January 17, 2004


The Enron story crawls closer to its end:

Washington Post: Two years after federal investigators waded into the wreckage of Enron Corp., the first chapter in the corporate scandal saga is nearing closure. Former Enron chief financial officer Andrew S. Fastow's guilty plea should put him behind bars for a decade. His wife, Lea, faces time in the slammer as well. More important, Andrew Fastow's agreement to cooperate breathes new life into the Enron investigation. As soon as this week, prosecutors plan to announce criminal charges against former chief accounting officer Richard A. Causey. In turn, Causey gets investigators much closer to his direct supervisor, former chief executive Jeffrey K. Skilling. And in a sign of just how hot things are getting, former chairman Kenneth L. Lay broke his silence with a statement condemning Fastow for "a betrayal of trust that is tragic in its proportions."

The most interesting question: what was the "betrayal of trust" that Ken Lay finds worth condemning now but not two years ago? Was it Fastow's initiatives to report fraudulent financial results for Enron, or Fastow's initiatives to help prosecutors catch Lay and Skilling?

And Ken Lay is probably still shaking his head, saying, "What did we do that was worse than what Halliburton did?"

Posted by DeLong at January 17, 2004 11:00 PM | TrackBack


Since Kenneth Lay has been found to have been negligent by the auditor appointed by the court (I believe it's the court handling at least some aspects of the Enron bankruptcy filing), I'd say his statement is too little, too late. It will be interesting to watch the progress of the civil class actions against Lay, et. al, now that he has been found negligent. Of course, by now he's had plenty of time to transfer $$, et al to his wife, as well as to offshore havens.

Posted by: sh on January 18, 2004 12:39 AM


I guess that Operation "look Clean for '04" is underway. Now that it might help Bush's re-electon chances. FBI agents have been diverted from New Orleans brothels and California medical marijuana clubs, to actually seriously investigating a multi-billion dollar mass of fraud.

The behind-the-scenes bargaining must be interesting: Lay's lawyer discussing all of the possible dirt that Lay might have on various present and (hint, hint) former Texas politicians, Ashcroft's guy talking about plane crashes and other hazards of Democratic political life.

Posted by: Barry on January 18, 2004 12:43 AM


I think ten years for Fast Andy is FAR too lenient given the havoc he wreaked. Months instead of years in prison for Mrs. Fast Andy is risible.

The government should try them all straight up without pleas and if they can't prove the crime with debits and credits then they can't prove it.

But if they can, the court should throw the book at the lot of them.

Posted by: Theodopoulos Pherecydes on January 18, 2004 01:18 AM


What does Halliburton in 2001 have to do with Enron in 2001?

Have THEY committed horrible accounting errors?

Did THEY defraud their stock holders?

Did THEY commit energy fraud in CA?

I almost feel like I'm defending either
-the guilty until proven guilty (for I grant Halliburton NOW has a bad rep)
-the big guy that everyone loves to hate...

But I'm just not seeing the link...

Mark De Vries

Posted by: Mark De Vries on January 18, 2004 03:17 AM


While the presumption of innocence might apply in a courtroom, I am less inclined to grant that advantage while judging the extent to which Enron's sins are prevasive throughout the corporate culture. The incestuous relationships of accounting and banking firms with their corporate clients and executive greed is not a limited phenomenon. Granted that GWB's tenure as a corporate director is more obviously an Enron type affair, but neither Halliburton nor any other large client of Arthur Anderson is entitled to a presumption of innocence outside of the courtroom. I do not believe that we have yet laid to rest the problems of indifference to breach of trust and responsibility in the corporate or the political world. And we may not until further cultural and systemic measures are taken.

Posted by: Chad on January 18, 2004 05:29 AM


At the time Enron went bust, there was a lot of speculation as to who was involved in the off-the-books partnerships Fastow and Skilling set up. It would be fascinating to know who these people were, and what they got out of them-my guess is that it would read like a Whos Who of Republicanism. But this has gone off the radar.

