission in those days, Mr. McGowan … Let’s take a look at the comments and reply comments of MCI in the Specialized Common Carriers decision … Will you read the first two sentences under the heading, ‘The Specialized Carriers Operations Will Not Result in Creamskimming’?”
McGowan read from the document Saunders handed him. “‘There will be no creamskimming because the MCI-type applicants propose to offer only customized point-to-point services and have no intention of attempting to compete with Bell in providing local exchange or long-distance telephone service, which account for the bulk of Bell’s revenues. All of these are conventional telephone switched-voice services, and none of the MCI-type carriers propose such services. The exchange services offered by the telephone company are not similar in any way to the services which the Specialized Common Carriers propose to provide. The exchange telephone services remain the dominant preserve of the Bell System, safe and secure from competition. Specialized Common Carriers will provide only specialized point-to-point private-line services.’”
“Does that accurately state your plans of that time?”
“Yes, as of that time.”
“Mr. McGowan, what the commission decided in the Specialized Common Carriers proceeding was that the services proposed by the specialized carriers were in the public interest, didn’t they?”
“No, I think that is too narrow a reading of that decision.”
“This is not an easy decision to read, is it?”
“It depends on what you are trying to find in there.”
“You were in court in Chicago when Judge Grady said it was an abomination, and that he couldn’t understand it, weren’t you?”
“Judge Grady did have some trouble at the beginning understanding it, yes.”
“Did he ever understand it? Did he ever say he understood it?”
“I am sure he understood it much more at the end.”
“Will you read me everything the commission says in there about FX and CCSA?”
“Where?”
“It isn’t there, is it?”
“Yes, it is there. They describe private line. They say specifically, for example, even if Bell lost its entire private-line market, which includes FX and CCSA, you still would not be hurt. They could hardly have anticipated you losing your entire private-line market without losing your FX market, since that includes your FX revenues.”
“Does the decision use the word ‘FX’ anywhere?”
“It uses it by calling it other ways.”
“Does it use the word ‘FX’ anywhere?”
“I am not sure whether the word ‘FX’ is in there. It could be or not be.”
“You know it’s not there, Mr. McGowan.”
“I have not memorized the contents of this document.”
“Now, in any event, you have testified under oath that the meaning of that decision is crystal clear; isn’t that right?”
“I believe it is certainly clear enough to a businessman to tell him what business this would say anyone could go into. This decision was not for MCI. This decision was for anyone who wanted to go into this business, not for us.”
“You know, don’t you, Mr. McGowan, that a lot of people have testified under oath that they read the decision at the time it came out and did not understand it to encompass FX and CCSA services. You know that, don’t you?”
“I understand there are some people.”
“Did you receive advice from any lawyer at that time, that the decision encompassed FX and CCSA services?”
“Yes, I did.”
“Who was that lawyer?”
“Lawyers. I received that opinion from, certainly, Mr. Kenneth Cox.”
“I don’t want to trivialize this thing, Mr. McGowan, I would like to focus it. This is the major issue that separated MCI and the Bell System during this period, isn’t it?”
“It was absolutely not the main issue whatsoever. The first time we ever heard this issue was after this whole thing blew up. Not once did we end up with someone saying, ‘You fellows aren’t entitled to it.’ If AT&T thought we were not entitled to it, customers kept demanding it, and I know they would have gone to the FCC and gotten us off their back. AT&T is amply able to take care of themselves in the regulatory forum. If they didn’t think we were authorized, they would have gone to the FCC and said, ‘These people are bugging us, go away.’ Bell thought of this idea that we weren’t authorized after this whole thing blew up, not before.”
“That is your testimony?”
“Yes, it is.”
“That’s what you are going to state here and try and convince this court?”
“That’s my testimony. I believe that.”
Therein lay the heart of the case: Like so many other trials, U.S. v. AT&T was going to come down to a matter of personal credibility, interpretation, and judgment. It was possible, as George Saunders believed, that McGowan was lying. It was possible, too, as the government assumed, that he was telling the truth. Saunders’ strategy was to prove that MCI’s story was a fraud, that McGowan’s complaints about AT&T were really a smokescreen for his own manipulative and devious plan to slip into the switched phone network and make billions in long-distance competition with AT&T. Throughout his cross-examination, Saunders continually implied that McGowan was perjuring himself. And though the MCI chairman never gave in to Saunders’ attack, his argumentative, defensive responses began to wear on Judge Greene. Though he recognized the importance of McGowan’s cross-examination and gave both Saunders and his witness wide latitude, Greene finally was unable to contain himself and burst out angrily, “I understand, Mr. McGowan, that you want to be careful of this cross-examination. But this constant fencing of every word is kind of getting ridiculous, so would you please answer the questions?”
