The Deal of the Century

by Coll, Steve;

  And immediately, this atmosphere of skepticism was exacerbated by the presidents of the operating companies themselves, who were at once shocked by Brown’s decision and anxious to position themselves as favorably as possible for the post-divestiture world, now that they were “free at last.” After the announcement was made on Friday, January 8, a number of operating company presidents predicted to reporters that local phone rates would rise dramatically because of the settlement. Delbert Stanley, president of New York Telephone, told the Wall Street Journal that the price of local service would “at least double” in the next five years. Others bemoaned the loss of AT&T’s efficient vertical structure, its “end-to-end” service responsibility, and the promotional opportunities formerly available to operating company executives. The presidents’ predictions about drastic rate hikes and deteriorating service, while sincerely made and ultimately accurate, were also self-serving. An important part of a local operating company president’s job was to convince his state regulators that proposed local rate hikes were necessary and justifiable. It was not an easy task, since no politically appointed state regulator liked to be known for routinely passing on higher phone prices to consumers. By predicting that the Bell breakup would accelerate the rising cost of local service, the presidents were already laying the political groundwork for their independence: if regulators, politicians, and the public thought the local operating companies were worse off because of the breakup, it would be easier for the companies, once on their own, to win rate hikes from their state utility commissioners.

  Brown and other top managers at 195 Broadway were sufficiently alarmed by the operating company presidents’ predictions of drastic local rate hikes that, during the weekend after the deal was announced, they dashed off a memo urging the presidents to keep their mouths shut about rising local phone rates. “News accounts in the national as well as local media are conveying the impression that the consent decree signed Friday in Washington will give rise to substantial increases in local exchange rates,” the memo said. “It is important that you promptly take whatever measures may be effective in correcting this misunderstanding. As you know, there is nothing in the consent decree that changes local rates.”

  Of course, the presidents had heard that line on Tuesday at the secret meeting in Basking Ridge, New Jersey, and on Friday morning; they had even been provided with a “fill in the blanks” press release about local rates from one of Ed Block’s PR men. Nonetheless, some of them had chosen to speak their minds about the settlement. After the weekend memo, the presidents stopped talking about local rates until after the deal with Justice was finalized. On Capitol Hill, the sudden silence was met with charges that the local presidents had been “muzzled” by AT&T’s corporate headquarters, and while 195 Broadway executives told congressmen the accusation was “a myth and an insult,” the presidents’ first statements had already made an indelible impression.

  Finally, the contention by Charlie Brown himself that the deal with Justice would have no “significant” effect on local phone rates was increasingly exposed as flawed. Brown and Baxter were technically correct when they said that local rates would have gone up anyway because competition was driving prices to reflect actual costs in the industry. But very early in 1982 it became obvious to regulators, industry analysts, and even Congress that divestiture would dramatically accelerate the trend. In a speech to Wall Street analysts in March 1982, Brown predicted that local rates would rise only 8 to 10 percent over the next four to five years; less than a year after the deal with Justice was approved, Southwestern Bell, which was still under Brown’s stewardship, applied to its regulators for a $1.2 billion, 26 percent rate increase to make up for revenues lost because of the impending breakup. Brown and other AT&T executives tried to play down the linkage between divestiture and dramatically higher local phone bills—by 1985 the cost of local phone service had nearly doubled in many states—because they were afraid that rate hikes would provide Congress an excuse to meddle with the Justice settlement. In Brown’s view, the danger was that the breakup itself would be blamed for changes in the phone industry that had actually been initiated by the FCC in the early 1970s, blessed by a decade of inaction in Congress, and relentlessly pursued by the U.S. Department of Justice. The chairman’s fear was well-founded; no matter how many times he declared, “This is clearly not our choice—our choice was the way we had the place organized,” AT&T still found itself on the defensive about the settlement.

