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Here's to the best government money can buy

CNET News.com's Charles Cooper says two mega-telecom mergers speak volumes about how money and power determine policy.

So much for trusting the government to do the right thing. Since the completion of last year's telecommunications megamergers, small and medium-size businesses have been getting hosed--with Uncle Sam playing the role of complicit bystander.

When the SBC-AT&T and Verizon-MCI deals got announced in 2005, supporters spun the news as pro-consumer and pro-business. But since the late fall, prices for local private lines have steadily increased. Maybe I missed the fine print on the press releases but how do square price increases with the public interest?

Actually, nobody should be surprised by the turn of events. A year ago Simon Wilkie, the former chief economist for the Federal Communications Commission, warned as much. Unfortunately, the somnambulists masquerading as antitrust lawyers in the Justice Department paid him no heed.

If the court decides these earlier deals were not in the public's interest, you can kiss the AT&T-BellSouth merger goodbye.

Wilkie conducted his research on behalf of the Alliance for Competition in Telecommunications, an organization funded by rivals of SBC and Verizon. But ACTel's members still raised a legitimate fear. They leased lines at wholesale rates from the likes of SBC and Verizon before reselling the lines to their business customers. As long as AT&T and MCI remained independent, competition naturally curbed the Bell companies' ability to ram through price hikes. Those restraints would disappear after the Justice Department gave a green light to the mergers without requiring the divestiture of major assets.

For the corporate fat cats and investment bankers involved in the deal, there's no doubt these are the best of times. I suppose history's fair judgment will take years to render. Still, there are fishy aspects to this story that have received short shrift in the general media.

Not long ago, I ran into Gary Reback at an industry get-together. Tech industry history buffs remember Reback, who for a time was perhaps the most influential lawyer in Silicon Valley. As head of its high-technology group at Wilson Sonsini Goodrich & Rosati, he represented many of Silicon Valley's hottest companies and played a pivotal role convincing the United States Justice Department to launch its antitrust probe of Microsoft. These days Reback represents ACTel and he has a tale to tell.

In May 2005 Hewitt Pate resigned as the antitrust chief at the Justice Department. Pate was not popular with the antiregulation crowd who initially cheered the nomination a month later of his replacement, Thomas Barnett.

It did not take long before Barnett was assailed for failing to move more rapidly to approve the SBC-AT&T and Verizon-MCI mergers. The sharks began to circle. Early that fall The Wall Street Journal reported that the Barnett appointment had been frozen and that a couple of senators had asked President Bush to reconsider the nomination.

In late September, ACTel says, it was told by DOJ lawyers to submit a white paper containing its objections to the proposed deal. But by the time ACTel submitted its documention a couple of weeks later, the deals had already by and large received tacit government approval.

By late October, it was all official. The Bells got most of what they wanted. The quid pro quo was an agreement to get rid of relatively minor facilities. As for Barnett, the senatorial hold was mysteriously lifted and he was sworn in on Feb. 10, 2006. It's odd for the DOJ to render a decision on a mega-deal when the assistant attorney general in charge of antitrust is not officially confirmed. At the time, some antitrust layers and commentators thought the proposed mergers would be delayed until a permanent antitrust head was in place. No such luck.

"Heretofore, no one thought it was appropriate to clear deals like this when the nominee could be put under extreme political pressure," Reback said.

The courts can't turn back the clock, but later this summer the U.S. District Court in Washington will hold a hearing to determine whether the mergers are in the public interest. When the two sides present their evidence, it should be a grand show. Wouldn't it be something if the court declared these deals not to be in the public interest (or at the very least that the DOJ failed its charge by rubber-stamping a couple of sweetheart deals)?

That's important for a couple of reasons.

In March AT&T launched a $67 billion stock offer to buy BellSouth, a proposed deal that would create a telecommunications gargantuan (which also would incorporate the biggest cellular company in the nation). Meanwhile, the telecommunications laws are getting a rewrite in Congress.

If the court decides these earlier deals were not in the public's interest, you can kiss the AT&T-BellSouth merger goodbye. Ditto for the ambitions of those who argue that network neutrality is just a byword for intrusive government regulation.

How we reached this crossroads speaks volumes about the influence of corporate money on power in contemporary Washington. Reback's probably right when he says the public's interest would be better served if we all paid greater attention. The problem is that we usually find out something's amiss after it's too late.