If I didn’t know better, I’d say that Nicole Gelinas has been reading (H/T Professor Bainbridge) my blog over the past several years:

[I]n the end, Sarbanes-Oxley has just made it easier for ambitious government attorneys to criminalize bad business judgment and complex accounting in hindsight. Further, in their focus on strengthening legal enforcement, the feds have passed up opportunities to create commonsense protections for investors. Worse still, the government has instilled investors with false confidence by implying that they can rely on prosecutors, not prudence, to protect their market holdings. Now the housing and mortgage meltdownówhich could hurt the economy far more than Enron didóis reminding investors that no law or regulation can protect them from economic disruption. [. . .]
As the economy heads into a possible downturn, calls will grow for someone to pay for the pain of another burst bubbleóand for yet more onerous rules, regulations, and prosecutions of businesses to prevent future crises. But no government mandate or punishment, however harsh, will stop companies and markets from being imperfect collections of fallible human beings. At the end of a decade of financial surprises, that may be the most enduring lesson of all.

As I noted here almost three years ago and have reiterated many times, the truth about Enron is that no massive conspiracy existed, that Jeff Skilling and Ken 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 commodities 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 the perilous post-tech bubble, post-9/11 market conditions. Thus, when the markets were spooked by revelations of the embezzlement of several millions by Enron’s CFO and his relative few minions, the company failed.
However, Gelinas is spot on in observing that Enron’s failure was not a market failure. That Jeff Skilling failed to predict that Enron would fail is not a crime. Unlike his main accusers Andy Fastow and Ben Glisan, Skilling didn’t embezzle a dime from Enron. Did he tirelessly advocate on behalf of this innovative company? Sure, but since when is it a crime for a CEO to be optimistic — even overly-optimistic — about his company?
The primary justification for the absurdly-long sentence handed to Skilling is the plight of the innocent employees and investors who lost their nest eggs when Enron went bankrupt. But the main reason that those nest eggs ever had value in the first place was because Skilling had 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 nothing is wrong with compassion for folks who lose money on an investment, rarely is it mentioned in the Enron morality play that many of those investors who lost their nest egg when Enron failed were imprudent in their investment strategy. They 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 things did not go as planned. Even though virtually all of those innocent Enron investors carry insurance on their homes and cars, one can only speculate why they didn’t attempt to hedge the risk of their investment in Enron stock. Most likely, many of the investors simply did not understand how Enron’s risk management services created their wealth in the first place.
Beyond the shattered lives, families and careers, the real tragedy of the post-Enron demonization of business is that it has distracted us from examining the tougher issues of what really causes the demise of a company such as Enron and understanding how such a company can be structured to survive in even the worst market conditions. It’s easy to throw a good and decent man such as Jeff Skilling in prison for most of the rest of his life, throw away the keys and simply attribute Enron’s failure to him. It’s a lot harder to try and understand what really happened.