Enron, the documentary

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As noted several times on this blog, the most popular book on the Enron affair to date has been the one written by Fortune reporters Bethany McLean and Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio 2003). If you want to read just one book on the Enron scandal, then Smartest Guys is the book for you.
Now, the Houston Chronicle reports that Smartest Guys is the basis of a documentary that will debut later this month at the Sundance Film Festival in Utah. Filmed by Alex Gibney, who is probably best known for producing the documentary — The Trials of Henry Kissinger (2002) — based on Christopher Hitchens’ searing book, The Trial of Henry Kissinger (Verso 2001), it does not appear from the following Sundance website description of the film that Mr. Gibney bothered to review any of Professor Ribstein’s writings on the portrayal of business in film in preparing the documentary:

Watching Enron: The Smartest Guys in the Room is a little like watching the outcome of a Super Bowl on ESPN Classic. Although you already know the final score, you’re still captivated by the drama of the game, entertained by the characters, and fascinated by the behind-the-scenes revelations. And Enron is indeed an engrossingly dramatic tale, especially as depicted in all of its exquisite detail by director/screenwriter Alex Gibney. The story of Enron is not simply a cautionary tale about greed and corruption. Nor is it a story that we are unlikely to witness again, for the rise and fall of Enron is as American as apple pie.
With this film, based on the book of the same title, Gibney has fashioned a history lesson that takes us “inside” the headquarters of the seventh-largest corporation in the United States and illustrates through a series of rapidly paced interviews, corporate footage, and news reports, the “new economy” of the 1990s: a climate where companies sold ideas rather than widgets, and a corporate culture where ethics became as old fashioned and out of date as value investing. Densely packed, with a world of information for the sophisticate and neophyte alike, Enron is riveting, muckraking filmmaking that should make any culture critic of the 1990s proud.

Hat tip to Charles Kuffner for the link to the Chronicle article.

Only in New York

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In a rare moment of candid introspection, the NY Times concedes that only New York could come up with a political race where Robert F. Kennedy Jr., the son of the late senator, would run for state attorney general (to replace Eliot Spitzer, of all people) against his brother-in-law, Andrew Cuomo, who is getting a divorce from Mr. Kennedy’s sister, Kerry.
When I mentioned this to my wife, she thought I was talking about an episode in a T.V. sitcom.

Why hasn’t the Disney-Ovitz case settled?

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Given the high stakes of the ongoing Disney-Ovitz trial, a reader asks Professor Ribstein that question, and the Professor speculates that the reason is the importance of the case. Having been involved in similar high stakes cases, that’s certainly one of the reasons that the case has not settled. However, the non-settlement is also likely a result of the D&O insurer’s investment banking analysis of the case.
In short, the Disney D&O insurer probably concluded before trial that the Disney defense has a good chance of winning the case. Thus, not only does the insurer salivate at the thought of knocking the plaintiffs’ damage claims out entirely, the insurer views the risk of a damages judgment in excess of the D&O policy limits as remote. That’s important because the insurer is likely responsible for any such judgment in excess of policy limits if, before the case went to trial, the insurer declined the directors’ demand to settle the case within policy limits {which demand is almost always directed to the insurer in such cases) and the plaintiffs actually offered a settlement within policy limits (such an offer is almost always made in such cases). Thus, the Disney directors are probably not too concerned about a judgment in excess of policy limits that might expose their personal assets to pay a portion of the judgment.
Inasmuch as the Disney D&O insurer views the defense case as strong and the risk of a judgement in excess of policy limits as remote, the insurer figures that the probable wide gap in settlement positions within policy limits before trial made taking a flyer on knocking the plaintiffs’ claims out completely a reasonable risk. In that regard, the Disney case differs from the recent settlements involving Enron and Worldcom directors, where the insurers recognized that they were going to end up paying policy limits regardless of whether the cases settled or went to trial. Therefore, the insurers’ sole goal in those cases was to remove the risk of an outcome where the insurers might be liable for damages in excess of policy limits. The “policy limits” settlements accomplish that goal.
Update: Be sure to check out Professor Ribstein’s typically insightful response, particularly his point about the insurer’s interest in risking an adverse judgment in the Disney case to promote the clarity of result that makes future underwriting decisions easier. Good stuff.

More Econoblog — Social Security reform

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The Wall Street Journal ($) is continuing its interesting Econoblog series, in which the WSJ hosts two experts in economics debating hot issues of the day. In this most recent segment, bloggers Arnold Kling and Max Zwicky debate the merits of Social Security reform. This is a first rate discussion of the issue, and includes further reading materials on the Social Security system. Don’t miss it.

John Keegan on the current situation in Iraq

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John Keegan is England’s foremost military historian and, for many years, was the Senior Lecturer at the Royal Military Academy at Sandhurst. His book — The Second World War — is arguably the best single volume book on World War II and his book The Face of Battle is essential reading for anyone seeking an understanding of the history of warfare. His newest book — The Iraq War — was published in 2004, and here are prior posts on Mr. Keegan’s views on the Iraq War.
In short, when John Keegan talks about war, pull up a chair an listen.
In this Daily Telegraph op-ed, Mr. Keegan provides a pragmatic analysis of the American-British approach to the war and elections in Iraq. In so doing, he disabuses several popular notions about the war effort, including the notion that the current violence in the Sunni Triangle and Baghdad reflect larger problems with the war effort:

Regarded solely as a military operation, the Iraq war of 2003 was a scintillating success. It is the aftermath that has sowed doubt among those who supported the decision to risk an attack.
Casualties among the Western forces have risen. Casualties among Iraqis have risen even higher and continue to rise; not, however, for the reasons foreseen by the anti-war party. It is not conventional force or conventional defence tactics that end lives, but something quite different, which may be called large-scale terrorism, largely by car bombing, suicide bombing and the assassination of Iraqis who co-operate with Westerners.
This is not a new development. What is going on in Iraq resembles the second Palestinian intifada, though it is more intensive and better organised. It is also more difficult to counter, since the Western forces lack the detailed intelligence to which the Israeli security forces have access.

