RE: Greed: Don't Bail Out the Enron Employees

From: Robert J. Bradbury (
Date: Tue Jan 22 2002 - 10:32:16 MST

On Tue, 22 Jan 2002, Harvey Newstrom wrote:

> It praises the executives for bailing out in time and blames the employees
> for not doing so. It ignores the fact that Enron executives bailed on inside
> information while feeding false information to employees and investors.

Actually Harvey it may be a little more complex. An article I've read
suggests that the Enron CEO was buying stocks using loans from Enron
secured by Enron stock (not unusual for corporations). You have to
remember Y2000 and early 2001 weren't very nice to many investors.
It looks like several of the significant investments the CEO had did
even worse than Enron. As a result he was forced to provide additional
stock to pay down the loan to keep within the margin requirements.
[I think the NY Times was the source.]

I don't think the SEC reports will be filed until next month, at which point
you can determine how much the CEO still owns in Enron stock. I suspect
its still quite a significant chunk. So I suspect he too has lost big time.
Now what will be interesting is how much of the compensation that was
handed out to the executives and the board over the last 5 years was
in cash vs. Enron stock. Generally boards make a point of doing a
majority of the compensation in stock. You can determine how much
of such stock was sold simply by looking at the SEC reports.

If they believed their own house of cards and didn't sell, then they
were in the same boat as the employees.

> They lied in their accounting.

This isn't clear. They were certainly setup to defer taxes. And
they certainly were taking advantage of structures and very subtle
regulations that allowed off balance sheet activities. But it isn't
clear the extent to which they "lied" vs. the structure they had
created (really -- I've seen reports of 800 to 3000 subsidiaries)
simply became so complex that accounting for it in a reliable fashion
would have been impossible!

You have to ask the question as to whether the accountants statements
that the reports "fairly reflected" the companies position were accurate
if they didn't include footnotes like:
a) Enron currently owns 533 offshore subsidiaries whose primary purpose
   is tax deferal.

This is an accounting practices problem, not an executive management
problem. Executive management are employed by the stockholders
to maximize profits. Enron management did that. Its the board
and accounting firm that are responsible for ensuring that they
are not stretching the rules so far they risk disaster.

> They destroyed evidence.

Perhaps. However, it may not have been the CEO who was responsible.
I've heard statements on the news that Enron issued letters stating that
no documents were to be destroyed. It might be the CFO (who I believe
came over from Arthur Anderson), or one of his subordinates who
setup the house of cards who was taking the actions that may
have destroyed documents. Or perhaps the management is being
two-faced. In either case the people involved should be held
criminally responsible.

> They encouraged people to invest into a situation that didn't really exist.

It "did exist", they were trying a very complex strategy to defer
taxes and it all came apart. The first commercial company I worked
for in the late '70s was doing the same thing with a concept called
"leveraged leasing". That strategy all came apart when the tax laws
were changed in the '80s. The Enron folks simply figured out a new
way to play the game and played it until people began to realize that
they just might be bluffing.

The problem is with a system that allows people to "bluff". It isn't
much different from vaporware in the software industry.

> This is not a description of true capitalism or a free market as the article
> claims. It is true that investments are risky, but fraud is not supposed to
> be one of those risks.

Oh but it is unless you take government regulation and taxes out of
the picture. Now as has been discussed on the list many times you
could remove the regulations and allow the liability laws to work
in their place. But to really make that work you need affordable
lawyers. That would allow the small business owners who are getting
stiffed by Enron [$4,000 (a floral shop) or $12,000 (a deli)] to
stand a chance of collecting. To have a true capitalistic system
where companies and people really have to be responsible for their
actions, we need to increase the number of law schools and double
or triple the supply of lawyers to allow their use in these situations.

I for one am not sure that I would really like to live in that society
though. At least not until I have a sub-AI agent that is clever
enough to tell me the relative risks I bear of getting sued for
any action I take in my public or professional life.


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