Category Archives: Business – General

Ungagged.net: The Other Side of the Enron Story

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A 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 in many subsequent posts here 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 — Ungagged.net: 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 — Ungagged.net 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.”

Ungagged.net 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?

Ungagged.net is currently a lonely 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.

Why is Timothy Geithner still Treasury Secretary?

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Tim Geithner_3Iíve been asking that question for almost a year now (see also here).

Craig Pirrong is asking the same question after Geithnerís comments about American business to a group of reporters at breakfast this past week.

Meanwhile, Larry Ribstein reviews the politics of supposedly ìobjectiveî governmental regulation.

Frankly, given abysmal leadership provided by both the Bush and Obama Administrations, itís a testament to the resilience of American business that the economy hasnít tanked worse than it has.

Cassano wins the lottery

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lotteryLarry Ribstein notes that AIG scapegoat Joseph Cassano appears to have won in his turn enduring the criminalization-of-business lottery.

Meanwhile, Conrad Black was released from prison this week pending a re-trial of the charges against him, but he is ruined financially by his turn at the lottery.

And Jeff Skilling remains in prison and James Brown awaits another trial in his seven-year ordeal.

So, does the decision not to prosecute Cassano indicate a government move away from the lottery policy of regulating business?

Iíll believe it when I see it.

The SEC’s strike suit against Goldman

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GoldmanSachs-SEC-071510As noted in April when the Securities and Exchange Commission brought its lawsuit against Goldman Sachs, the case was destined to settle with Goldman paying a hefty settlement, which the SEC announced last week. But Larry Ribstein expands on that thought in this timely post on what the proposed settlement means to the folly of the current reform movement regarding governmental regulation of financial firms:

The SEC is heralding the $550 million settlement in its suit against Goldman as ìthe largest penalty ever assessed against a financial services firm in the history of the SEC,î and ìa stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.î Surely the agency had a strong incentive to try to use the Goldman settlement to obscure the memory of Madoff, Stanford and the Bank of America settlement. Meanwhile,todayís NYT concludes its Goldman story with a quote suggesting Goldman got off lightly.

The truth is far more disturbing: the SEC got a big payday in what would have been seen as a strike suit had it been a private securities class action lawyer. [.  .  .]

What clues on all this can be gleaned from a settlement that involves a huge amount of money but only an admission of a ìmistakeî?

The bottom line is that this suit has proved to be no more than a common ìstrikeî suit, no better than the sort of private securities class actions that triggered Congressional reform 15 years ago. Instead of attorneysí fees, the SECís objective appears to have been purely political. In the end it extracted a ransom payment from Goldman so the firm could reclaim its reputation and get back to business.

The court must now review the settlement. It should take a cue from the dissenting Commissioners and reject it because of the puzzling and troubling inconsistency between the amount of the settlement and Goldmanís meaningless admissions. The SEC should have to prove exactly what Goldman did wrong. This will force Goldman to either litigate or make a meaningful settlement. Goldman is hardly an object of pity at this point. In any event, the issues here go far beyond Goldman to, among other things, the proper role and function of the SEC.

It is sad that the SEC not only cannot be trusted to find fraud, but that it can no longer be trusted to litigate and settle cases involving the supposed frauds that it finds. But this is where we find ourselves in the days following ìfinancial reform.î

Expecting the SEC to regulate a firm as sophisticated as Goldman Sachs effectively is about as rational as investing oneís entire nest egg with Bernie Madoff or Allen Stanford.

James Brown’s Hell

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Does the end of convicting a business executive of a crime justify the means by which government prosecutors accomplish it?

James Brown, the former Merrill Lynch executive and one of the defendants in the Enron-related criminal case known as the Nigerian Barge case, has to be asking himself that question as he continues to endure what is now his seventh year of prosecutorial hell.

Even in the littered landscape of failed Enron-related prosecutions, the Nigerian Barge prosecution stands out for its sheer brazen nature.

The Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.