Greene began to ask questions of McGowan directly, focusing mainly on the relationship between MCI, Bernie Strassburg, and the FCC during the fall of 1973. McGowan treated Greene with the same contempt he directed at Saunders, and Greene snapped, “At least in answer to my questions, I wish you would answer them rather than making speeches.”
For some of the government lawyers, McGowan’s performance represented the low point of the entire case. Through his shrillness during cross-examination, he had called into question the integrity of the government’s MCI story and he had alienated, at least temporarily, the affections of Judge Greene. McGowan’s reluctance to work closely with the government lawyers in preparation for his examination seemed precisely an example of how his first and overriding priority was his own self-enrichment. This resentment did not reflect a naive view by the Antitrust division lawyers that aggressive “competitors” like McGowan should be warm, nice people; simply, it left a bad taste in the Justice staffers’ mouths. They had to remind themselves that McGowan’s a
ntagonist in this drama, John deButts, was an equally unattractive personality in their minds: he, too, was arrogant, strident, dissembling. It was important, they told themselves, not to see this case as solely a clash between two men, McGowan and deButts. To some of the Justice lawyers, the end they were pursuing—the breakup of AT&T, the creation of economic pluralism in the telephone industry—justified the means, even if those means included the enrichment of a character like Bill McGowan. To others on the Justice trial team, the case was just a job, and no matter who benefited by its outcome, it was important that the job be done right.
None of them, however, could be magnanimous about the gloating faces of the AT&T lawyers who sat at the defense table across the courtroom. As Saunders scored point after point against their most important witness, the young government lawyers felt their ears burning. As much as they liked and appreciated Saunders himself, it infuriated them to see the AT&T trial team attorneys, whom they’d been fighting for years, leap to their feet to “towel Saunders off” after one of his grueling sessions with McGowan, as if George was the legal heavyweight champion of the world, about to score another knockout. At moments like that, the government lawyers forgot all about the merits and demerits of U.S. v. AT&T and set their hearts and minds to how it could be quickly and decisively won—with or without effective testimony from Bill McGowan.
Chapter 20
The Baldrige Proposal
When the Reagan administration’s commerce secretary, Malcolm Baldrige, interviewed Bernie Wunder early in 1981 for the job of assistant secretary of commerce in charge of telecommunications policy, one of the first questions Baldrige asked was, “What do you think about the AT&T case?”
“It ought to be settled,” Wunder told him.
“Yeah, I think so, too,” Baldrige agreed.
And so, it seemed that spring, as the trial of U.S. v. AT&T progressed, did every secretary in the Reagan cabinet. Caspar Weinberger had already taken public his view that the case should be dismissed. The new attorney general, William French Smith, was widely considered by congressional and White House insiders to support that idea, even though he was prohibited from ruling on the case because of his past affiliation with Pacific Telephone. Edwin Meese, long-time friend and counselor to President Reagan, privately told AT&T chairman Charlie Brown that he was sympathetic to the phone company’s plight and would do what he could to expedite White House intervention in the case. Even cabinet-level officials who had little to do with economic or legal policy, such as Secretary of Agriculture John Block, expressed support for settlement or outright dismissal.
The question, though, was how to accomplish that goal when the administration’s own Antitrust chief was boasting about litigating the case “to the eyeballs” and when the trial before Judge Greene was moving rapidly ahead.
From New York, Charlie Brown and his general counsel Howard Trienens were doing all they could to devise a workable strategy. When the brouhaha between Weinberger and Baxter hit the newspapers, Trienens called the White House and made an appointment to discuss the matter personally with Ed Meese. He flew to Washington and met with the President’s counselor in his office. Trienens told him, “You all really ought to get your act together—stop this public bickering and start working on a solution.” Meese agreed. But the sort of solution that Meese and Trienens wanted—dismissal of the case or favorable settlement terms forced on the Justice department by the White House—would require a direct decision by the President himself. Obviously, such a decision would have major political and policy repercussions. Meese could not simply walk into the Oval Office and ask Reagan to drop the case. A lot of groundwork would have to be laid inside the administration.
Trienens knew where to start. Malcolm Baldrige and Bernie Wunder at the Commerce department had already made it clear to AT&T that they would be willing to push a dismissal proposal to the White House. One problem was that, since February, Wunder’s confirmation as assistant secretary in charge of the National Telecommunications and Information Agency had been delayed for no apparent reason. Until Wunder was confirmed, it would be impossible for Commerce to put forward a major telecommunications policy proposal such as dismissal of U.S. v. AT&T. During his meeting with Meese, Trienens successfully pushed the counselor to move Wunder’s confirmation along quickly.
