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October 14, 2008

Refracting Enron myopia

presumed innocent One of the more entertaining aspects of the current Wall Street financial crisis has been reading how some of the business columnists have been interpreting it.

Take, for example, Houston Chronicle business columnist, Loren Steffy. You may remember him from his acerbic coverage of the trial of former Enron executives, Jeff Skilling and the late Ken Lay, or his perpetuation of the Enron Myth regardless of the circumstances.

Dismissing me as an Enron apologist, Steffy regularly disputed my long-held theory that the run-on-the-bank that felled Enron could well happen to any trust-based business.

Apparently confused by the fact that what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses impacted by the current credit crunch, Steffy reaches for insight from one of the fellows who set the stage for this mess:

Investigators are poring over the failed firms, looking for signs that executives misled shareholders. Some evidence may be found, but Sam Buell, the former prosecutor who led the effort to indict Enron's Jeff Skilling, doesn't think we'll see widespread prosecutions.

"It's not a conspiracy if everybody's in on it," said Buell, who's now a law professor at Washington University in St. Louis. "In order to have a fraud conspiracy, you've got to have some effort by one group to deceive another group."

In this case, individual investors may not have understood what Wall Street bankers were doing with complex debt securities, but those charged with safeguarding the marketplace were certainly aware.

Regulators knew and approved. So did credit rating agencies. And auditors, both internal and external. With a mouse click, investors could find public documents that described the debt instruments with hundreds of pages of detail. [.   .   .]

"If everybody's in a bubble mentality, if they're betting the price of real estate will keep going up, disclosure doesn't address the problem of what happens when all those assumptions turn out to be wrong," Buell said. "Everybody knows what they're doing. They're just making bad decisions."

Yes, you read that correctly. Buell implies that Skilling was guilty of criminal conspiracy because not "everybody" was "in on it" at the time Enron was making its supposedly opaque disclosures. However, since "everybody's in on it" now, Buell doesn't think there will be widespread prosecutions because "[i]t's not a conspiracy if everybody's in on it."

With such reasoning, is there any doubt now why this outfit generated this record?

For the record, I actually hope Buell is right this time that few businesspeople are prosecuted for misjudging business risk. But for a more rational explanation of how financial regulation fits into the current crisis, check out these Larry Ribstein posts here, here and here and this masterful one by Arnold Kling.

Posted by Tom at October 14, 2008 12:01 AM |

Comments

Tom:

I agree with you and hope that this doesn't become a witch hunt. My hope, futile as it may be, is that American’s really wake up to the problems that have occurred in the past few weeks and who actually foretold of this down turn and when. If any witch hunt occurs it should start at the top as in Congress, as the saying goes “The Buck Stops Here!”… Your post on September 26th where Barney Frank is shown stating that “"these two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis” is a good example of misleading the public. Obviously one group “Congress” is deceiving another group “The Public”. Further, if the DOJ wants to go after failed firms looking for signs they misled shareholders, it has to look no further than the CEO’s of Freddie Mac and Fannie Mae. Obviously none of this will ever happen, but if we continue to let the criminals run the roost up in Washington D.C., this great nation will be in serious trouble for years to come!

Posted by: Dennis Bailey Author Profile Page at October 13, 2008 10:55 PM

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