But as Brown’s Supplemental Memorandum below filed this past Friday explains, “trumped-up” is too kind a term to describe what the prosecutors did to Brown and his fellow Merrill co-defendants.

A quick history of the case is helpful. After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which the firm did by offering up Brown and fellow Merrill executives Dan Bayly, Robert Furst, and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force hamstrung the Merrill defendants’ defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction and who would have testified favorably for the defendants. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants’ defense.

Thus, after bludgeoning a couple of plea deals from former Enron executives Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the Merrill defendants, which was good enough to obtain convictions in Houston’s deeply-hostile environment in 2005 toward anyone having anything to do with Enron.

Of course, most of the convictions were vacated on appeal (and in Fuhs’ case, thrown out completely). However, each of the Merrill defendants served over a year in prison during their appeal while their families endured the substantial human cost of this and other misguided Enron-related prosecution.

Even after the convictions of the Merrill defendants were vacated, the Department of Justice initially threatened to pursue a retrial of the three remaining Merrill executives. But then the DOJ recently dismissed all charges against Bayly, while Furst cut a favorable plea deal that will lead to a dismissal of the remaining charges against him.

So, logic dictates that the DOJ would dismiss its charges against Brown, the only remaining defendant. Right?

Well, not so fast.

The DOJ has inexplicably teed up another trial of Brown, who was the only one of the Merrill defendants who was convicted on additional charges of perjury and obstruction of justice for having the temerity of protesting his innocence to the grand jury that originally investigated the Nigerian Barge deal. Brown’s new trial is currently scheduled to begin on September 20.

But in the meantime, Brown’s legal team has been leafing through enormous amounts of exculpatory evidence that the Enron Task Force withheld from the Merrill defendants in connection with the first trial back in 2005, but which the DOJ has recently been forced to disclose.

The result of the Brown team’s effort is set forth below in the Supplemental Memorandum in support of a motion for a new trial for Brown on the perjury and obstruction charges (the downloaded version of the memo is bookmarked in Adobe Acrobat to facilitate ease of review). The memorandum details the appalling length that the Enron Task Force went during the first trial in suppressing exculpatory evidence in favor of Brown and his co-defendants and generally disregarding the rule of law in order to obtain convictions. As the memorandum concludes:

The conclusion is now inescapable that the ETF engaged in a calculated, multi-step process to deprive Brown of his constitutional right to Due Process. (1) They repeatedly denied the existence of Brady material, told this court they had met their Brady obligations and fought vehemently against producing anything [exhibit reference and footnote omitted]. They highlighted only selected material in a veritable garden of Brady evidence — much of their selections being vague, tangential or marginal — while working around clear, declarative, relevant exculpatory material even in the same page, paragraph or document. (3) When ordered by the Court to produce summaries to the defense, they further redacted even the Brady material they had themselves highlighted and withheld the crucial facts that they had highlighted as Brady. (4) They egregiously capitalized on their misconduct at trial by making assertions that were directly belied by the exculpatory evidence they withheld.  .  .  .

The memorandum goes on to set out dozens of Brady violations, including charts that compare the exculpatory statements that the Enron Task Force withheld prior to the first trial with the incriminating statements that the Enron Task Force extracted from witnesses during that trial.

Folks, this is really bad stuff. But as bad as it is, I have not seen any mention of it in the mainstream media.

When is the mainstream media going to realize that the scandalous behavior of government prosecutors in prosecuting business executives in connection with the Enron case dwarfs the true crimes that were committed at Enron?

Or is the media’s stubborn refusal to challenge the Enron narrative an even bigger scandal than the prosecution’s misconduct?

James Brown Supplemental Memorandum in Support of Motion for a New Trial

The Politics of Ignorance

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beckolber_lgIf you tire of the seemingly endless demagogic blather that governmental officials and pundits often pass off as discussion of key societal issues, then be sure to read this insightful Will Wilkinson post on the politics of ignorance:

The problem [of ideologues elevating doctrine over wisdom] is heightened by the fact that the reading public generally enjoys ideologues more than three-handed scholars, and so the more ideological among ideologues find themselves with larger audiences and more numerous and remunerative opportunities to publicly opine.