  With the operating company presidents silenced, state regulators stepped in as their proxies to press for the best possible deal for local companies from Congress and Judge Greene. The California Public Utility Commission formally declared that the settlement was not in the public interest because Pacific Telephone could not survive without the help it received from AT&T. A New York utility commissioner told the press, “This thing is an abomination. The stockholders will be better off and AT&T competitors will be better off, but the customer is the forgotten man.”

  Such declarations provoked Congress to apoplexy. Hearing after hearing was called by committees in both the House and Senate, and a swarm of bills was introduced aimed at preserving “universal” and “lifeline” telephone service; establishing a national “consumer board” to protect telephone users from rising local rates; forcing AT&T to dismantle itself further by separating its Long Lines department from Western and Bell Labs; allowing the local companies to sell telephone equipment in competition with the new AT&T; restricting AT&T’s use of its patents; regulating control of the Yellow Pages; creating a national fund to assist elderly and poor phone users; and a host of others.

  Charlie Brown spent so much time in Washington during 1982 testifying about the breakup and fighting against restrictive legislation that some executives at 195 Broadway felt there was a void in leadership at AT&T. In July 1982, Charles Hugel, one of the original blue team executives and a leading candidate to inherit Brown’s chairmanship, resigned unexpectedly from AT&T to become chairman of Combustion Engineering. Hugel said later, “By April, there was so much that had to be done and you couldn’t get senior management to focus on it.… It was difficult to get anyone to make a decision. You wouldn’t believe how many committees there were by then. You’d go out to Basking Ridge, New Jersey, and the cars would be lined up and down the driveways and adjoining roads because there were so many people at committee meetings. It just kept rolling around and around. Charlie and Howard were up to their necks in Washington appointments—only the chairman could do that. But there was no chief operating officer. There was no one in charge.”

  Congress, similarly, was in a state of such outrage and confusion that it was effectively paralyzed. When the deal with Justice was announced, Senator Barry Goldwater, a communications subcommittee chairman and ostensibly a leader on telephone issues, declared that breaking up the phone company was “one of the best decisions ever made.” Some months later, he pronounced, “If there was any way we could legislate to put AT&T back together again, I’d be in favor of that.”

  The back-flipping by Goldwater and others pushed Brown into the position of one day defending the settlement against charges that it was a “rip-off of the consumer,” while the next explaining that he was as sorry as Congress that the Bell System had been destroyed. At one point, while fighting legislation designed to reconfigure the post-divestiture phone industry, the AT&T chairman wrote a letter to every member of Congress that said, “It is too late for Congress to have second thoughts about whether or not, and at what pace, competition should be encouraged—or whether the Bell System should have been broken up to begin with. Please do not, at this juncture, disrupt the … restructuring of the telephone industry.”

  AT&T’s most daunting nemesis in Congress, Tim Wirth, returned with a vengeance to fight the phone company after the settlement was announced. In March 1982, he introduced a bill known as H.R. 5158 that provided for separation and partial outside ownership of Long Lines, rules preventing AT&T from
competing with the divested operating companies, and the transfer of some lucrative lines of business from AT&T to the new operating companies. The confusion surrounding the lobbying and debate over the bill was overwhelming. MCI, ITT, and other AT&T competitors quietly bankrolled a consumer campaign to generate “grass roots” concern over issues raised by the Justice deal—MCI wanted to be sure that AT&T was not too quickly deregulated. But after the Nader group sent out 150,000 direct-mail pieces urging consumers to express their opinions to Congress about rising costs and declining service, McGowan changed his mind and attacked the Wirth bill as “legislation that’s so backward-looking it simply cannot pass.” So just as 30,000 letters expressing consumer outrage, generated in part by MCI, arrived in Congress and propelled 5158 out of committee, McGowan began publicly to oppose the same legislation because he had decided it was not too favorable for the operating companies and consumers—it allowed the operating companies to compete at MCI’s expense. Fifteen AT&T competitors also spent part of a $300,000 joint fund to hire Washington superlobbyist Robert Beckel, who had headed the Carter administration’s successful effort to pass the Panama Canal treaty in the Senate, to lobby for the Wirth bill. Meanwhile, AT&T was dumping more than $1.5 million into its Washington lobbying operation in a blitzkrieg effort to defeat the same legislation. At one point, Beckel remarked that the Panama Canal treaty was “a piece of cake compared to this.” Bill Baxter even jumped into the fight, telling a congressional committee that separating Long Lines from Western and Bell Labs “would be like going after a cockroach with a twelve-gauge shotgun,” and prompting a congressman’s response, “It’s the largest cockroach I’ve ever seen.”

