Posted on 07/07/2006 8:06:00 PM PDT by bruinbirdman
Former Enron chairman Kenneth Lay has just died, just over a month after being convicted of fraud, and almost five years after his company's cataclysmic collapse. The common perception of Lay is that he and other Enron leaders brought about the company's fall because, eager to make money, they schemed to bilk investors. The ethical lesson, it is said, is that we must teach (or force) businessmen to curb their selfish, profit-seeking "impulses" before they turn criminal.
But all this is wrong.
Enron was not brought down by fraud; while the company committed fraud, its fraud was primarily an attempt to cover up tens of billions of dollars already lost--not embezzled--in irrational business decisions. Most of its executives believed that Enron was a basically productive company that could be righted. This is why Chairman Ken Lay did not flee to the Caymans with riches, but stayed through the end.
What then caused this unprecedented business failure? Consider a few telling events in Enron's rise and fall.
Enron rose to prominence first as a successful provider of natural gas, and then as a creator of markets for trading natural gas as a commodity. The company made profits by performing a genuinely productive function: linking buyers and sellers, allowing both sides to control for risk.
Unfortunately, the company's leaders were not honest with themselves about the nature of their success. They wanted to be "New Economy" geniuses who could successfully enter any market they wished. As a result, they entered into ventures far beyond their expertise, based on half-baked ideas thought to be profound market insights. For example, Enron poured billions into a broadband network featuring movies-on-demand--without bothering to check whether movie studios would provide major releases (they wouldn't). They spent $3 billion on a highly inefficient power plant in India--on ludicrous assurances by a transient Indian government that they would be paid indefinitely for vastly overpriced electricity.
The mentality of Enron executives in engineering such fiascos is epitomized by an exchange, described in New York Times reporter Kurt Eichenwald's account of the Enron saga, between eventual CEO Jeff Skilling and subordinate Ray Bowen, on Skilling's (eventually failed) idea for Enron to sell electricity to retail customers.
An analysis of the numbers, Bowen had realized, "told a damning story . . . Profit margins were razor thin, massive capital investments were required." Skilling's response? "You're making me really nervous . . . The fact that you're focused on the numbers, and not the underlying essence of the business, worries me . . . I don't want to hear that."
When Bowen responded that "the numbers have to make sense . . . We've got to be honest [about whether] . . . we can actually make a profit," Eichenwald recounts, "Skilling bristled. 'Then you guys must not be smart enough to come up with the good ideas, because we're going to make money in this business.' . . . [Bowen] was flabbergasted. Sure, ideas were important, but they had to be built around numbers. A business wasn't going to succeed just because Jeff Skilling thought it should."
But to Skilling and other Enron executives, there was no clear distinction between what they felt should succeed, and what the facts indicated would succeed--between reality as they wished it to be and reality as it is.
Time and again, Enron executives placed their wishes above the facts. And as they experienced failure after failure, they deluded themselves into believing that any losses would somehow be overcome with massive profits in the future. This mentality led them to eagerly accept CFO Andy Fastow's absurd claims that their losses could be magically taken off the books using Special Purpose Entities; after all, they felt, Enron should have a high stock price.
Smaller lies led to bigger lies, until Enron became the biggest corporate failure and fraud in American history.
Observe that Enron's problem was not that it was "too concerned" about profit, but that it believed money does not have to be made: it can be had simply by following one's whims. The solution to prevent future Enrons, then, is not to teach (or force) CEOs to curb their profit-seeking; the desire to produce and trade valuable products is the essence of business--and of successful life.
Instead, we must teach businessmen the profound virtues money-making requires. Above all, we must teach them that one cannot profit by evading facts. The great profit-makers, such as Bill Gates and Jack Welch, accept the facts of reality--including the market, their finances, their abilities and limitations--as an absolute. "Face reality," advises Jack Welch, "as it is, not as it was or as you wish. . . You have to see the world in the purest, clearest way possible, or you can't make decisions on a rational basis."
This is what Enron's executives did not grasp--and the real lesson we should all learn from their fate.
Good read. Beats down the lefty drivel about how the profit motive was responsible for everything that happened with Enron. Never attribute to malice that which can be adequately attributed to stupidity.