What results is not so much an exercise in public reason as a smash-em-up reputation derby, where elites vie to increase their pull with the public and policymakers by disparaging ideological competitors. Moves in the reputation game take many forms, from sniffs of imperious condescension, to bald ìstupidest man aliveî name-calling, to self-congratulatory above-the-fray comments like this one. There is no reason to trust that this is a process through which truth unfolds.

In the absence of institutions that limit the scope of democratic authority over intractably complex policy questions, the best we can hope for is perhaps a tad more self-awareness among opinion elites about their tendencies toward dogmatism and for the rise of norms that do more to reward the honestly judicious and penalize highly-regarded doctrinaire assholes.

As noted earlier here and here, the instinct of most politicians and much of the mainstream media is to embrace simple ìvillain and victimî morality plays when attempting to explain a particular trouble.

Take, for example, investment loss. The more nuanced story about the financial decisions that underlie a failed investment strategy doesn’t garner sufficient votes or sell enough newspapers to generate much interest from the demagogues or muckrakers. That’s why we periodically endure witch hunts, such as the recent one demonizing speculators. Thatís also why it’s important that our leaders who are ignorant about the function of speculation in markets take a moment to understand its beneficial purpose.

Morality plays are comforting because they make it easy to identify and demonize the villains who are supposedly responsible for trouble. The truth is usually far more nuanced and complicated, but ultimately more rewarding to embrace.

At least tell him that he is a sacrificial lamb

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Department of Justice LRegular readers of this blog are familiar with the technique that federal prosecutors used in the post-Enron era to score easy convictions against businesspeople.

Threaten to go Arthur Andersen on a company, offer to let the company off the hook under a deferred prosecution agreement in return for offering up an executive or two as sacrificial lambs to be prosecuted, and then bludgeon the individualís career, life and family into bits under the sledgehammer of the DOJís prosecutorial power.

Jamie Olis was arguably the first of those sacrificial lambs, and there were plenty in connection with the Enron-related prosecutions. Heck, the DOJ is even getting ready to tee up a re-trial of one such case this September.

But check out this example of DOJ brazenness that Ellen Podgor passes along. The DOJ enters into a deferred prosecution agreement with American Express and, as a part of the deal, has AE enter into a side-letter agreement that, absent the DOJís prior consent, prohibited AE executive Sergio Masvidal from obtaining employment with an AE unit or any company that bought the AE unit.

Given the DOJís heavy-handed approach in such matters, that part of the deferred prosecution agreement is not all that unusual. But one aspect of this particular deal was.

The DOJ didnít bother to disclose the side-letter to either Masvidal or the District Court that approved the deferred prosecution agreement.

Masvidal eventually found out about it when he was denied employment by the company that bought the AE unit. So, he sued the DOJ, which eventually led to the DOJís issuance of the letter below, which admits that the DOJ did not disclose the side-letter to the District Court on purpose and that the DOJís investigation ìdid not reveal any evidence that Mr. Masvidal had committed any criminal offenses or violated any banking regulations.î

Now, do you still have any doubts that the same bunch was capable of this and this?

 

 

DOJ’s Clearing Letter in Sergio Masvidal Case

Rational Optimism

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The%20Rational%20Optimist.jpgMatt Ridley supplies a dose of good end-of-the-week vibes with this article based on his new book, The Rational Optimist (Harper 2010):

When I set out to write a book about the material progress of the human race, now published at The Rational Optimist, I was only dimly aware of how much better my life is now than it would have been if I had been born 50 years before. I knew that I have novel technologies at my disposal from synthetic fleeces and discount airlines to Facebook and satellite navigation. I knew that I could rely on advances in vaccines, transplants and sleeping pills. I knew that I could experience cleaner air and cleaner water at least in my own country. I knew that for Chinese and Japanese people life had grown much more wealthy. But I did not know the numbers.