Charlie Brown, meanwhile, was spending a considerable amount of time on the telephone and in Washington talking with administration officials about why the case should be dropped. In the course of several weeks that spring, he talked with Ed Meese, White House Chief of Staff Jim Baker, Cap Weinberger, Malcolm Baldrige, and several others. The theme of Brown’s presentation was that unless some direct action was quickly taken by Reagan, the telecommunications policy of the administration was going to be set, by default, by Bill Baxter and the career trial attorneys at the department of Justice.
“If that’s what you want, that’s what’s going to happen. If that’s not what you want, then something needs to be done,” Brown told the members of Reagan’s cabinet.
Not unwittingly, Brown was reminding the key players in the administration that Baxter was a political outsider, an obscure academic who had played no role in the 1980 presidential campaign and who had been chosen Antitrust chief because of his strongly held conservative ideology, not because of his political loyalty or experience. It was a sound tactic. Even as early as April, Baxter’s blunt arrogance was beginning to alienate some of the key cabinet secretaries who wanted to dispose of the AT&T case. The political appointees at the Commerce department, for example, liked to say that Baxter thought there were two kinds of people in the world: those who agreed with him, and those who were stupid. The trouble was that because the Reagan “team players” at Justice, Bill Smith and Ed Schmults, were recused from the case, Baxter spoke for the entire department on matters concerning AT&T. Brown urged Meese, Weinberger, and Baldrige, who had direct access to the President and far more clout in the administration than Baxter could ever dream to hold, to take the problem into their own hands.
In order to seize responsibility for the decision to dismiss the biggest antitrust suit in American history, Reagan’s top advisers would need expert help, and for that they turned to Bernie Wunder and the Commerce department.
Wunder was a plain-speaking, politically savvy Republican lawyer from South Carolina who, since 1975, had worked as minority counsel to the House subcommittee on telecommunications. When Baldrige offered him the stewardship at NTIA, Wunder came to his Commerce job with three objectives. First and foremost was to pass comprehensive legislation in Congress that would address the issues and problems of telephone industry competition while preserving the integrity of AT&T’s national switched network.
“The sonuvabitch is working,” Wunder would say when asked why he so passionately opposed breaking up the phone company. At the same time, Wunder wanted to see more competition in the industry. He felt this could be achieved without divestiture, through legislation that set down the kinds of equal access and interconnection rules that Justice and AT&T had tried to work out during the Crimson Sky negotiations. And finally, Wunder wanted to make sure that local telephone rates did not rise significantly as a result of any congressionally-mandated competitive experiments, because he feared that such rises would lead to a backlash against his program. The cross subsidies between AT&T’s highly profitable long-distance service and its costly local service were politically important. Everyone paid for basic phone service, while relatively few phone users—mainly businesses—spent significant amounts of money on long distance.
Wunder also believed that the biggest obstacle to achieving these goals was the Justice case against AT&T. During six years in Congress, Wunder had worked on one comprehensive telecommunications bill after another, each designed to end uncertainty in the telephone industry while laying down rules—without divestiture—to increase competition, and each was defeated, ultimately, by congressmen and senators worried that the bills would improperly in
terfere with Justice’s suit against AT&T. The most frustrating defeat of this kind had occurred the previous June, when—after eighteen months of intensive hearings, lobbying, and negotiating between AT&T, MCI, subcommittee members, and others—a comprehensive bill had finally cleared the House Commerce Committee, only to be killed in Peter Rodino’s antitrust subcommittee. Wunder was determined, now that he was in a position of authority at NTIA, to do all he could to prevent that from happening again.
So even before the high-level lobbying by Charlie Brown and Howard Trienens stirred Ed Meese, Cap Weinberger, and others into action, Wunder had begun to prepare the data and formal policy arguments that would be needed to support any decision to dismiss the government suit. Much of the material Wunder needed was already lying around NTIA, left over from the Carter administration, whose NTIA chief, Henry Geller, had also been interested in a legislative or other out of court settlement of the Justice case. It had been under Geller’s supervision that NTIA had prepared the “menu” of settlement alternatives, which led eventually to the aborted Crimson Sky deal. Geller had worked at the FCC’s Common Carrier Bureau during the early 1970s, where he had helped shape the bureau’s procompetition policies. After Execunet, though, Geller decided that competition policy in the phone industry was out of control, and he had come to NTIA in 1977 with goals similar to those being pursued by Bernie Wunder in 1981. (Later asked why he tried to roll back at Commerce the competition policies he had helped devise at the FCC, Geller replied, “All I can say is that I was dumb [when I was at the FCC]. I didn’t have the vision to see what I was doing.”) But Geller was unable to accomplish anything more than preparation of the informal menu of settlement alternatives. In the Carter White House, the Commerce department was regarded as little more than an apologist for the interests of big business, and it had little policy influence.