Thursday, July 06, 2006

Enron – Repeating The Basics

My observation that the late Ken Lay was a real human being, whose family does not deserve the abuse heaped while he has yet to be buried, produced some very interesting reactions. The two most interesting categories have been the ‘Ken Lay Was A Crook Who Robbed People Blind’ canard and the ‘We have Sarbanes-Oxley Only Because Of Enron’ myth. Certainly, those claims and others like them go to show how little people actually learned about the Enron debacle and Lay’s part in it, and so a refresher is needed. Already.

Enron began in the 1980s as an energy trading company in Houston. Enron’s founder, Ken Lay, held a doctorate in Economics and intended to apply an aggressive theory of commodity speculation to the natural gas market. Texas is know for oil, but natural gas has become a fast-rising product in terms not only of price but also convenience – power plants, for instance, use natural gas for their fuel more often than any other source. Merging with Internorth in 1985, then-Houston Natural Gas gained access to pipelines and gas production facilities as the new company “Enron”. Four years later, Enron began trading natural gas as a commodities broker, quickly adding water, coal and steel to its portfolio.

I should stop here and remind the reader that Enron put a new spin into the Mergers & Acquisitions game. Where most players tried to take over whole companies, Enron sought out specific areas where the corporation could diversify and expand. As a concept, the plan was remarkably stable and well-thought-out. Most people today do not realize that for several years, Enron’s work was completely legitimate and its profits based on hard work and innovation. Unfortunately, pride and greed were about to take control.

Somewhere in the late 1990s, Enron began to change how it did business. Jeff Skilling was the President and Chief Operating Officer (COO), which is a critical point; in most corporations, the COO is the person who handles the cash flow directives and strategic operations. Skilling also had the most contact with Andrew Fastow, the Chief Financial Officer (CFO) who was closely connected to Arthur Andersen, the accounting giant responsible for Enron’s audits and financial statements. That is, two men directly in control of Enron’s nominal operations and reporting, known to have made a lot of money selling stock when they knew the company was in trouble, were also in control of the information which reached the Board of Directors, SEC, and CEO Ken Lay.

At this time, it is important to review a list of names – Timoth Bolden, Richard Causey, Dave Delainey, John M. Forney, Ben Glisan Jr., Kevin Hannon, Joe Hirko, Kevin Howard, Mark Koenig, Michael Kopper, Lawrence Lawyer, Ken Rice, Jeffrey Richter, Paula Rieker, Rex Shelby, and F. Scott Yeager. What do these guys have in common? They are all Enron employees who either pled guilty to or were convicted of financial crimes related to the fall of Enron, in addition to Skilling, Fastow, and Lay. In other words, a lot of people were dirty in this company, and while any one of them may be blamed for their part, picking just one is not really reasonable.

Ken Lay is an interesting case study. On the one hand, there is significant evidence to support the idea that he really did not know about the massive fraud going on at Enron, and that what he did get in trouble for, amounted to trying to keep the company in business in desperate conditions. On the other, of course, is the fact that as Chairman of the Board at Enron and first/final CEO, he had a moral responsibility for everything and everyone at the company. Speaking with admittedly limited experience with corporations crashing to the ground, I have had experience with employees who got into deep trouble and suddenly realized their predicament – to a man, they panic and try to pretend that a few tricks and concealment will buy them the time they need to make everything okay again. That is not really possible, of course, but it happens over and over again, and at the risk of over-simplifying the matter, I think that’s what happened with Lay. He had never before faced a disaster on the scale of Enron, and when he realized at last what was going on, he tried to save the company by lying about its condition in order to buy time. In doing so, he poured his money into the company, and lied to banks in order to get loans to keep making payroll. In the end, trying to save the company is what got him into real legal trouble. Morally of course, we are looking at a different picture – Lay should have pursued the worries and checked out the concerns, and he should have never forgotten the people he had made promises and commitments to, but he trusted Skilling and Fastow, and could not bring himself to accept that those closest to him had lied repeatedly to him. In the end, I think the shame and disgrace of what happened to his company, his family, and his future brought on the heart attack.

As for Skilling, boy howdy but he’s in for it. Fastow copped a ten-year sentence, which right now looks pretty light all things considered. Lay is dead, and whatever people want to say about that, it means that all eyes and anger will be directed at Jeff Skilling, who has been deserted by his friends and family alike. And the judge is likely to be shopping for an especially big gavel to ram home the sentence. Found guilty on nineteen counts, Skilling is probably looking at between fifty and two hundred years behind bars, to run consecutively. Zero fun, especially the kind of prison Skilling is going to get. Yes, Skilling appears to richly deserve a harsh punishment, but even so it’s a cruel person who looks at such a penalty and finds it amusing. Murderers and rapists get less, after all, but God help the man who faces a judge who plans to send a message.

But I was going to answer the claim that Lay lined his pockets, and that Enron is why we have Sarbanes-Oxley. Well, last question first. A lot of people forget Arthur Andersen’s role in the Enron collapse – if AA has just done it’s job, the financial reports would have made the conditions clear long before the company collapsed. And let’s not forget Worldcom or Adelphia, Xerox or Tyco; frankly there was a great need for better reports. And as annoying as it is to meet Sox standards, it does what it is supposed to do; gives investors and the public a clearer look at what is going on in major corporations, sp folks can have better confidence in those companies. And while some companies would rather leave the country than meet those standards, to my mind that speaks to the level of stability and transparency those companies maintain – I’d just as soon not invest there anyway, thanks.

Now to the investor’s woes –there were three groups who lost a lot in Enron, but the largest group never got any press. Yes, thousands of Enron employees lost their stock portfolios, but people have warned against putting all your savings in one place, especially a single stock, for decades. It’s harsh, but they should have known better. And yes, I have had a company I work for go belly-up. It’s no fun, but I got over it and moved on, learning lessons which have helped me avoid a similar mistake later. And yes, investors were lied to in 2001, but most investors poured their money in years before, when no one was lying to them and they could have sold their stock whenever they liked. Investment has risks, and again this is not a new caution but an old, old story – blaming other people for lying to you is one thing, but it doesn’t mean the investors had no responsibility to do their homework. It bothers me, because such people will trust someone else on no real knowledge about them, and so some of them will just get taken again, because they simply will not make sure about where they are putting their money. But the biggest victims have long been ignored; creditors to Enron who provided materials and services to the company lost $54 Billion in the reorganization, and those creditors suffered just like anybody else. Only the media had no sympathy for them. Those creditors, including my present employer, took the losses because thy had to, and moved on. I suggest everyone else do the same. Learn from Enron, but the bitterness and bumper sticker jingoism is just petty and stupid.

No comments: