In the January 8th New Yorker, Malcolm Gladwell writes about Enron in an article entitled "Open Secrets." As with every topic that Gladwell sets his pen to, the article is lucid, interesting, and provocative.
He writes about the sentencing hearing of Jeffrey Skilling, and notes the "victim impact statements" of former employees who've lost jobs, savings, retirement dreams - or, having read their testimony, have lost faith (in the system), hope (that they'll be able to retire on anything other than dogfood), and charity.
Here's one comment:
"Mr. Skilling has proven to be a liar, a thief, and a drunk,” a woman named Dawn Powers Martin, a twenty-two-year veteran of Enron, told the court. “Mr. Skilling has cheated me and my daughter of our retirement dreams. Now it’s his time to be robbed of his freedom to walk the earth as a free man.” She turned to Skilling and said, “While you dine on Chateaubriand and champagne, my daughter and I clip grocery coupons and eat leftovers.” And on and on it went.
(I have posted on this earlier, and continue to believe that, whatever crimes were committed by Skilling et al., and whatever their personal faults - 'liar, thief, drunk' - a lot of the individual losses suffered were a) paper losses above all else, and b) the result of bad - uninformed? naive? wrong-headed? stupid? - investment decisions that had people putting all of their retirement eggs in one Enron basket.)
Gladwell is not here to write about the feelings of Enron employees, however. The article deals primarily with a general phenomenon, with specific reference to Enron, and that phenomenon is the reason why it's so hard to figure some things out. Gladwell's argument rests on the distinction between a puzzle and a mystery. A puzzle is something that you can solve if you have all the pieces you need. A mystery is something in which all the evidence/information is available, but it may take a lot of work to filter through the information and discern what's a real clue from noise.
Enron, Gladwell asserts, was a mystery, not a puzzle. The clues that would have led someone to conclude that Enron was going to fold were all there in plain sight and no one at Enron was really trying to hide them. It's just that few people were able to - or chose to - see them. The few that did included reporters for the WSJ, a short-seller, and a team of Cornell MBA students who analyzed the Enron financials as a course project.
The issue this article raised (implicitly) about the sentences imposed on Skilling and company is troubling. To me, the sentences seem more proportional to "feelings" - outrage of employees and shareholders who feel screwed (whether they were or not by anything other than their own misjudgments); a general public fed up with executive greed, arrogance, and hubris; and the justice system looking to create an example/deterrent - than they do to the actual crime.
Maybe, just maybe, the information was so overwhelmingly complex and convoluted that a lot of those who should have known better (Skilling, Fastow) were as much in over their heads - and too greedy and arrogant to recognize it - as they were in cahoots to defraud employees and shareholders.
As a result of Enron the other scandals, we see companies fall (and with them all those jobs, pensions, and share value). And we get new regulations that virtually everyone concedes cost more than they're worth. What we get in return is the spectacle of CEO's in the slammer. Not such a great bargain, however viscerally satisfying and justified these sentences may be.
If all this doesn't represent a dead weight economic loss, we need to change its definition.
We have a really interesting long term issue here around how we are going to handle the hyper-growth in information, in information complexity, and in the creation of new financial instruments (like the SPEs that helped bring Enron down) without becoming paralyzed or making ourselves all crazy.
Maureen, it is an excellent piece indeed; I love Malcolm. And you did a great summary of it, particularly the issues you raise at the end.
ReplyDeleteI think the way we deal with the issue of trust in institutions is enormously important.
Broadly, we've got two options.One is to impose more and more Sarbanes Oxley types of preventative laws. The other rests more heavily on prosecution.
The first one rests on a Hobbesian view of business, mixed with one part of slightly misinterpreted Adam Smith: the idea that people are inherently in it for themselves, rascals who are prone to screwing everyone out ofeverything if they are held in check and kept apart from each other.
That's how we get the idea of conflicts of interest; the old Glass Steagall act; and more recently the separation of consulting functions from accounting firms (at least on the same clients at the same time).
The other approach is consistent with a more sanguine view of humanity, though it doesn't require that. It simply rests on the notion that sanctions can work if imposed firmly and randomly. It's the principle that audits used to work on.
The most recent example is now-governor Spitzer in New York. Spitzer didn't write laws, nor were laws particularly written behind them; he basically just prosecuted the hell out of existing laws. His motives may have been mixed at some times, but his results were pretty clear.
The spirit of this hard sentencing is on the move these days, what with sentences being handed down for Skilling and the other big scandals of the past few years. I suspect that may partly explain why we're seeing more seemingly-unforced resignations for options backdating (that and the fact that apparently some arbitrageurs caught and squeezed a few executives between a rock and a hard place).
I think there is a choice to be made between these two approaches. If we continue to "regulate competition" by separating the fighters, inserting lawyers at every turn, separating buyers from sellers through purchasing agents, and working on the idea of chinese walls to prevent conflicts of interest, we will end up with a helluva costly system.
The far better course seems to be more enforcement. Not only is it a lot cheaper, it has the added value of raising a level of expectations for general behavior, as opposed to the lowering of expectations that comes from separating people.
Gladwell also referenced an article that he drew on, an excellent piece by a law professor at Cornell, I believe. One of his recommendations is to repeal some of the restrictions we currently put on short-sellers, e.g. allowing deductibility of interest for short-sellers, and removing the no-sell-on-a-downtick rule; this would strengthen the existing capital markets' ability to self-punish risky behavior like Enron's.
One of the things at stake is the remarkable increase in the private equity market. The level of regulation in the public markets is getting so high that extraordinary amounts of money are just leaving and creating an alternative parallel capital universe which is unregulated.
The knee-jerk answer--bring private equity under more regulation--is certainly not the whole right answer, and maybe even not very much. The right answer is to make the public capital markets more efficient. The best way to do that is stop issuing regulations that require more and more lawyers and accountants to track them, and replace them with doubled levels of enforcement. We generally have laws on the books to take care of most situations; what we don't have , as Gladwell points out, are institutions with the inclination or the wherewithal to prosecute, short-sell, or otherwise take care of the bad-doers.
Great blog, Maureen. As thoughtful as your comments on other blogs.
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