A couple of NY Sunday Times articles reports on the success of a number of former Enron executives. However, in doing so, the Times misses a major point that is sadly lacking in most mainstream media accounts of Enron’s demise.
This interesting Alexei Barrionuevo piece examines the rebounding energy trading business, a productive and profitable sector of the economy that was virtually shut down in the aftermath of market-maker Enron’s bankruptcy case. The article does repeat a few of the common myths about the energy trading business, such as “traders manipulate markets,” “trading increases energy costs,” and “traders caused California’s power crisis.” Overall, though, the article does a good job of presenting how bright, young traders — many of whom formerly worked for Enron — invested their own money when the energy trading industry almost ground to a halt in early 2002 and now are profiting as the comeback of this valuable sector of the economy provides companies flexibility in providing for — or hedging the risk of — their energy needs.
Meanwhile, this Times article notes that Rich Kinder of Kinder Morgan Inc. was recently named chief executive of the year by Morningstar, Inc. Kinder is a former long-time Enron executive who left the company in 1996 to set up Kinder Morgan after six years as president when former Enron chairman and CEO Ken Lay passed him over for the chief operating officer position in favor of Jeff Skilling.
The Times blurb on Kinder implies that Enron’s monkey-business began after Kinder left the company, and that is certainly true with regard to former Enron CFO Andy Fastow’s shenanigans with certain special purpose entities. However, the Times fails to note that the vast majority of business activities that made Enron such an extraordinarily successful company during the 1990’s — both in its primary business activities and in the ways in which it raised money — were taking place while Kinder was Enron’s president just as they were five years later when the company collapsed into bankruptcy. Unfortunately, an enormous and unnecessary loss of wealth occurred as many of the markets for Enron’s beneficial and innovative financial transactions — such as the energy trading industry and structured finance use of derivative pre-pay forward contracts, to use just two examples — shriveled in the wake of the societal demonization of Enron during 2001 and thereafter.
Consequently, Kinder’s success after leaving Enron actually emphasizes a point that the Times and much of the mainstream media completely misses — i.e., that it is critically important in determining the truth of what happened at Enron to distinguish between Enron’s role as a legitimate, innovative company and the limited fraud that took place. As noted in this prior post, the Enron Task Force is currently struggling with that realization in its prosecution of Lay and Skilling. A more truthful analysis of Enron’s demise would likely result if much of the mainstream media would catch on and take notice, too.

This Wall Street Journal ($) article on Friday (USA Today article here) reports that government authorities led by New York Attorney General Eliot Spitzer are finalizing a settlement with American International Group under which the company would settle civil business fraud charges for between $1 and $1.5 billion. The anticipated deal does not settle similar civil claims against AIG’s co-defendants in the case, former chairman and CEO, Maurice “Hank” Greenberg and former CFO Howard Smith.
Spitzer has probably maximized his political benefit from persecuting AIG and particularly Greenberg, and AIG — by offering up to Spitzer a number of sacrificial lambs, including Greenberg — has already avoided an Enronesque experience. So, the proposed settlement is really not surprising. However, it still is important to step back and assess what happened here, particularly in view of — as Larry Ribstein notes — the appearance of regulatory extortion.
Spitzer publicly demonized a pattern of structured finance transactions at AIG that had been in place for years. Rather than undertaking a measured regulatory review of the complex transactions — which, by the way, were not even clearly material to AIG’s $80 billion plus equity value — Spitzer threatened AIG with a criminal indictment, which would probably have put AIG out of business (remember Arthur Andersen?). Then Spitzer went on television to pronounce that the AIG transactions were “wrong,” “illegal,” and fraudulent even though it was not yet clear what the charges were, much less whether they were true. AIG’s board quickly cratered and unceremoniously showed the door to Mr. Greenberg, who was primarily responsible for creating huge amounts of shareholder wealth over the past generation. Mr. Greenberg was not even able to present his side of the story before AIG’s board bowed to the Lord of Regulation and characterized the transactions as “improper.”
In short, Spitzer used public allegations of business fraud to charge, try and convict easy and popular targets — i.e., a big company and its allegedly greedy leader — even before he announced that he wasn’t going to pursue criminal charges against Greenberg. Much of the mainstream media has embraced this public relations abuse while portraying Spitzer as the defender of noble egalitarianism fighting against the forces of corrupt capitalism.
As noted recently here in regard to Enron case, many legitimate business transactions — most notably structured finance transactions that most prosecutors and journalists neither understand nor do the homework necessary to understand — are unfairly and incorrectly portrayed as complex business frauds in the wake of such seemingly simple morality plays. Completely ignored in the process is the fact that such transactions build wealth in companies for the benefit of shareholders, and that such transactions are usually reviewed and approved by multiple professionals who are experts in such transactions. Rather than protecting shareholders or any meaningful public purpose, Spitzer’s investigation of those transactions in regard to AIG — as noted here and here — simply damaged AIG and its shareholders.
Meanwhile, with the inviting prospect of greater political rewards resulting from the favorable publicity of knocking a wealthy businessman off his perch, Spitzer has dispensed with any notion of prosecutorial discretion in regard to his investigations of business. Although Spitzer’s political campaign and his media friends portray him as a hero to shareholders and the common man, my sense is that the AIG case offers powerful evidence of precisely the opposite.