Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Edscharp who wrote (770)	1/28/2002 6:22:13 AM
From: stockman_scott	Respond to of 3602

All-American Flameout By David Ignatius Washington Post Columnist Sunday, January 27, 2002; Page B07 PARIS -- If Enron were a Japanese bank, rather than an American energy company, Kenneth Lay might have held on as chief executive for another decade. Instead, Lay was pushed out Wednesday -- vaporized in the firestorm surrounding Enron's collapse. Seen from abroad, what's striking about the Enron scandal isn't simply the duplicity of the company's executives and auditors but the speed of its collapse. Enron went from Master of the Universe to bankruptcy in a few weeks. That sort of instant demise simply doesn't happen most places -- especially not to politically powerful people like Ken Lay. In a perverse way, Enron actually illustrates what makes American capitalism work so well: the possibility that even the mightiest company can suffer a total, devastating flameout. Lay and his former Enron colleagues, along with their see-no-evil auditors at Arthur Andersen, can now look forward to that particular American version of hell in which they will be tormented for eternity by lawyers. The human dimension of the Enron disaster was reinforced by Friday's news that the company's former vice chairman, Clifford Baxter, was found shot dead, an apparent suicide. That was a reminder that Enron truly has elements of a Greek tragedy, in which hubris brings men and women to a tragic fate. Enron seduced its board of directors, accountants, investment bankers, politicians, securities analysts and millions of investors with its false and inflated financial statements. But it couldn't sustain the deception forever. A year ago, a "short-seller" named Jim Chanos -- one of those vultures of American capitalism who bet on a stock's decline -- finally began to force out the truth. It's as American a tale as "The Great Gatsby." Yes, the United States is the land of opportunity, where it's possible to make millions overnight. But it's also a country where hundreds of businesses go bust every day. The bankruptcy laws allow the debris to be cleared away quickly, so that the assets of a failed company can be purchased by a new owner and put to good use. This Schumpeterian process of "creative destruction" seems heartless to many non-Americans. But it allows U.S. markets to "clear," as prices fall to a level where someone is willing to buy. That makes life miserable for the individual losers, but it allows the economy as a whole to move on. Now, compare the Enron fireball with the frozen wasteland that is the Japanese banking system. The root problem appears to be the same in both cases: Japanese banks, like Enron, have long made a practice of hiding their financial problems in off-book accounts. With Enron, the trick was to hide debts and losses in what were known as "Related Party" entities. These were the so-called "LJM" partnerships run by the company's chief financial officer, Andrew Fastow. When Enron was finally forced on Nov. 8 to disclose these hidden debts, it had to restate its earnings for the previous 4 3/4 years and slash its reported earnings by nearly $600 million. Less than a month later, the company had filed for bankruptcy. Japanese banks have used similar financial chicanery. When the Bubble Economy burst a dozen years ago, loans that had been collateralized by inflated real estate and stock became uncollectable. Rather than writing down these bad loans promptly, as they should have, many Japanese banks tried to avoid embarrassment by shifting them to what amounted to "Related Party" entities. The scandal in Japan is that this isn't a scandal. The government extended a $60 billion bailout in 1999, but banks are still hiding their uncollectable loans in off-book accounts -- and the government and the public are still going along with the farce. The fear seems to be that some banks would be driven into bankruptcy if they admitted the seriousness of their problems. Because in Japan no individual bank or politician wants to accept the shame of failure, the system as a whole remains crippled. Similar problems of facing up to disaster afflict European companies, too. French magistrates have been investigating financial swindles involving the formerly state-owned oil company Elf Acquitaine for eight years, but appeals are still continuing in the case, and some of the magistrates are giving up in disgust. Some French banks, too, have succeeded in burying their bad loans and financial mistakes. It's comical to see American politicians racing around now expressing their indignation over the Enron scandal. Isn't this the same gang of politicians that accepted huge campaign contributions from Enron? And more to the point, aren't some of the pols the ones who sabotaged the former Securities and Exchange Commission chairman Arthur Levitt when he tried to clean up the accounting profession? What worries me is that in its haste to make amends, Congress may pass new laws that make U.S. financial markets less flexible and resilient. Sunlight really is the best disinfectant. If the Enron case shows anything, it's that American markets themselves provide brutal discipline -- once the lies are exposed and the facts are on the table. © 2002 The Washington Post Company