  Battered from all sides, Wirth finally threw in the towel in July, declaring at an emotional House Commerce Committee meeting, “In my eight years in this body, I have seen nothing like the campaign of fear and distortion that AT&T has waged to fight this bill. In the short run, AT&T has won a tactical victory. But AT&T’s victory is a major setback for the American people.… AT&T is preventing Congress from making the decisions that are ours to make. Let me make it very clear that our commitment to these issues remains as strong as ever. We recognize our responsibility to make telecommunications policy.… From the day the settlement was announced, everyone knew it was a great deal for AT&T and that it would increase local rates. Until the settlement, AT&T was the leader in advocating that Congress—not the FCC, and not the courts—should set telecommunications policy. What followed the settlement is an unprecedented attempt by AT&T to block Congress from setting that policy. After all, Bell got a very good deal from the Justice Department.”

  William Baxter, the man responsible for this “very good deal,” was at the same time being bashed around by various House and Senate committees, but unlike Brown, Baxter had nothing to lose in Congress and by nature he was unaffected by attacks on his person or character. Jonathan Rose, the assistant attorney general who had helped Baxter defeat Malcolm Baldrige’s dismissal proposal in the summer of 1981, said later, “To Baxter, life should be decided on its economic merits. He never had any trouble dealing with these congressional hearings—he just went up there and told them what he thought. His attitude was, ‘Why should anyone be troubled by these congressmen?’ Cross subsidies and deregulation were the only things that mattered to him.”

  So when the Antitrust chief found himself before the Senate Commerce Committee in early 1982 answering pointed questions about why he had seen fit to take a skiing vacation in the midst of the inter-intra negotations, Baxter deflected the attacks as if they were harmless toy arrows.

  “Defense Secretary Weinberger said that divestiture would be disastrous.… Could you tell us how long the Defense department had to study the actual proposed decree?” Senator Harrison Schmitt of New Mexico demanded of Baxter angrily.

  “I really can’t,” Baxter replied. “I was out of the city. And Mr. Brown, the chairman of the AT&T Company, took the decree, I believe, to Secretary Weinberger.”

  “You left it to Mr. Brown to discuss this with the secretary of defense? It seems to me that might have been the responsibility of the Justice department.”

  “I understand. I left it with Mr. Brown.”

  “I am incredulous!” Schmitt bellowed. “I can’t think of another thing to say.”

  But Baxter had nothing to add, either, no apology to make. He sat expressionless at the witness table, chain-smoking his unfiltered cigarettes, waiting to field the next question.

  In the end, both Justice and AT&T escaped unscathed from Congress’ season of outrage. By April 1982, Baxter had endured questioning at nearly a dozen different Capitol Hill hearings, and if his reputation for candor was not unblemished, his antitrust policies—the AT&T settlement, dismissal of the IBM case, his lax attitude toward corporate mergers—remained unaltered. For Brown, on the other hand, 1982 was a long and demanding year of travel, speeches, congressional testimony, and eleventh-hour legislative negotiations. The excruciating demands on the chairman were perhaps mitigated by the decision of AT&T’s board of directors in 1982 to raise Brown’s annual salary 17 percent to $661,667 and to hike his overall compensation, including incentive and savings plans, insurance and personal benefits, and director’s fees, to $1.3 million, a 30 percent increase. Whether for that or other reasons, the chairman responded with extraordinary energy and determination, and at every crucial moment in the phone company’s battles with Congress during 1982, AT&T prevailed. No legislation affecting the terms of the inter-intra deal with Justice was passed by the nation’s preeminent body of lawmakers.