This same rational is what has always separated Conservatives from the moonbat Liberals.
No, no! This is all wrong...profit is the enemy. If we would all go to a higher plain of reality and just give our money to the people who really want to be good and don't have to justify what they invest (waste our money on) we would all be better off!
Wait, we do! We send our money to the government and they do just that! But we are not any better off. How does that work?
sarcasm/off
Ping. Thought you'd find this of interest.
In Enron's case the credit card was the Special Purpose Entity or SPE. What's Right and What's Wrong With (SPEs), SPVs, and VIEs
>>>In layman's terms if you pay your bill using a credit card you still have the debt. If you pay the credit card using another credit card you still have the debt.
>>>In Enron's case the credit card was the Special Purpose Entity or SPE.
In Enron's case they borrowed the money on the second credit card and then booked it as revenue.
This article proves what it set out to disprove: they defrauded the stockholders. By their willful avoidance of reality (and related accounting entries to allow such) they fooled themselves and their outside investors. Actually there was one that wasn't fooled, but Skilling called him an a**h*** during an investor conference call.
Ooooooohhhh! How touchy feely. How about we tell them what the laws are, and bust thier bee-hinds if they break 'em.
Good piece.
ping
ENRON took the fall, the big fall, for a lot of different parts of the economy. Primarily, the accounting side. The FASB in early 90s fought tooth and nail against the newer "fashioning" of the books and accounting systems whereby bone fide (the big 5) accounting groups could "diversify" their business side. Many other businesses besides ENRON hired these guys to guide and do the books.
Next, let's talk "energy". During the years that Enron and others were engaged in "diversified accounting" for business expansion, Dems in CA, for example, were putting lots of personal money into the energy markets.
I remember SAG Bill Lockyer expressing his desire to see Ken Lay meet "butch" in jail. I wanted to sock Lockyer in the jaw. The entire Energy "disaster" in California was the result of CA DEMOCRATIC POLICIES. CA Dems WANTED to expand their "business" base to include other countries. Including the addition and involvement of the UN in the California Constitution.
It was crocodile tears shed by Dems when CA had to buy energy from Canada.
The "evil" which brought down ENRON was thunk up in CA by Democrats.
There are 9 states on (or were on) the same grid with CA. Enter now, Howard Dean's thrust to seize the states surrounding CA for "political agenda purposes". The lies continue to go around and around.
With President Bush, I pray Ken Lay is at peace. Democrats skillfully saw the loop closing and emptied out their allied "newer energy" producers, leaving ENRON holding the biggest bag.
And the Dems say they hate musical chairs. BS.
Let's take one more snapshot about ENRON, here. ENERGY. CA Dems manuevered the crisis in California. Willie Brown in San Francisco and his mobsters were moving to SEIZE PG&E's substations. Years earlier he'd extorted PG&E to "give energy" to a good buddy. That good buddy of Willie's was Johnnie Cochran. Johnnie Cochran used the profits to boost his law firm. Then, the OJ Case. Fast Track forward, again, to CA's energy crisis. If this "crisis" had not HAPPENED, and brought international attention to the matter of "energy" (which of course was preceeded by the great Y2K jazz and the "energy/grid" crisis".. and there's Enron in the spotlights of a massive targetting. It was all a part of a fast money-making scheme, this newer accounting book/energy/diversity crapola, lots of littler players came out with big bucks. And walked away into the shadows with their bootie.
May Ken Lay and his family know peace.
The article ascribes some well-intentioned but oafish approach to making money. I think they just wanted to fool the market long enough to make their pile of money, and didn't care what happened to their employees or long-term investors.
You laid that out very well. ENRON trusted its financial and accounting advisors. ENRON took the fall for such advice.
I brought this up to a number of different people when the whole "Enron is Bush's fault" thing started. The US government(then headed by BJC), strongarmed India into buying a NG fired power plant, even though a) India has NO NG resources, b) India is rich in coal, c) India was to buy their NG from Enron, and d) Enron was building the plant in India, insured by you and me.
It turned out that the cost of the electricity was so high that India couldn't afford to pay for the cost of the NG, let alone the costs of the power plant, so they defaulted. Leaving Enron, you, and me holding the bag.
Mark
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