The Deal of the Century

by Coll, Steve;

  Jacob Schaefer’s testimony passed by in a blur as the lawyers at both the government and defense tables read voraciously through Greene’s seventy-four-page opinion. The trick to reading any legal document is to begin at the back, and so the lawyers quickly turned to page seventy-three and the start of a section labeled “Conclusion.” The first two sentences said it all: “The motion to dismiss is denied. The testimony and the documentary evidence adduced by the government demonstrate that the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time.” AT&T, Judge Greene seemed to be saying, was already guilty. The next sentence said, “The evidence sustains the government’s basic contentions, and the burden is on the defendants to refute the factual showings made in the government’s case.”

  The body of the opinion was not so starkly conclusive, but to Saunders and his cohorts it was just as depressing. In guarded, detailed, and intelligent language, Greene marched through each important section of the government’s case and declared that “the evidence sustains the allegation.” On the question of phone equipment competition and John deButts’ PCA strategy, Greene wrote, “The Court concludes … that defendants have used their local exchange monopolies to foreclose competition in the … equipment market.” About the MCI story and the controversies over FX lines and Execunet, the judge said, “The Court finds that … AT&T has monopolized the intercity services market by frustrating the efforts of other companies to compete with it.” On whether the Bell operating companies bought too much phone equipment from Western and not enough from outside suppliers, Greene also firmly supported the government’s contentions. The judge’s only concessions to AT&T came on the relatively minor issues concerning legal and economic definitions of markets, equipment pricing, and a disputed legal theory concerning AT&T’s filings before the FCC during the early 1970s.

  When Jacob Schaefer’s testimony was over, Judge Greene called for a brief recess. George Saunders stood up.

  “Before you go, I have had a chance to glance over your opinion, and on page seventy-three of this opinion, in the conclusion, it says, ‘The testimony and documentary evidence adduced by the government demonstrate that the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time.’ I don’t think this is what your opinion says, but I think that sentence will be read and reported in the press as saying you have made up your mind and it is all over. Am I wrong?”

  “That’s obviously not what it means,” Greene answered. “If you will read the next sentence, it says that the government has satisfied its burden, and the burden is now on the defendants to disprove what the government has done.”

  “I say, I have not digested this weighty opinion yet,” Saunders said cautiously. He did not want to make Greene angry. “But I have glanced at it, and that’s what I understood the opinion to be saying, until I got to that sentence. I wanted to make sure.…”

  “It is absolutely clear,” Greene snapped. “The American way is you have your chance, and you can disprove it. I think the opinion says in at least fifteen different places …”

  “Absolutely.”

  “… that you have the burden and you may disprove, and you may well succeed in disproving everything.”

  “We are confident that we will, Your Honor.”

  Some of the government lawyers, pink with excitement over the unexpectedly laudatory opinion, joked outside the courtroom that Saunders’ challenge to Greene had only served to call the newspaper reporters’ attention to an especially quotable passage that might otherwise have been ignored. But they understood Saunders’ distress. Unstated in Saunders’ exchange with the judge was the obvious fact that Greene’s opinion was as much a political salvo as it was a legal document. The Justice lawyers understood that, as did their discouraged opponents at the defense table. The opinion was far more conclusive than it needed to be, and it was unusually long and detailed. In scope and tone, it was much like the hefty, passionate advocacy motions on dismissal filed by the two sides after Gerry Connell rested the government’s case in July. Because the trial lawyers, like Greene, were then unaware of Baxter’s finesse strategy against Baldrige’s proposal, they had all assumed that the motion to dismiss would most likely be their last opportunity to argue the facts in U.S. v. AT&T before the case was dropped. Thus they had thrown themselves into the project like condemned men devouring their last meals. Greene had done the same: this opinion might well be his only chance to state his views about the evidence he had listened to, day after day, for the past six months. At the same time, if he used the opinion to affirm zealously the government’s case, he would raise the political price of dismissal for Reagan to an intolerable level. Neither Greene nor the majority of attorneys trying the case was aware on that September morning that a nearly irrevocable decision not to drop U.S. v. AT&T had already been made by the White House. Greene’s strong opinion could not change Reagan’s course; it simply confirmed the cautious reasoning and political instincts of the President’s chief of staff, Jim Baker.

