Boston Globe: The Black Box Economy
Stephen Mihm, an assistant professor of American history at the University of Georgia has a feature article in the current issue of the Boston Globe called “The Black Box Economy.” Focusing on the shadowy world of ever more sophisticated derivatives, he speculates on the doomsday potential of these instruments that are valued at over ten times the world’s total GDP and that are often based on no underlying asset at all. Some hope is held out by way of the FASB.
Is Ken Lay a Crook?
Convicted on Thursday May 25th, both Ken Lay and Jeffery Skilling were found guilty of fraud and conspiracy though, as several analysts point out, they neither violated FASB rules nor masterminded the “smoke and mirrors” financial mis-management at Enron.
For example, when they shifted lines of business between business segments with the net effect of reducing the outward appearance of losses, they violated no GAAP (generally accepted accounting principles). What was at issue however was their non-disclosure of underlying reasons for these changes to investors–a fundamental failure of the level of accountability required by the SEC (in hindsight) and now mandated by Sarbanes Oxley. The Times concludes, “Enron’s financial statements did not conform to the rules. But the convictions of Mr. Lay and Mr. Skilling were based in part on determinations that they failed to give a fair picture, even when they did not violate the rules. That is a precedent that could come back to haunt other executives.”
How did Lay and Skilling not present a fair picture? A further example of their well-developed pattern of misrepresentation occurred during a summer, 2001 meeting between Lay and analysts where he declared Enron’s liquidity to be “fine” even though he knew at that time about $7 billion in hidden debt, and liquidity temporarily guaranteed only by an emergency $1 billion loan with Enron pipelines offered as collateral.
On another occasion during the same period, despite knowledge that broadband was going way south, that Arthur Anderson had found a $1.2 billion balance sheet oversight and that a major partnership was failing, he declared to the public that Enron stock was “an incredible bargain.”
Now that there is a conviction some argue that Sarbanes Oxley is no longer required to protect the public from corporate corruption. Scott Richardson, an accounting professor at the University of Pennsylvania’s Wharton School of Business concluded, “The regulation isn’t necessary because the legal system is working.”
What the legal judgment does nothing to mitigate however are the following consequences of the Enron debacle: $60 billion in market value wiped out, $2.1 billion in pension plans destroyed, 5,600 jobs gone forever.
After Trial Quotes:
“I firmly believe I’m innocent of the charges against me. We believe that God in fact is in control and indeed he does work all things for good for those who love the lord.” - Ken Lay
“Some things work, some things don’t.” – Jeff Skilling
“You can’t lie to shareholders, you can’t put yourselves in front of your employees’ interests. No matter how rich and powerful you are, you have to play by the rules,” – prosecutor Sean Berkowitz.
“To me, God has spoken to him with this verdict, I guess it gives me a little comfort, but it doesn’t put back my retirement money.” – Sherri Saunders (former Enron employee who lost $1 million in retirement savings).
When the question of whether the recent verdicts were fair was put to a vote on MSNBC, of the 138,200 who voted, 92% said “Yes, they deserve to go to prison,” 3.1% said “No, they clearly showed their innocence,” and 4.6% didn’t know what to believe.
What do you think?
