Thursday, June 01, 2006

Scary article on the aftermath of Enron

in Salon.

Alas, the root causes of Enron are still with us, and getting worse. I am pained to report that in the breeding grounds of corporate crime, the teeming Gold Coast mansions and sweaty polo clubs, little has changed in the executive attitudes that brought us Enron. If Ken and Jeff are the incorrigible Billy Halop bullies in this melodrama, we -- society as a whole, my friends -- must share the blame. Did we not hear their yelps of greed? Their defensive blame shifting? The keening of their flacks?

How easily we forget the root causes: the pampering, the permissiveness. How easily we forget the SEC's granting Enron, in 1997, the exemption from the Investment Company Act that it needed in order to structure its operations to shift debt off the books. The media functioned as an unofficial pep squad, and the earliest warnings were sounded not by reporters but by "short-sellers," market players who bet that stock prices will decline.

Shorts are always on the lookout for a good stock fraud, which makes them almost universally despised, particularly by corporations with something to hide. Short-sellers were the earliest naysayers concerning Enron, with short-seller James Chanos acknowledged to be a source for Bethany McLean's early groundbreaking article in Fortune. Chanos saw to it that the bad news about Enron traveled fast -- and, in the process, he made a few bucks. As both the bearers and profiteers of bad news, short-sellers are hardly winning popularity contests. They were already ancient, reliable scapegoats by the crash of 1929, and remain so today.

But the traditional hatred of shorts was forgotten after the Enron scandal broke in late 2001. During that brief window of time, Congress and the SEC were stirred to action, and even the somnolent financial press became enlivened. The details of Enron (basically a lot of crooked accounting with some insider trading thrown in) were murky, and that proved propitious when it came time for the putative guardians of our financial markets to come up with "solutions."...

What Sarbox has never done, and never could do, is change corporate behavior, anymore than you can stop a car thief by taping a Do Not Steal sign to the dashboard. Remember that CEOs who are going to pull off a mega-scam like Enron, or even a routine stock swindle or accounting trick, are not going to be deterred by a law book or someone with a stinkin' badge. They have a more pragmatic view of corporate responsibility -- they feel they don't have any. If you listened closely, you heard the Enron management credo at the trial. It is the same philosophy that has been employed by second-story men and Mafia bosses since the dawn of the first proto-scam. It can be summed up as, "If it's broke, it ain't broke, and anyway it ain't my fault."

Under this credo, if a company has some kind of difficulty, whether it be a massive fib on its balance sheet or a simple tendency to lose money, the problem is not the company, and heaven forbid not the CEO or the board of directors. It is them. The objects of blame can be short-sellers, "Wall Street," journalists, independent analysts (another post-Enron Good Thing we are supposed to cherish) or sometimes all of the above working in cahoots. Lay and Skilling personally acknowledged the popularity of this latest corporate rage at their trial, when they testified that Enron was a victim of evil short-sellers working in league with journalists, unfairly driving down the share price.

The them defense is gaining currency, bringing the paranoia of UFO-ers and four-shooters-at-Dealey-Plaza wackadoos into the boardrooms and business news programs of America. The media, instead of scoffing at such rubbish -- there are notable exceptions -- either ignores them or actively promotes their cause.

First of all, these crooks create an opportunity for short-sellers, whose work (with a disclosure or two therein) is entirely legit. I have invested in the Grizzly Fund, a short fund, for example.

It went down yesterday, but overall, it's been up.

A company for which I used to work used this "short sellers" excuse. In retrospect, I should go the SEC and complain, but it's been well over 7 years since I worked there, and likely the statute of limitations has expired on any corporate hanky-panky. Moreover, their CEO has since left, good riddance to him.

Read the rest of the article, if you have any idea that the mainstream media will tell you the full story on the rackets involved in "investing."

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