  When a copy of the opinion was sent over to Bill Baxter’s Antitrust front office later that afternoon, it was not received with unanimous enthusiasm. Ron Carr, Baxter’s chief deputy, was a former U.S. Supreme Court clerk and a self-described ideological purist on the issue of judicial activism. While Carr-supported Baxter’s efforts to save U.S. v. AT&T from dismissal by Reagan’s cabinet, he thought Greene’s opinion went much too far: he thought it was as if the judge wanted to preserve the dispute over phone industry competition, rather than resolve it.

  “I think the opinion is irresponsible,” Carr told Baxter when both had read it.

  Baxter smiled indulgently. In the last few months, he had learned a few things about the peculiar blend of ideological self-righteousness and ruthless political pragmatism necessary for success in Washington. “It’s a clever maneuver,” he replied.

  Greene maintained for years afterwards that it was nothing of the sort. He said that if the opinion was unusually strong and detailed, it only reflected AT&T’s repeated requests for an expansive answer to their motion to dismiss, and certainly it was true that Charlie Brown and Howard Trienens wanted to know as much as possible about where Greene stood that September. Greene also said, as he told Saunders in court, that his harsh language in the conclusion was not meant as a verdict but rather as “the American way … that you have the burden and you may disprove, and you may well succeed in disproving everything.”

  In fact, however, there had been a protracted debate in Greene’s chambers during the week before the judge released his opinion about whether the language in the conclusion was too strong. The argument among Greene and some of his clerks centered on phrases such as “the testimony and the documentary evidence … demonstrate” and “there has been proof of anticompetitive conduct.” Some of the clerks who had helped research and draft the opinion felt that Greene had overextended his reach, that he was implying in his conclusion that the defense could not disprove the government’s case, which was precisely George Saunders’ initial reaction. It was a semantic question with legal implications, and at one point the judge and his clerks even looked up words in the dictionary and read aloud their precise definitions. In the end, Greene rejected the objections to his wording, and he told his clerks that the meaning of his conclusion was clear enough. The judge was not going to back off on his political message to Reagan, Congress, and the public about how important he felt it was to try U.S. v. AT&T to its end in federal court—to make the system work.

  On the twenty-sixth floor of 195 Broadway that hot Friday afternoon in September, Charlie Brown and Howard Trienens received Greene’s message sullenly but stoically; the opinion was yet another disappointment in a year of unrelenting disillusionment. Distant and unemotional, AT&T’s two top strategists had neither the capacity nor the inclination to let loose their growing personal frustration with Washington’s “system,” which seemed on the one hand not to work at all and at the
same time to be perfectly designed to drive them and their company into chaos and disfunction. It seemed to Brown that all of AT&T’s executive talent, and a good deal of its money, had now been diverted into an endless and unwinnable war with Washington. Perhaps Brown would have felt better if he had smashed an ashtray against his office wall or pounded his desk with his fist. Instead, he reacted impassively: he believed that reliability, stability, and consistency of manner and style were among the most important qualities of a corporate chief executive, and he had spent decades cultivating those attributes. “What you see is what you get with me,” he liked to say.

  Much of the time, however, what there was to see was spiritless and inscrutable. And that was why only a handful of top executives at 195 Broadway who were close to AT&T’s chairman could appreciate that Charlie Brown might soon do something very drastic.

  Chapter 26

  The Inter-Intra Split

  On October 14, 1981, the leading executives of Charlie Brown’s corporate management team gathered in a conference room at 195 Broadway to talk about Charles Hugel’s blackboard.

  Brown himself was absent, but Howard Trienens attended. Hugel, the former president of Ohio Bell who had championed, with Brown, the blue team competitive strategy during the 1970s, was present. Hugel had been brought to New York by Brown soon after John deButts retired. Also at the meeting were Morris Tanenbaum, a diminutive, soft-spoken scientist and engineer who had begun his career at Bell Labs in the early 1950s and who was now Brown’s executive vice-president for corporate affairs and planning, and Ian Ross, the president of Bell Labs.

  The history of Hugel’s blackboard was no secret within the upper reaches of AT&T’s management, although information about what was being drawn on it was disseminated to executives outside corporate headquarters only on a need-to-know basis. The blackboard dated back to the summer of 1980, a demoralizing season for the newly ascendant blue team. In June of that year had come the $1.8 billion verdict in the MCI case. In July, the comprehensive telephone competition bill, to which Charlie Brown had devoted so much personal attention, was killed by House Antitrust Subcommittee chairman Peter Rodino, who feared it would interfere with the Justice antitrust suit, which Judge Greene was then aggressively pushing to trial. Earlier that same year, the “menu” settlement deal with Ken Anderson had been nixed by Sandy Litvack.

  In August, on the heels of these successive disappointments, Brown had called in Howard Trienens to pose him the obvious, and forbidden, question.

  “Why are we fighting this case?” the chairman asked. “Why are we fighting so hard to keep the local exchange bottleneck?”

  The most important answer was that the question had never been asked before, at least not by anyone in a position of leadership at AT&T. Over the course of a century, the men who ran the Bell System had grown up inside the company, their “bell-shaped heads” drilled with the values of stability and the ethic of public service. Proposing to divest the local operating companies—the foundation of the American telephone system—was akin to “loose talk about breaking up the Holy Roman Empire,” as a congressional staffer once put it. It could be argued that in August 1980, when Charlie Brown first seriously broached the topic, the strategic inviability of AT&T’s monolithic structure had been obvious for at least a decade. John deButts and his contemporaries in Bell’s corporate management had been unable to accept that idea—unable, even, to examine it critically. But while deButts derived his strategic vision from the phone company’s long and glorious past, which he had hoped to preserve, Charlie Brown was a futurist, an engineer fascinated with the advance of technology, a man who thought he saw scattered light on the business horizon—the dawning of the information age. In the summer of 1980, he was not yet convinced that AT&T would have to destroy and recreate itself in order to realize this future, but he was willing to contemplate the possibilities.

  The idea became known on the twenty-sixth floor as the “inter-intra split.” Brown first discussed it openly with his board of directors in the fall of 1980, after he, Trienens, Hugel, and some others had informally explored the concept. It was an alternative to be fully considered, nothing more or less, Brown said. In its purest form, the inter-intra split described a complete separation of AT&T’s “interexchange” and “intraexchange” facilities, its long distance lines and local loops. The basic local telephone infrastructure would be separated from its intercity support network; there would be no shared facilities. This was a far different idea from the menu and Crimson Sky settlement terms that Trienens had begun to discuss with Justice in 1980. Those deals involved divestiture of only one wholly-owned operating company, troubled Pacific Telephone. The inter-intra split would require AT&T to reinvent the American telephone network. It was, of course, exactly what the Justice department wanted.

  Late in 1980, Charles Hugel set up a blackboard in his 195 Broadway office to investigate, with chalk and eraser, how it might be done. He worked with Al Partoll, an up-and-coming Brown protégé, Paul Villieres, and occasionally others. The first question was whether it was economically feasible to make a “pure” split, with absolutely no shared facilities, within five years. They tried to put a price tag on that set of assumptions, but it turned out to be absurdly expensive. So many new buildings and other facilities would have to be constructed that not even Bell, the bastion of investment capital in corporate America, could afford it. So they swept over that idea with an eraser and drew up alternative plans. During the Crimson Sky negotiations late in 1980 and early in 1981, Hugel’s office became suddenly busy with engineers and executives who were trying to determine how, precisely, to cut loose Pacific, Cincinnati Bell, and Southern New England Telephone, if a final deal was consummated with Justice. That work provided the inter-intra team with new ideas and approaches. During the spring and summer of 1981, after Crimson Sky fell apart and while Trienens and Brown were largely preoccupied with intrigue in Congress, at the White House, and in Judge Greene’s courtroom, Hugel refined the plan for total operating company divestiture.

