Friday, September 4, 2015.

< Will Tiger catch Jack? | Main | The changing face of internal medicine >

July 27, 2010 The Other Side of the Enron Story

Ken Lay 070606A common topic on this blog has been the power of anti-business myths within American society.

Take Enron, for example. The anti-business myth contended that that Enron ? at one time one of the largest publicly-owned companies in the U.S. -- was really just an elaborate financial house of cards that a massive conspiracy hid from innocent and unsuspecting investors and employees.

The Enron Myth is so widely accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Enron.

The mainstream media -- always quick to embrace a simple morality play with innocent victims and dastardly villains -- was not about to complicate the story by pointing out that the investors in Enron could have hedged their risk of loss by buying insurance quite similar to that which Enron developed in creating their wealth in the first place.

Instead of attempting to examine and tell the nuanced story about what really happened at Enron, much of the mainstream media simply became a part of the mob that ultimately contributed to the death of Ken Lay and hailed the barbaric 24 year sentence of Jeff Skilling. Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob.

As noted originally here and in many subsequent posts over the years, it is far more likely that the truth about Enron is that no massive conspiracy existed, that Skilling and Lay were not intending to mislead anyone and that the company was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation.

Although there is nothing inherently wrong with such a business model, it turned out it to be the wrong one to survive amidst choppy post-bubble, post-9/11 market conditions when the markets were spooked by revelations of the embezzlement of millions of dollars by Enron CFO Andy Fastow and a relative few of his minions.

The carnage of the Enron Myth is now piled high -- the destruction of Arthur Andersen, the death of Lay, the outrageous prosecutorial misconduct involved in the case against Lay and Skilling, the senseless prosecution and imprisonment of the four Merrill Lynch executives in the Nigerian Barge case, Richard Causey, Chris Calger, Kevin Howard, Joe Hirko and the other Enron Broadband defendants -- the list goes on and on.

In the wake of such destruction of careers and lives, the public is even less willing to confront the vacuity of the myth and the destructive dynamics by which it is perpetrated. indeed, even though 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 over the past two years, much of the public and the mainstream media still cling to the Enron Myth.

Attempting to challenge this enduring myth is a wonderful new resource -- The Other Side of the Enron Story.

Created, funded and filmed by Beth Stier -- who was the subject of prosecutorial misconduct as a non-party witness in the trial of the Enron Broadband case -- is a "webumentary." That is, a website comprised of short modules of documentary-style content, organized into two main categories: "What It Was Like to Be on The Other Side of the Enron Story," and "Behind the Scenes of The Other Side of the Enron Story." currently features over a dozen relatives of defendants, attorneys, former Enron executives and employees telling their stories about what they experienced personally in dealing with the overwhelming governmental power and societal forces at work in the Enron saga. Moreover, six experts in economics, political science, finance, UK law and civil liberties -- including Clear Thinkers favorites William Anderson and Harvey Silverglate -- provide their views on the ominous implications that the government's handling of the Enron case have on us all.

Ms. Stier continues to add new information to the site, the latest of which are dozens of snippets from fascinating interviews of David Bermingham and Gary Mulgrew, two of the NatWest Three bankers from England who were caught up in an international firestorm in connection with the Enron Task Force's effort to turn Fastow and his right-hand man, Michael Kopper, into witnesses for the Task Force against Skilling and Lay. This series of interview modules paints an absolutely fascinating tale of three regular fellows from the U.K. having their lives, families and careers turned utterly upside down by governmental forces that viewed them as mere pawns in a much larger game.

Apart from the its egregious human toll and the serious abuse of state power that its promoters ignore, the Enron Myth?s devastating impact is that it obscures the true nature of investment risk and fuels the notion that investment loss results primarily from someone else's misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation?

For example, self-settled derivative prepay transactions are not particularly intuitive (no product actually changes hands) and are not well-understood outside the trading business. Nevertheless, such transactions provide the valuable benefit of hedging risk for companies, who pass along that benefit to consumers in the form of lower prices for their products and services.

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public's ignorance to demonize innovative risk-takers who are attempting to create wealth? How does throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison do anything to educate investors about the true nature of risk and the importance of diversification and hedging? is currently a voice in the wilderness advocating against such governmental overreach. Here?s hoping that voice grows louder as those of us who are concerned by the pernicious growth of abusive governmental power listen to the stories and observations contained in this valuable resource.

The trailer for the webumentary is below.

Posted by Tom at July 27, 2010 12:01 AM |



i think you have made the excellent point, over time, that if, in the united states of america, you are someone the public might be jealous of, heaven help you--you are high risk to be over-prosecuted and/or over-sentenced.

as a layman, i do not think i have heard you particularly address a solution so i will ask a question that common-layman-sense commends: is it not defense attorney incompetence that seems so often to take the extremely risky path of putting matters into the hands of 12 angry, jealous people who cannot understand the material, have the time to serve on a jury and seem, over and over, too eager to stick it to the "greedy bitch or bastard" as the case may be?