  When Congress’ last hope for a role in telecommunications policy making, Tim Wirth’s H.R. 5158, was abandoned in July, former FCC chairman Richard Wiley remarked, “Judge Greene has now become the man of the hour. His decision in the Tunney Act proceedings will chart the future of the telecommunications industry like nothing else—because there will be nothing else.”

  Once more, the answer man. It was a role to which Harold Greene was growing well accustomed.

  Chapter 34

  The Telecommunications Czar

  “There are two ways to explain what Judge Greene did,” the Justice department’s Ron Carr said when it was all over, a trace of bitterness in his voice. “One is the ego theory, that he wanted to become a miniature FCC and that he likes the power and attention. The other, more generous theory is that if you look at everything he did, there is no principle running through it but one: How do you avoid a political reversal of this judgment? How do you avoid congressional interference? I think that is the unifying principle. Actually, the two theories can complement each other—Greene was protecting his turf from Congress while simultaneously creating a kingdom for himself.”

  It was, of course, Judge Greene’s prerogative, even his duty, to consider whether the settlement of U.S. v. AT&T was in the public interest. Given the judge’s comments and demeanor during the year-long trial, neither Justice nor the phone company doubted that Greene would look favorably on the basic decision to divest all the operating companies, and, indeed, even during the first angry hearing after the judge returned from the Caribbean, Greene remarked that at first glance he thought the deal between Justice and AT&T appeared to be a good one. Greene said later that he had felt for some time that divestiture was the most sensible solution. In a 1985 interview, Greene insisted that he had not decided during the trial how he would finally rule on U.S. v. AT&T, but he also observed, “I have no doubt about the correctness of deregulation. The basic fact of the phone industry is it grew up when it was a natural monopoly: wooden poles and copper wires. Once it became possible to bypass this network through microwaves, AT&T’s monopoly could not survive. What the Bell System did was illegal. It abused its monopoly in local service to keep out competitors in other areas. Competition will give this country the most advanced, best, cheapest telephone network.”

  So the question was not whether Greene would find the breakup of AT&T to be in the public interest—b
oth parties in the lawsuit assumed he would—but whether the judge would tinker with the terms of the consent decree before approving it. It was not clear whether Greene was legally empowered to change unilaterally the terms of the deal, but there was no question the judge could refuse to approve the settlement until the changes he wanted were agreed upon by Justice and AT&T. If the parties refused to go along, Greene might force the resumption of the antitrust case.

  In Congress, AT&T was spending millions to prevent precisely the sort of meddling that Judge Greene might indulge in. But the irony was that during the Tunney Act proceedings before the judge, it was Justice lawyers like Ron Carr and Bill Baxter who most vehemently objected to Greene’s increasingly autocratic role. What Charlie Brown and Howard Trienens wanted more than anything was to get the deal approved and over with so that AT&T could get on with the gargantuan task of reorganizing itself to prepare for final divestiture. Thus the phone company was in a mood to compromise in court. AT&T’s lawyers and executives generally felt that while Judge Greene had been a hostile opponent during the trial, he was also a fundamentally reasonable, hard-working, and intelligent man, and he was not likely to concoct something “nutty,” the word Howard Trienens often used to describe provisions of congressional legislation. More importantly, Greene was the one man in Washington now empowered to strike a final deal and make it stick. And unlike Congress, he was of one mind, he was well-informed about the issues, and his decisions could be appealed. The Justice Antitrust front office, on the other hand, was anxious that Greene’s role be restricted as much as possible. To Baxter and Carr, the inter-intra deal was an agreement of nearly transcendent ideological purity, since it cleanly separated the competitive part of AT&T from the regulated monopoly part. The conservative, free-market principles underlying the settlement were of paramount importance to Baxter and Carr, and they wanted to make certain that those principles were not violated during the proceedings before Judge Greene.