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Non-Tech : The Enron Scandal - Unmoderated -- Ignore unavailable to you. Want to Upgrade?

To: Yogizuna who wrote (154)	1/15/2002 11:37:22 AM
From: stockman_scott	Read Replies (1) \| Respond to of 3602

The Worst Thing About Enron: Checks and Balances Failed By Allan Sloan Tuesday, January 15, 2002; Page E01 The Washington Post Enron was supposed to be the next new thing, a new-economy company with substance to it. Unlike flaky Internet start-ups that substituted ethereal yardsticks such as "eyeballs" and "stickiness" for revenue and profits, Enron had real businesses, real assets, real revenue and what seemed to be real profits. It owned natural gas pipelines and electric generating plants and water companies. Not only would it do well, it would improve the planet by substituting the efficient hand of the market for the clumsy hand of government regulation. And it seemed to work. From humble beginnings as a natural gas company, Enron rose in a mere 15 years to No. 7 on the Fortune 500 list, doing $100 billion of business in 2000. Along the way, Enron became one of America's most admired companies and a perennial favorite on best-places-to-work lists. But Enron turned out to be another bubble. Unlike a Pets.com or a Webvan, whose implosions did little damage outside of costing dice-rolling speculators some money and techies some jobs, the Enron bubble exploded like a grenade. Today, Enron is a smoking ruin, the biggest corporate bankruptcy filing in American history. A year ago, the stock market valued Enron at more than $60 billion. Its stock has since lost 99 percent of its value -- and still seems overpriced. Stockholders and lenders are out tens of billions of dollars. Many of Enron's 20,000 employees lost their retirement savings when the company collapsed. About 5,000 of them, from computer jocks in Houston to newsprint recyclers in New Jersey, lost their jobs, too. By contrast, Chairman Ken Lay made $205 million in stock-option profits in the past four years alone, and other big hitters and board members made out, too. What's especially galling is that a handful of executives and outsiders made millions by investing in off-balance-sheet deals with Enron that played a large role in destroying the company. The collateral damage keeps spreading. Prominent among the wounded is Arthur Andersen, Enron's outside auditing firm, which disclosed last week that some employees destroyed documents. Andersen's reputation has been tarnished to the point that the Big Five accounting firms might shrink to the Big Four. Wall Street's credibility has been shattered. Utilities deregulation, for which Enron was the model, is now on the back burner. The spectacle of impoverished, unemployed Enron workers has thrown a harsh spotlight on the risks of 401(k) accounts stuffed with company stock. Confidence in financial markets has been shaken -- and rightly so. With the action in Afghanistan slowing down, Enron shock waves have finally reached Washington, raising the specter of another 'Gate. Life would be simple if we could blame the whole thing on Enron Chairman Lay. Or on George W. Bush, who goes way back with Lay, the biggest individual contributor to Bush's presidential and Texas gubernatorial campaigns. But Enron isn't that simple. It's something far more scary: a wholesale systemic failure. The multi-layered system of checks and balances that is supposed to keep a company from running amok completely broke down. Executives of public companies have legal and moral responsibilities to produce honest books and records -- but at Enron, they didn't do that. Outside auditors are supposed to make sure that a company's financial reports not only meet the letter of accounting rules but also give investors and lenders a fair and accurate picture of what's going on -- but Arthur Andersen failed that test. To protect themselves, lenders are supposed to make sure borrowers are creditworthy -- but Enron's lenders were as clueless as everyone else. Wall Street analysts are supposed to dig through company numbers to divine what's really happening -- but almost none of them managed to do that. Regulators didn't regulate. Enron's board of directors didn't direct. Why did all these people look the other way for so long? Money talks. Or, with Enron, shouts. The company put lots of money in the pockets of people and institutions who were supposed to police it. Enron's incessant dealmaking generated huge fees for Wall Street investment-banking houses. And guess what: Wall Street loved Enron, with most analysts rating its stock and bonds as the greatest thing since money was invented, at least until they finally heard Enron's death rattle. Enron paid huge fees -- $52 million in 2000 -- to Arthur Andersen for auditing and consulting services. Andersen allowed it to get away with accounting that was at best aggressive and at worst criminal. If Andersen had stood on principle, Enron would doubtless have changed accountants. Enron famously made heavy political contributions. Pols got peanuts compared with what Wall Street and Andersen got, but it was enough to help Enron run over regulators at both the national and state levels. The Enron fallout promises to be severe and far-reaching. With a criminal investigation underway, some of the Enron players face the possibility of spending time in the Big House. The only questions about Arthur Andersen is how much the partners will have to pay to settle this mess and whether the company can survive as an independent entity. The accounting profession is wishing it were again faceless and colorless, instead of being in the harsh spotlight. Financial conglomerates such as J.P. Morgan Chase and Citigroup are going to be scrutinized over their multiple and often conflicting roles at Enron: lenders, trading partners, investors, advisers, investment bankers. The bottom line: Enron wanted to change the world. It did. But not quite the way that it had in mind. ______________________________________________________ Keith Naughton, Kevin Peraino, Temma Ehrenfeld and Donna Foote in Los Angeles and Jamie Reno in San Diego contributed to this report for Newsweek. Sloan is Newsweek's Wall Street correspondent. His e-mail address is sloan@panix.com. © 2002 The Washington Post Company