One of the enduring myths of this era of criminalizing business practices is that Enron’s energy trading policies were one of the primary causes of California’s power crisis during the early part of this decade.
Well, with Enron gone, that myth is not going to hold up this time around if what James D. Hamilton predicts comes to pass:
California may again offer the nation a useful illustration this summer of how not to deal with an energy crisis.
California Energy Blog last month passed along the warning from the Federal Energy Regulatory Commission that the southern half of our state is in “the worst electricity supply situation in the entire country.” I’m not worried about it, though, because I know that the California Energy Commission has been working for five years to come up with a plan.
And here it is, in all its glory: the fifth annual installment of the flex your power now! campaign. In the Commission’s own words, here’s how it works:Pitch in this summer, California. When you hear the “Flex Your Power NOW!” alert, immediately conserve energy. Learn more about what to do when you hear the alert.
But the really cool thing is the “Conserve-O-Meter”. Go ahead, I’ll wait here while you check it out.
And thus we continue in the great tradition of California regulators, who seek with great diligence, earnestness and, dare I say, ingenuity, to try to balance supply and demand every day by telling each one of us exactly what we need to do. As long as we all maintain the proper spirit and check up on the Conserve-O-Meter as the day progresses, I’m certain that all Californians can be counted on to do the right thing, ensuring the equality of supply and demand as a result of conscientious attention to civic duty.
I’m curious Tom … at what point might you be willing to consider lying to investors and manipulating markets for the sake of monopolistic or oligarchic control to be a bad thing? I mean, dang … I’m a pretty staunch defender of free markets and all that (though not to the libertine ideal espoused here), but at some point you have to realize the negative effects of markets and the reality for the political world to meet with it head-on.
Or do you just not believe in such a meeting under any circumstance whatsoever?
Greg, lying to investors is a bad thing, as is manipulating markets for monopolistic and oligopolistic purposes. People who engage in such things should be required to pay for the damages that they cause by doing such things. So, we agree with regard to that. Where we may disagree is that I believe criminalizing such conduct is a slippery slope to injustice.
The problem is that prosecuting agency costs — such as KPMG pushing the edge of the envelope on tax shelters or Arthur Andersen not using very good sense in executing its document retention policy — is much different than prosecuting prosecuting clear-cut crimes, such as embezzlement. The difference relates primarily to the nature of the evidence involved, the relevance of contracts, and the subtleties of dividing responsibility between corporate actors.
Professor Ribstein has put it this way. Suppose somebody mugs you on the street. There is no question that is a crime. However, what if they ask you first if they can borrow your wallet, you loan it to them, and then they don?t give it back in time? What if they ask your employee who’s running the store for you whether they can borrow some money and then don’t pay it back? What if the “thief” is another employee who says the manager gave him the money as bonus compensation?
Who is liable in these situations turns on the contracts among the various parties. Proof depends on who said what to whom. Can we rely on what the witnesses say about this? What if the prosecutor tells the guy who?s minding the store that he?ll not face a prosecution for conspiracy if he spills the beans on the employee?
Take the Tyco case as an example. It was widely reported that the jurors in post-trial interviews said that they convicted Kozlowski and Swartz in part because they assumed the directors were so firmly in the defendants’ pockets that they would have provided a writing if the defendants had asked for it. Inasmuch as the defendants didn’t ask for it, the jurors reasoned that they must be guilty. But why wouldn?t the defendants have asked for such a writing if they surely would have gotten approval? Not because they wanted to hide their bonuses, because there was evidence that the bonuses were well known within the company and by the company’s auditors.
Moreover, shouldn’t the directors have faced prosecution also for allowing such excess compensation? Shouldn’t the auditor (Richard Scalzo) also have been prosecuted? Similarly, in the Enron case, if Arthur Andersen is prosecuted, shouldn?t Vinson & Elkins be prosecuted for their far more egregious conduct in facilitating Fastow?s transactions in which he funneled money to his associates and family members and covering up the invalidity of such transactions in connection with their investigation into Sherron Watkins? memo to Ken Lay?
I concede that society needs to have punishment and accounting for clear-cut crimes. But agency costs are much better handled by civil lawsuits that include — unlike the criminal prosecution — all the people involved, including the directors who either ignored or approved the wrongful conduct and the accountants who either neglected it or knew and approved it for a bad reason. My sense is that this is a much more rational way in which to deal with agency costs than attempting to make them appear to be clear-cut crimes, which is something that they are not.
The supposed payoff to criminal prosecutions of agency costs is deterrence. But businesspeople such as Kozlowski will keep on pulling these shenanigans while the legitimate risk-takers who create jobs and wealth for the community sorts will be the ones who are deterred. I’m not suggesting that Kozlowski or Andy Fastow’s funneling money to his associates should be encouraged, but the cases against Mike Milken, Hank Greenberg, Jamie Olis or Dan Bayly are significantly different, and I am not comfortable that politically ambitious prosecutors such can tell the difference. The carnage that results to the families of such unjustly imprisoned people cannot be responsibly be rationalized as a trade-off of an imperfect system.
And regardless of good intentions, punishing all the risk takers in the commercial power generation market does not encourage new power plants or power lines.
Why would anyone risk capital in a market where you are punished for being too successful, and still absorb all the losses?