Posted by: Bob H on January 18, 2004 07:14 AM


>>>What does Halliburton in 2001 have to do with Enron in 2001? Have THEY committed horrible accounting errors<<


Posted by: Brad DeLong on January 18, 2004 08:46 AM


We need to pay far more attention to the mutual fund skimming problem that is costing us significant retirement savings. Failure to pay enough attention to how much saving is lost to excessive mutual funds fees and assorted skimming is a sad mistake.

Also, the important problem of counting options as an expense has not yet been addressed.

Brad DeLong

Time to address the mutual fund problems!

Posted by: anne on January 18, 2004 08:50 AM


In honor of Fastow's plea, I'm re-reading 'The Smartest Guys in the Room' by McLean and Elkind-- which traces Enron's rise and fall in gruesome detail. Highly recommended.

Posted by: Matt on January 18, 2004 08:57 AM


Defenders of the compromise struck with SFAS123 - pointing the expense of options in the footnotes - have said that rational investors know how to look past the income statement and read this footnote. Then again - they have also said that putting this expense on the income statement would lower stock valuations. These two statements are contradictory. If the first is true, the proposal by FASB would have no effect on stock valuations. If the second is true, then the defenders of the current accounting are implicitly saying investors are being duped.

Posted by: Harold McClure on January 18, 2004 09:00 AM


Harold McClure

"Defenders of the compromise struck - pointing to the expense of options in the footnotes - have said that rational investors know how to look past the income statement and read this footnote. Then again - they have also said that putting this expense on the income statement would lower stock valuations."

Fine comment, as always.

Again, do not ignore the problem of lost saving compounding due to absurd mutual fund expense. Remember, when interest and dividend rates are this low mutual fund expenses will be quite a performance drag. Vanguard charges 18 basis points or less for the S&P. Scudder charges 90 basis points plus a commission. Compounding does the rest. Look over the mutual fund industry at comparable expenses charged for easily managed bond funds, and wonder sadly.

Posted by: anne on January 18, 2004 09:14 AM


I haven't followed this closely. To what degree have the laws been changed to keep it from happening again? Someone said awhile back "The problem isn't what they did which was illegal, but more what they did which was legal". The Republicans, following their personal-responsibility meme, have been quick to convert this into a case of misbehavior by individuals.

This is hardly the first episode of this kind: there are also the savings and loans, BCCI, and now the mutual finds.

It really seems that by and large, there has been little accountability. So far we haven't had a big crash (the present slump is close, maybe) so it's mostly a lot of scattered individuals who have been hurt -- and the media haven't been eager to tot up the losses. It seems though, that so many major figures have been compromised that if the shit really does hit the fan I think that the stability of our system will be threatened.

One of my several reasons for disliking Joe Lieberman is his role in chilling out the Enron investigation -- he was Arthur Anderson's man in the Senate. ("It would be as bad to do too much as to do too little".) Because of him and others like him, the Democrats could not plausibly stick Bush with the blame he deserved. As I keep saying, we have a one-and-a-half party system.

Proceeding further into the forbidden zone, I'll ask whether some of the difficulties we have tracking al Qaeda funds aren't due to laws written to protect the people who ended up giving us BCCI, Enron, etc. etc. Al Qaeda isn't a movement made up of the wretched of the earth, it's an armed NGO financed by oil millionaires.

Posted by: zizka on January 18, 2004 09:31 AM


'And Ken Lay is probably still shaking his head, saying, "What did we do that was worse than what Halliburton did?"'
Ken, you neglected to get your man to be VP (and de facto President). Silly of you.

Posted by: Dick Durata on January 18, 2004 10:22 AM


"'And Ken Lay is probably still shaking his head, saying, "What did we do that was worse than what Halliburton did?"'"

What did they do? They went bankrupt. People couldn't care less about Enron as long as the party kept going. Investors wouldn't have cared, politicians wouldn't have cared, Enron employees wouldn't have cared etc...
One of the most important things to be done to stop some of the increase in inequality in America would be the expensing of stock options. It might shame CEO's into reducing their pillaging of shareholders.

Posted by: William on January 18, 2004 10:55 AM


What would be helpful is a study of compensation for top management against corporate earnings. How much of earnings is taken away from owndership by top management compensation? In the case of the NYSE, compensation for top management actually took "most" of the earnings.

A fine fine research topic.

