Lessons of Enron, 10 years on
Ten years ago, the sixth largest corporation -- Enron -- declared bankruptcy. That failure was the biggest early warning sign we had of fatal flaws in our market economy. Had everyone at the time have been a little more intelligent, attentive and thoughtful, we could have avoided the credit crunch and our current economic crisis. What went wrong?
IDEOLOGY
Early complaints that Enron wasn't all it was cracked up to be, that market manipulation was rampant, was firmly rejected by Larry Summers and Alan Greenspan. Economic maestros, they believed they knew better than those responsible for day-to-day businesses like power generation. The free market, they ruled, was always right. Years later, decades worth of recorded phone trades proved what the regulators had always known: Enron manipulated markets with criminal intent. It would be wrong to say that Greenspan and Summers abetted the corporation; it would be right to say that they were blinded by ideology. Their religious zealotry and love of intellectual models effectively blinded them to realities others saw easily.
GOVERNMENT IS LATE, SLOW AND COWED
The SEC didn't understand Enron, and even after the sixth-largest corporation in America failed, most of the Senate didn't understand it either. Experts like Frank Partnoy were drafted in to explain what went wrong, but the complexity of the financial engineering was so dense that most legislators backed away, intimidated by their own ignorance. This had profound consequences. When financial instruments, or the organizations that create them, become too complex for democratic institutions to understand, they successfully evade oversight. A good rule of thumb should be that opacity is a warning sign, not a badge of honor.
COMPLEXITY IS A GOOD HIDING PLACE
Enron filed for bankruptcy much earlier than it needed to -- if it needed to at all. Why? Because its balance sheet had become so convoluted that even the CFO and his officers couldn't keep track of their assets. So much was hidden in Special Purpose Vehicles, in offshore accounts and in subsidiaries, that no one actually knew what the company owned. This wasn't unique. Greece fell prey to the same kind of financial engineering, on the advice of some well-paid bankers. It's like hiding your diamond earrings from potential burglars. They may be safe from the thief but when you need them, you can't remember where you put them.
MARK-TO-MARKET
Enron looked like it was making money that subsequently never materialized because it had secured agreement to value its assets according to current market prices. Mark-to-market was subsequently applied to assets in investment banks, to CDOs, to all kinds of derivatives that one day were valuable -- and the next day were worth nothing. Mark-to-market was just one piece of accounting nonsense that masked the true risks implicit in derivatives. It helped to keep a dark market dark. That Enron was just one in a long line of disasters associated with derivatives was a warning sign that legislators and regulators could have seen, should have seen -- but turned a blind eye to.
TRIBAL INSTINCTS
Enron didn't go wrong because the late Ken Lay and currently imprisoned Jeff Skilling were bad guys. The bad apple theory of catastrophe doesn't work here. The failure of this corporation required the active participation and collusion of hundreds, if not thousands, of employees. Enron's corporate culture encouraged rampant, ruthless internal competition, driving otherwise decent human beings to take risks of a kind they knew were dangerous and wrong. Asked to choose between losing face and losing shareholder's money, self-image won out -- as it always will. If companies foster internal competition, they can and should expect to see even the finest employees' values fall by the wayside. Post-It notes that quote Martin Luther King -- "Our lives begin to end the day we become silent about the things that matter" -- are not adequate antidotes.
SUCCESS IS SEDUCTIVE
Enron was finally exposed by shortsellers and by two journalists at Fortune - but only after the magazine that had, for years, celebrated the corporation as one of the finest in America. Harvard Business School wrote case studies, lauding the company as the business model for the future. McKinsey, proud of its alumnus Jeff Skilling, poured consultants into the company. Arthur Andersen's professional integrity was blinded and finally destroyed by billings of $1million a month. Public success and vast wealth go a long way to disable the integrity and intelligence of otherwise smart, moral individuals. If we still imagine money doesn't change the way we see the world, we have learned nothing.
Enron was the dress rehearsal for the banking crisis which propelled the economic crisis we now find ourselves mired in. We could have, should have learned from it. We didn't. Legislators were intimidated. Government was weak and probably corrupt. Employees in their hundreds colluded in what they knew to be wrong. This was willful blindness on an epic scale. And once the market bounced back, it was easy to fall back on the fatal argument that Enron had been the exception, not the rule. For those who imagine that it didn't really matter, that this was a crime without a victim, I'll end with the words of a small shareholder, Mary Bain Pearson, who had the courage to testify before Congress. Today, you would say that she is one of the 99 percent.
"My name is Mary Bain Pearson. I am a 70-year-Old Latin teacher and tutor. I have always tried to handle my business in a logical manner, like you conjugate a verb or decline a noun. I am also a child of the Depression, when my father was working in a bank and the bank failed during the Depression, and he never got over that, and for the next 50 years he used to always warn me to save something for an emergency or an illness, and not to put all my eggs in one basket, and be careful with my money.
After a while, I decided I would invest in Enron stock. Now, I do not want you to think I am too naive. I did a lot of work investigating it, and learned about its history. Finally, I bought 100 shares so I could go to the board meeting, and I did go to some board meetings and met some of the members of the board, who I held in the highest esteem. We had Mrs. Phil Gramm was there that day, and I thought she was smart, because she already had a job in the economy up here in Washington, and I thought she was smart. And so I thought, well, this must be a good company to invest in, so I bought some more stock.
I am just a pebble in the stream, a little bitty shareholder. I did not lose billions but what I did lose seems like a billion to me. I was going to use my Enron stock as my long-term health care.... Well, I do not know what I am going to do now. I am going to have to go home and reevaluate my life and see what I can do. I am not a big stockholder, just a little person, but when they asked me how I felt about Enron I said, well, at first I was in a state of shock for a while. And then after that wore out, a veil of disappointment fell over me. I was disappointed in the people that I put my trust in years ago. And then after a little time passed on, bitterness came into being, and bitterness will eat you alive if you let it, but sometimes at night I do feel real bitter over what I have lost, because it was a big part of my future, and I do not know how I am going to handle the future now. All I can do is hope and pray I do not get sick."