Posted by: Dr. TOM Author Profile Page at July 27, 2010 5:38 AM

In your zeal to zing the prosecutors, I keep thinking you downplay that Enron really was, if not a house of cards, then not much more than an illusion constructed with a lot of smoke and mirrors, some of which were legal, others not so much. There might have been some profitably business units at Enron, but (I venture) 80%+ of their market capitalization was based on the belief that Enron was making markets and money where it in fact just wasn't.

It wasn't news of Fastow's embezzlement that shook Enron, it was the revelation that Fastow had improperly moved billions of dollars of liabilities off of Enron's balance sheet that led investors and trading partners to flee. A company of Enron's size and reported profitability could easily have weathered a multi-million dollar embezzlement, but reports that the balance sheet and income statement were not as presented was the killer. As you've said, a trust based business can't afford to have questions asked about the accuracy of its financial statements. Once Enron was exposed as having lied about one aspect, it was only logical that people suspected the worst and sought to disassociate themselves from Enron as fast as they could. Remember, Enron had all but collapsed before the first prosecutors showed up.

To continue, Arthur Anderson didn't go down because they failed to catch Fastow's embezzlement, they were charged with not catching the fraud. The same for Skilling, he wasn't charged with facilitating the embezzlement, but of conspiring with Fastow to misrepresent Enron's balance sheet.

This isn't to excuse the prosecutors, I agree with much of what you've written about them and their tactics, but Enron wasn't full of lily-whites either.

And if I've misunderstood your argument, sorry.

Posted by: steve sturm Author Profile Page at July 27, 2010 2:09 PM

I really would disagree with the last comment. First, as I point out in one of the interview segments, Enron was not a "house of cards" by any means. It was a real company with real assets; the problem was that it was highly-leveraged and highly-dependent upon the cheap credit that was part of the unsustainable boom during the late 1990s.

Economists such as me who subscribe to the Austrian Theory of the Business Cycle, can recognize what happened. Enron's leadership was very aggressive in pushing leverage, and as long as the credit spigots were open, the strategy was fine. However, once the boom had run its course, so had Enron's strategy.

Second, the Enron case was not about "embezzlement," and if Mr. Sturm does not recognize that point, then he needs to become better educated about this case before making comments. In fact, much of Andrew Fastow's testimony was false, and prosecutors knew it was false.

As Tom has pointed out many time, Mr. Fastow's testimony was spoonfed by prosecutors, and the prosecutors knew that it was false. Now, subornation of perjury still is a felony, even if prosecutors know they never will be charged, given that prosecutors don't indict themselves.

Unfortunately, nearly a decade after Enron's collapse, the narrative still holds, even if the facts of the narrative are not true. Sort of a bad sign of things to come.

If we are going to use the "lily-whites" standard, then why do we skip the prosecution? It seems to me that subornation of perjury and withholding evidence -- both of which prosecutors did with impunity -- is not exactly the work of glorified angels. Yet, prosecutors who do these things are treated like heroes. Gives us pause, does it not?

Posted by: William Anderson Author Profile Page at July 27, 2010 2:35 PM

William: you cared enough to post your objections twice?

I don't disagree that Enron had real assets and those assets had real value, but its stock market capitalization was far in excess of that base value, with much (if not most?) of Enron's market cap attributable to the perception that they were more successful than they really were... a perception Enron management was accused of fostering through misleading statements. Whether they did is not my point, my argument is that Enron's stock price would have been much lower if investors had a clear understanding of Enron's operations. Do we disagree?

You're also right that the shutting of the credit spigot is what led to Enron's demise, but I'll argue that it wasn't a market-wide shutting of credit that occurred (Enron was no innocent victim of industry wide tightening of credit), as other faith-based companies continued to receive credit, the shut off was to Enron specifically, and in response to the revelations that Fastow had cooked the books by hiding billions of dollars of liabilities.

And I never said the Enron case was about embezzlement, in fact, I said Enron could have survived if it had been just that. If I remember the time line right, Enron was on the verge of collapse before news came out that Fastow had lined his own pocket... a collapse triggered by the shutting of the credit spigot which was triggered by fear that Enron wasn't all that it was cracked up to be (fears that had been floating around for a while (the Fortune article, for example) but which Enron had been able to deflect.

And no where did I defend the prosecution, their tatics or Fastow... but as I led my comment, disapproving of their tactics shouldn't cloud the fact that Enron wasn't what Skilling and Lay and company were touting. Whether their comments and deals amounted to a crime, I have my doubts. But there is a reason I didn't plow my savings into Enron stock... the suspicion that there was more hype than substance.

I think the real sad story is that Enron could have survived as a real company with real assets and real profitability... in other words, the company that existed before Skilling pushed to turn Enron into whatever it was that he was dreaming about. Enron's employees and shareholders suffered because Enron tried to go where, in hindsight, they had no business going. But that wasn't good enough for Skilling and Lay.

Posted by: steve sturm Author Profile Page at July 28, 2010 4:36 PM

Post a comment

Thanks for signing in, . Now you can comment. (sign out)

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

Remember me?

© 2003 - 2015. Tom Kirkendall. All Rights Reserved.