Mr. Keegan also puts to rest the increasingly popular notion that America’s involvement in Iraq is “becoming another Vietnam:”

Some critics of Western occupation policy are raising the idea that Iraq is becoming a Vietnam, a popular thought with old-style opponents of American foreign policy, but quite inaccurate. What America confronted in Vietnam was ideological nationalism, organised at several levels, political and military, all ultimately depending on the Vietcong’s ability to defeat the enemy by conventional methods. There is absolutely no equivalent in Iraq of the Vietcong main force and its battalions of highly motivated infantrymen.

With his powerful historical perspective, Mr. Keegan goes to explain the source of the Iraqi opposition, the difficulties involved in quelling it, and the threatening nature of the upcoming elections to that opposition. These are compelling and thoughtful points of a true clear thinking expert on the nature of war. Check out the entire article.

The Bush Administration’s second term agenda

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This Economist article does an excellent good job of summarizing and analyzing the Bush Administration’s second term agenda.

Handy scorecard

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Given the number of criminal trials of high-profile corporate executives that are upcoming, it’s become a bit difficult to keep up with all of them without a scorecard. Thus, the Wall Street Journal ($) has provided one for us. Check it out.

Enron bankruptcy CEO takes over at Krispy Kreme

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Krispy Kreme Doughnuts Inc. took a big step closer to chapter 11 today as it announced that its chairman and chief executive, Scott A. Livengood, retired and that turnaround expert and current Enron CEO, Stephen F. Cooper, was named CEO and a director.
Steven G. Panagos — who works with Mr. Cooper at his consulting firm, Kroll Zolfo Cooper LLC — was also named president and chief operating officer of Krispy Kreme.
Somewhat surprisingly, the news sent Krispy Kreme’s shares soaring in mid-morning trading today. Expect that speculation to reverse itself as the reality of the situation becomes clearer over the next several days.
Krispy Kreme has been hammered over the past year by a gradual slowdown in sales and multiple investigations of its accounting practices and franchisee acquisitions. Here are the prior posts on the trendy doughnut maker’s demise.
Mr. Cooper and his firm are well-known in bankruptcy and corporate reorganization circles, as evidenced by the firm’s involvement in the high profile Enron chapter 11 case. Mr. Cooper and his firm will likely recover more than $100 million once their work is completed in the Enron reorganization.

Harvard Prof not impressed with Enron directors’ settlement

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Lucian Bebchuk is a professor at Harvard Law School and a co-author of Pay Without Performance: The Unfulfilled Promise of Executive Compensation. In this NY Times op-ed, Professor Bebchuk takes dead aim at the recent Enron directors’ settlement and he does not like what he sees:

With Enron, the failure of the board had disastrous consequences, leading to the second largest bankruptcy in American history and shaking investor confidence. It is difficult to envision a stronger case for imposing a meaningful financial penalty on directors. Yet the settlement fails to do so.
The settlement hardly heralds a new era in which directors who fail to act in shareholders’ interests pay the price. If even Enron’s board members are treated this gently, then other corporate directors can rest easy.

Professor Bebchuk has a point, but it’s a bit simplistic. The main mitigating factor in the Enron directors’ settlement is Enron’s liberal D&O insurance policy, which is the primary source of funding for the settlement. In the absence of such a liberal policy, plaintiffs’ lawyers would hold out for larger contributions of personal assets from individual directors, such as occurred in the directors’ settlement in the Worldcom case, where the directors’ contributed 20% of their non-exempt net worth.
After Enron, Worldcom and other corporate scandals, liberal D&O policies are rare and more costly. Without that hedge to the risk of director liability, the risk to outside directors has racheted up considerably, as this recent WSJ ($) article reflects. So, it would appear that the market indications are quite contrary to Professor Bebchuk’s conclusion that outside directors can “rest easy” with regard to their risk of director liability.

US Airways = Eastern?

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This Washington Post article reports on the seemingly simple choice that US Airways machinists face this week — either they can approve the carrier’s latest contract proposal calling for pay, benefit and job cuts or they can turn down the contract and walkout, which might just send the struggling airline into liquidation. That part of the article is fascinating as the WaPo reporter attempts to present in a coherent manner the machinists’ position that they would prefer to lose their jobs than making the concessions necessary to help keep the airline afloat so that they can keep their jobs.
But what is even more interesting is the article’s comparison of the US Airways situation with that of Eastern Airlines, which former Continental Airlines CEO Frank Lorenzo attempted to steer through a chapter 11 case during the late 1980’s. Although Mr. Lorenzo successfully reorganized Continental under chapter 11, he failed in regard to Eastern, which ultimately liquidated amidst internecine labor disputes.
My sense is that putting US Airways out of its misery would be a positive step for the long term health of the U.S. airline industry. Nevertheless, it is utterly amazing to watch the rationalizations that workers will come up with in such reorganizations to explain why they should push the liquidation button at the expense of their own jobs. Why would not it be better than simply losing their jobs entirely for the recalcitrant workers to negotiate a small equity stake in the reorganized airline in return for giving up their jobs to hungrier workers who want them? Or stated more simply, why do the workers feel compelled not only to shoot themselves in the foot, but to shoot their entire foot off?