CAPITAL VIEWS: Greenspan Ruminates About Enron Collapse
28 Feb 11:35
By John Connor
A Dow Jones Newswires Column
WASHINGTON (Dow Jones)--Federal Reserve Board Chairman Alan Greenspan
obviously has been doing a lot of thinking lately about the Enron debacle and
what brought the former high-flying firm to its present sorry state of affairs.
Here is a sampling of Greenspan's Enron-related commentary, in which he
sometimes says essentially the same thing in somewhat different ways, garnered
from his testimony Wednesday before the House Financial Services Committee:
--"I think, after the fact, we will look back on this Enron episode as a
period when we put our corporate governance back on track, which would not have
happened without it, in my judgment - not fully. That is favorable to the
long-term outlook."
--"I think Enron...is not a significantly negative event to the economy, and
in fact, in the longer run, its emergence may alter the way we govern
corporations, that the long history of corporate governance will continue to be
a very substantial and positive force for economic growth and productivity."
--"And I don't deny that there may be other Enrons out there which we just
have not - that have not been exposed; that's conceivable to me. But it cannot
be a large issue."
--"The Enron situation is essentially one in which there was an endeavor to
imply that earnings were much greater than they really were, that increasing
debt was hidden. I can think of no reason to have done what they did with their
off-balance-sheet transactions than to obscure the extent of the debt they had.
And what essentially was squandered in that process was the reputational
capital which they had succeeded in achieving over a period of time."
--"Enron is a classic case of a company whose market value is very
substantially dependent on the reputation of the firm. And when it became
apparent that the data that they were putting forth as representing their
earnings figures were indeed false and had to be recalculated, they lost a very
large part of their reputational value, and indeed it was that that ultimately
did them in. Had they, for example, recognized the losses that they actually
had in these affiliates early on, I have no doubt it would have hit their stock
some, but it would have had a negligible impact relative to what actually
happened."
--"It was a very expensive business mistake which they made. I do not think
that had they had a correct set of accounts that were would-be - they'd still
be in business, their stock price would be lower. Their stock price would be
lower because basically energy prices are lower, and their margins presumably
wouldn't have changed, so their earnings would have been less viable. But they
would not be in Chapter 11."
--"The fact that such a substantial amount of shareholding is now for
investment and not control has effectively switched the locus of control from
shareholders to the CEO."
--"My own judgment is that you have to be careful about trying to presume
that directors are really, truly independent. I've served on innumerable boards
in the private sector, and there is an asymmetry of information between an
insider in a corporation and an outside director which will never be breached -
which will never be brought together, I should say."
--"I've served on too many audit committees to know that, even though I would
consider myself independent, I would consider myself knowledgeable, I did not
know what questions to ask the chief financial officer during meetings to find
out what it is that conceivably is going wrong in the corporation, and he
wasn't about to tell me."
--"It's my impression, on the basis of experience I've had on innumerable
boards on which I have served, that if you get a chief executive officer who
looks toward his outside auditor as somebody to tell him what he is doing
rather than somebody who should try to acquiesce in a particular set of
accounting principles, you will change the whole nature of the relationship
between directors, CEOs, and you will certainly create the type of independence
of the audit function that will attract people back into the accounting
profession and create the types of directors who will be most effectively
helpful to the CEO and to the shareholders in getting appropriate corporate
governance."
--"...a company...whose assets are substantially physical, real...could
conceivably have the reputation of its management sullied considerably or come
under a cloud, and yet the company would still have sufficient physical assets
to engender incomes which would give it considerable capital value. But that is
not the case with Enron. Their actual real assets - pipelines and various
energy-related assets - were a relatively small part of the market value of the
firm."
In his testimony, Greenspan discussed various underlying factors he sees as
instrumental in creating the environment which ultimately led to the Enron
debacle.
"One was the unfortunate reversal of the FASB ruling in the early 1990s about
stock option accounting," he said. "We estimate that over...the period 1995 to
the year 2000, almost three full percentage points of the annual average gain
in earnings resulted from the fact that stock options, rather than cash, was
used as compensation amongst our major corporations. This undoubtedly had an
effect of accelerating the earnings outlook....
"And so what occurred as a consequence of all of these forces was an endeavor
to try to game the accounting system in a manner to create the perception of
short-term earnings growth which would be confused with long-term earnings
growth," the Fed chairman said.
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(John Connor, a veteran observer of the financial marketsand the Washington
scene, is Washington bureau chief for Dow Jones Newswires. He can be reached by
E-Mail at John.Connor@DowJones.Com)
(END) DOW JONES NEWS 02-28-02
11:35 AM |