Do you know the numbers? In 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.

We invent new technologies that decrease the amount of time that it takes to supply each otherís needs. The great theme of human history is that we increasingly work for each other. We exchange our own specialised and highly efficient fragments of production for everybody elseís. The ëdivision of labourí Adam Smith called it, and it is still spreading. When a self-sufficient peasant moves to town and gets a job, supplying his own needs by buying them from others with the wages from his job, he can raise his standard of living and those he supplies with what he produces. [.  .  .]

So ask yourself this: with so much improvement behind us, why are we to expect only deterioration before us? I am quoting from an essay by Thomas Macaulay written in 1830, when pessimists were already promising doom:

ìThey were wrong then, and I think they are wrong now.î

Financial Ed 101

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abacus Itís good to see that James Surowiecki has come around to my way of thinking that better investor education is far more likely to hedge the risk of future financial scandals than throwing a few business executives in prison:

The governmentís new consumer-protection agency has the authority to ìreview and streamlineî financial literacy programs, but thatís not enough. We really need something more like a financial equivalent of driversí ed. Thereís evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates.   .   .   .The point isnít to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

Surowiecki is spot-on with his observation (as is this TGR post on Surowiecki’s article), but the promoters of the Greed Narrative continue to protest — what about the innocent victims who lost their nest eggs as a result of the collapse of a company such as Enron?

Well, one of the main reasons that those victims’ nest eggs ever had value in the first place was because innovative executives such as Jeff Skilling and Ken Lay transformed Enron into the world’s leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers.

Although itís fine to feel sorry for someone who loses money on an investment, the Greed Narrative ignores the fact that most of those "victims" who lost their nest eggs were imprudent in their investment strategy. Taking Enron as an example, those investors should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron’s stock price while being protected by a floor in that share price if it fell below a certain value. Those are the type of precautions that a prudent ñ and well-educated ñ investor would take in regard investing in a trust-based business.

Incongruously, while virtually all of those Enron "victims" hedged the risk of their investment in their homes by purchasing homeowner’s insurance, few of them hedged the risk of their investment in Enron stock. Most of them simply did not understand how Enron’s risk management services created their nest egg in the first place. Thus, when those nest eggs evaporated during the bank run on Enron, those investors didn’t even try to understand what truly had occurred. They simply embraced the easy-to-understand Greed Narrative.

The Greed Narrative’s devastating impact is that it obscures the true nature of investment risk and fuels the myth 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?

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?

At a time when America desperately needs innovators and entrepreneurs to create jobs and wealth, better education for investors makes much more sense than the paths we have been taking.

To File or Not to File, That is BP’s Question

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bp_logo1 Ever since the Deepwater Horizon oil well blowout in late April, friends in my line of work and I have been debating whether British Petroleum is going to file a chapter 11 case to reorganize while dealing with the huge and still-to-be determined liabilities arising from the catastrophe.

As the spill spiraled out of control, my sense was that the question about a BP bankruptcy filing was not whether the company would file, but rather ìwhenî and ìwhere.î Just dealing with the tens of thousands of claims that will be asserted against BP in hundreds of courts across the U.S. cries out for centralized bankruptcy processing from a logistical standpoint, if nothing else.

But from a purely financial standpoint, the question of whether BP will need to file is a closer call. As Joe Schaefer outlines here, BP is a hugely profitable, hard-asset based company that is ñ at least on paper — capable of weathering this financial firestorm outside of bankruptcy protection, particularly if the relief well is successful and restores investor confidence in BPís capacity to deal with the liabilities. 

On the other hand, as Craig Pirrong reminds us (related NY Times article here), BPís financial situation is perilous and could deteriorate with Enronesque speed if the markets lose trust in BPís capacity to perform on its contractual obligations. Those CDS spreads are indeed ominous.

Stay tuned.