Posted by: anne on January 18, 2004 11:19 AM


Enron created billions of non-existend revenue and profits and hid billions in liabilities using off-balance sheet vehicles.

Unless I have missed something, Halliburton at worst booked cost overruns too agressively as revenue. Since these overruns are supposed to be booked as revenue as soon as collection becomes very likely, this is a notoriously gray area.

While not suggesting that Halliburton didn't violate GAAP (since I simply don't know enough details), putting their transgressions in the same sentence as Enron's seems way out of line.

Posted by: Dirk Jenter on January 18, 2004 02:11 PM


When you materially change your accounting procedures, you are--at the very least--supposed to say so. Off balance sheet vehicles are at least part of GATT (though they shouldn't be). Material misrepresentation is not part of GATT.

Posted by: Brad DeLong on January 18, 2004 05:01 PM


Financial sleight-of-hand aside, Enron should be a warning against the idea of government business loans and business subsidies. Enron borrowed $1.059 billion from OPIC alone for twelve of its projects, including $301.9 million for the failed Dabhol, India natural gas plant.


(The Export-Import Bank also supplied loans for the Dabhol venture.)

I don't support the idea of government (or NGOs) investing in businesses, from sports stadiums to power plants, in the first place. (I'll make an exception for building infrastructure during a military occupation; that kind of activity is an investment in national security - for the occupier and the occupied.) They certainly shouldn't invest in anything so risky that government and NGO purse strings are the only places to turn.

Posted by: Alan K. Henderson on January 18, 2004 09:59 PM


I'm with Chad and anne, the problem is endemic in the US corporate system of finance, in how options are not expensed (oh MicroSoft!), in how funds are artificially loaded and churned, how muni bonds are raised and IPO's financed, how valuations were hyper-inflated (Forbes article, by +27%!) (which goes to Brad's findings about valuations vs earning discontinuities at market cusps), and the crushing burden of margined futures and options waiting to self-destruct.
Even the Feds manipulation of money supply and interest rates centers around the stock market.

No wonder things got so crazy in 1998-2000, it was a once in a life-time Klondike Gold Rush, and Oklahoma Land Stampede of epic proportions. No sane person can resist the lure of easy money when you predispose "sane" to mean solely self-aggrandizement, at least until you get caught.

Still they quickly get caught up in the myth of their own celebrity, their own invulnerability. Just look at these guys who are getting caught, their sheer arrogance like a oily Exxon spill.
A train wreck, and many more runaways out there.

Bringing anecdote to generality, an accounting associate of mine found irregularities in high-risk bond offerings traced to a retirement trust bank through his knowledge of the accounts. The principals fell apart, some disappeared, some found dead in their hot tubs, the trust bank got off the hook, and the investors got $.10 on $1.

My accounting friend, after making an affadavit to the FBI, hasn't been seen since. Hopefully he's in the WPP, not floating in Biscayne Bay.

And there's your problem. Your watchers, your enforcers, are in the employ of politicians who are also on the take from those being enforced. And we're all victims of the myth of capitalism, that what goes up, must continue to go up.

Ken Lay will never see the inside of a jail cell.

Posted by: Fred Conses on January 19, 2004 12:33 AM


It'll be interesting to see how Skilling and Lay fare legally. It is possible that Lay will plead ignorance (despite those bothersome fiduciary responsibilities) but it's hard to see how Skilling can claim he didn't know what was going on.

Posted by: Matt on January 19, 2004 07:01 AM


One should never forget that Andersen's role in life was not to help Enron avoid the law: they were paid to show Enron how to comply with the law, and for the most part they succeeded.

When cleverly complying with the law is indistinguishable from sneakily evading it, we have a litmus not for bad law but for entire bad legal structures.

In this case the structure is the audit relationship: it is rotten from the ground up, in all cases, whether or not the companies buying their own audits are dishonest, incompetent or both. Any particular law or practice within that structure is necessarily farcical.

Posted by: David Lloyd-Jones on January 19, 2004 07:20 AM


Dick Durata:

" Ken, you neglected to get your man to be VP (and de facto President). Silly of you."

So getting his business associate (Dubya) (s)elected as President wasn't good enough? :)

Posted by: Barry on January 19, 2004 08:12 AM


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