  By the fall of 1981, it was near final form. The conceptual issues—how the intraexchanges could be defined, how they would be technically and economically separated from long-distance facilities, how long it would take to complete such a Draconian divestiture, and so on—had been resolved by Hugel and his team of managers and engineers. What remained were the larger strategic and political questions, such as the one that Hugel, Trienens, Tanenbaum, and Ian Ross convened to discuss on October 10: namely, national security.

  In Hugel’s mind, this was the last major issue that had to be resolved before he could recommend the split to chairman Brown as a viable, ready alternative. On October 1, Brown had promoted Hugel to a new post in charge of reorganizing Western Electric and Bell Labs for the new age of competition, and so Hugel was about to turn over the inter-intra planning to Tanenbaum.

  Tanenbaum told the group that the split could probably not be accomplished without destroying the integrated national security communications network, which depended on central management and facilities. That, the Bell executives were aware, was what Caspar Weinberger had unsuccessfully argued the previous summer during the White House debate over dismissal of U.S. v. AT&T. Tanenbaum felt that the Defense department was probably right, and that AT&T’s management was obligated to consider the impact of its actions on national security.

  Ian Ross, the Bell Labs president, agreed with Tanenbaum’s assessment, and he argued loud and long against the interintra split that Hugel had devised. There had long been a tension in Bell System management between executives like Tanenbaum and Ross on the one hand, who were scientists committed to the purity and independence of Bell Labs’ research, and executives like Hugel on the other, who felt that the Labs ought to be more closely integrated with Western Electric in a traditional “product development” relationship. Hugel felt that in the precompetitive era, it had been fine for the Labs to be unusually independent, almost like a university science cen
ter. The country as a whole derived obvious benefits from that structure, since Bell Labs was required by law to license to competitors the many patents it developed. But now that the competitive era had arrived, this “ivory tower” system would cripple Western’s attempt to compete against the likes of IBM, Xerox, Wang, and other large, sophisticated computer and communications equipment companies. It was Hugel’s view that divestiture of the operating companies was an acceptable trade-off for the opportunity to transform Western and the Labs into a “lean and mean” product-oriented, competitive organization. Such a transformation was precisely what Ross, particularly, dreaded; he was determined to argue at every opportunity against divestiture. But the long-standing antagonism between Western and Bell Labs colored his opposition to Hugel’s plan.

  “There are ways to overcome the defense communications problem,” Hugel said. For example, AT&T could create a central services organization for the Pentagon that would pool the resources of all the newly created companies. Tanenbaum wondered if that would be enough, but he agreed to work on it as he fleshed out Hugel’s skeleton plan in the weeks ahead.

  When the meeting was over, Hugel felt that a turning point had been reached. During the 1970s, as he had risen through AT&T’s management ranks to the elite corps around Charlie Brown, Hugel had been frustrated by his company’s seeming inability to shake off its past. For example, Hugel believed that Bell had wasted an opportunity in the late 1960s and early 1970s to “trade off” politically the possibility of unlimited phone equipment competition for the right to preserve its national network. But instead of accepting equipment competition, deButts had pursued his PCA strategy.

  “The old telephone people didn’t recognize terminal equipment for what it was—not an integral part of the network,” Hugel said later. “There was the PCA argument, and the studies about harm to the network were legitimate, but that really wasn’t seeing the forest for the trees.” After the Bell Bill debacle in 1976, such a trade-off became unrealistic, and the frustration of Hugel and his like-minded colleagues in AT&T’s high management grew. By the time they came to New York after Charlie Brown’s ascendance in 1979, Hugel and other blue team executives felt that 195 Broadway had been virtually swallowed up by antitrust litigation and the fitful efforts to pass legislation in Congress. Brown, Trienens, and other company leaders spent nearly all their time strategizing about and responding to events in Washington. Now, more than two years later, the whole mess only seemed worse. And there was no end in sight.