Bigger than Enron.

June 21, 2002 9:35 AM

Bigger than Enron. Why the largest business scandal in American history is just the tip of the iceberg--and why investors should care. PBS Frontline aired this expose of the Enron/Anderson scandal last night. Included in the report were details of how deregulatory fervor in Congress enabled these sheisters to invent profits out of thin air.
posted by Ty Webb (13 comments total)

Good show. I thought it was interesting when the former AA CEO said "I sleep like a baby... I wake up every two hours and cry.".
posted by rotifer at 10:03 AM on June 21, 2002

Bah. He's being paid good money to say that sort of thing. It's kindof morbidly fascinating to watch the US economy slipping more and more. I've been reading a set of essays on http://www.zealllc.com/... talk about bearish!
Zeal is predicting a bottom to the NASDAQ at under 500. Normally, I'd say "whatever", but the problem with their essays is that they actually make sense in a historical and economic sense. The nonsense spewing from wall street makes less and less sense to me.
posted by muppetboy at 10:11 AM on June 21, 2002

I didn't see the show, but reading Lieberman's opinion on valuing stock options was very interesting.

The price of the option is fixed at the date of grant by the board of directors. The exercise price is equal to the Fair Market Value on the date of grant. Admittedly, it is difficult to determine the Fair Market Value of common stock of a private company. (Valuing it against the price of the preferred stock is one way.)

To say that an option only has "value" on the day it is exercised is misleading. Certainly that is when a taxable event occurs. (Of course key employees who were allowing to reverse vest their stock and file an 83(b) election paid zero tax.)
posted by birgitte at 10:20 AM on June 21, 2002

From the introduction:

In "Bigger Than Enron," FRONTLINE correspondent Hedrick Smith shines a spotlight on how the corporate watchdogs -- the bankers, lawyers, regulators, politicians, and above all, the accountants -- failed to prevent Enron and other scandals from happening. ... The report explores how the system of controls was eroded by conflicts of interest, as well as by congressional intervention that blocked efforts at protecting investors.

The thing is, the main reason (I think) the watchdogs didn't do anything is that no one wanted them to. Politicians didn't, corporations didn't, and the market certainly didn't. With so many investors investing on faith (i.e., gambling), the market didn't care about a company's fundamentals, so long as the stock kept going up. If the watchdogs had acted, they would have been most resented by the very group whose interests they were designed to protect -- investors.

In the long term, of course, the market would have to pay, and it's paying now. But for as long as stocks were still climbing, no one wanted to hear any news that slow them down.
posted by mattpfeff at 10:26 AM on June 21, 2002

Oh yeah, THAT'S IT... it's the fault of investors!
posted by muppetboy at 10:34 AM on June 21, 2002

Oh yeah, THAT'S IT... it's the fault of investors!

Nah. If you're looking to blame, you look at the people who lied and stole. It's if you're looking to understand that you should look at the market as a whole, and the incentives it created not only for those who lied and stole, but for those who didn't do anything about it.
posted by mattpfeff at 10:49 AM on June 21, 2002

Good call muppetboy! Blame the victims, yeah, that's the ticket. Isn't it the investors and employees who suffer while the company heads and their advisors profit?

Looks like a repeat of the 1920s and 1930s with deregulation and greed bringing about distrust of the social agreement (how 'bout that, "free market" is based on socialist principles!) and the supports for the market fall. The supports fall and the market falls and fails.
All the money and markets in the world depend on a simple trust agreement.

Do you trust the market and it's leadership/policeman (SEC appointee from Dubya, loyal lackey to CEOs, handpicked by Kenny Boy, Harvey Pitt) or not?
Ready to withdraw your 401K money from the market yet?
posted by nofundy at 10:56 AM on June 21, 2002

The thing is, the main reason (I think) the watchdogs didn't do anything is that no one wanted them to. Politicians didn't, corporations didn't, and the market certainly didn't.

You're right (although I would avoid anthropomorphizing "the market"). One of the main points of the Frontline report was that the accounting industry failed in its public responsibility to honestly and accurately report on the financial situation of Enron and others, not least because many accounting companies also have consulting divisions which, in Anderson's case, was advising Enron on ways to skirt and manipulate the very accounting procedures which Anderson's accounting division was supposed to be reporting on. It doesn't take a PhD in economics to see that that is a conflict of interest, yet attempts to regulate it were squashed, and justified through appeals to "economic growth".

If you're looking to blame, you look at the people who lied and stole.

Yes, and also look at the deregulatory zealots in government who made it possible for them to lie and steal. In the long run, these supposedly pro-business types have done more damage to capitalism than any amount of regulation.

But I agree with you, mattpfeff, that many investors are culpable in the sense that they implicitly approved these accounting scams as long as their stock value remained high.
posted by Ty Webb at 11:02 AM on June 21, 2002

Good call muppetboy! Blame the victims, yeah, that's the ticket. Isn't it the investors and employees who suffer while the company heads and their advisors profit?

Just to clarify... I was being extremely sarcastic.
posted by muppetboy at 11:11 AM on June 21, 2002

Muppetboy, I understood that but I can see why you would want to clarify. I also was being sarcastic with the "that's the ticket" statement, just in case anyone notices.
posted by nofundy at 11:46 AM on June 21, 2002

Your laissez faire capitalism at work.
posted by Dirjy at 5:04 PM on June 21, 2002

It always startles me how many envious coots post here.
posted by dglynn at 9:01 PM on June 21, 2002

I think there's some culpability, too, for the kind of people who think that they have some kind of god-given right to buy something (stock) and have its value magically increase by huge leaps and bounds without them having to do anything.

I mean, what kind of universe do these people think this is?

Playing with the stock market is gambling. Don't invest a penny more than you can afford to lose, people.

(Fwiw, I'm completely divested. I've been unemployed for over a year and had to cash in all my stock (bought through employee stock purchase program, and I got out about what I put in, which I think is fair) and even my 401(k)).

People who don't get out now will be kicking themselves later that they ignored the warning signs of Enron et al.
posted by beth at 10:58 AM on June 24, 2002