is “National Enron Media Week.” Now that Ex-CEO Kenneth Law has
refused to testify to a Senate committee, we may be facing “National
Enron Media Year.” It’s “All Enron, all the time.”
The media are on Enron like a dog on a bone. The reporters have
one assignment from editors: to expose dirt. They want workers’
empty retirement fund dirt, payoffs to top Republicans dirt, and
insider trading dirt. Dirt attracts viewers. Dirt gets the ratings
up. Higher ratings allow the media to charge more money to advertisers.
This media feeding frenzy is basically reports on an empty barn
from which the thoroughbred horses have all escaped. The horses
that were left behind — nags, mostly — are not topics
for public discussion. I have yet to see even one report on Enron’s
future prospects, yet 15,000 of Enron’s 20,000 employees are still
at work. They are of no interest to the media. “No dirt here.” The
public will feast on stories of what the barn’s managers failed
to do to keep the thoroughbreds from escaping.
Enron’s empty barn is not the important story. The story is the
breed of departed thoroughbreds: derivatives. They are a temperamental
breed. They run like the wind when spooked, taking men’s dreams
and capital with them. They are easily spooked. They are not understood
by business journalists. They are surely beyond comprehension by
the general public, whose eyes would glaze over 60 seconds into
the “Special Report: Why Enron Failed.” Congress hasn’t a clue.
They were also beyond Arthur Anderson Company’s powers of comprehension.
This is what scares me. The profrssional monitors did not see this
coming, did not sound a warning in time.
Derivatives are everywhere: $100 trillion worth, minimum. They have
become business as usual. On them, the employment, retirement portfolios,
and dreams of tens of millions of employees depend, but derivatives
are so complex that Kenneth Lay and his associates did not see that
they were creating a monster that would consume the company and
their careers. Derivatives made Enron look good; then they made
Enron look bad; but at no point did a journalist ask Kenneth Lay:
“Are derivatives the main source of Enron’s above-average profits?”
There had to be some reason why Enron was abnormally profitable.
It wasn’t efficiency; they were hiring too many new people too fast.
There are not that many innovative people on the market, at least
not of the kind who produce above-average profits long term.
For years, business journalists marched lock-step to assure their
readers that Enron was the greatest horse barn around. A good example
is this document: a press release from Enron dated February 6, 2001
— exactly one
year ago today.
MOST INNOVATIVE FOR SIXTH YEAR
RELEASE: Tuesday, Feb. 06, 2001
— Enron Corp. was named today the “Most Innovative Company
in America” for the sixth consecutive year by Fortune magazine.
“Our world-class employees and their commitment to innovative
ideas continue to drive our success in today’s fast-paced business
environment,” said Kenneth L. Lay, Enron chairman and CEO. “We
are proud to receive this accolade for a sixth year. It reflects
our corporate culture which is driven by smart employees who continually
come up with new ways to grow our business.”
No.18 overall on Fortune’s list of the nation’s 535 “Most Admired
Companies,” up from No. 36 last year. Enron also ranked among
the top five in “Quality of Management,” “Quality of Products/Services”
and “Employee Talent.”
are judged primarily from feedback contained in confidential questionnaires
submitted by approximately 10,000 executives, directors and securities
analysts who were asked to rate the companies by industry on eight
one of the world’s leading electricity, natural gas and communications
companies. The company, with revenues of $101 billion in 2000,
markets electricity and natural gas, delivers physical commodities
and financial and risk management services to customers around
the world, and has developed an intelligent network platform to
facilitate online business.
At the bottom of this press release is a remarkable slogan. Best
of all, it is trademarked: Endless possibilities (TM).
I gather that this applied especially to Enron’s accounting practices.
I suspect — just a guess, of course — that this example
of breakthrough financial journalism will not be featured in future
direct-mail solicitations for subscriptions to Fortune.
When one company is said to be the most innovative company in the
nation for the sixth time, there is something amiss. Reporters should
dig deeper. If any company maintains first place for six years,
the free market is not responding as the textbooks say. There should
be imitators and raiders who hire away the company’s innovative
This especially caught my attention:
Corporations are judged primarily from feedback contained in confidential
questionnaires submitted by approximately 10,000 executives, directors
and securities analysts who were asked to rate the companies by
industry on eight attributes.
So, the “best and the brightest” one year ago thought that Enron
was #18 among all large American corporations. A year ago, you could
have bought a share of Enron stock for $80. What a deal!
This brings me to a consideration of the academic economists’ theory
of efficient markets.
MARKETS AND INEFFICIENT MANIAS
Investors want to believe that the market is as smart as the efficient
market theory says. It isn’t. The market is no wiser than the fund
managers who decide where to put their clients’ money. These are
bright people, but they run in packs. There are more stock mutual
funds than there are New York Stock Exchange stocks. They have to
do something with all that money. Pension fund managers see money
rolling in, month after month. What to do with all this money?
The dot-com mania is the best example of an irrational stock market
in our generation. Wynn Quon of Canada’s National
Post puts it well:
Here’s the simple bottom line of what happened in the tech boom
and bust: Most of the dot-coms, the telecom startups, the Linux
companies simply didn’t make any money. It’s as black and white
as that. This meant that any large upward movement in prices would
be unsustainable. The key to understanding how things got out
of hand doesn’t lie in interest rates but in mass psychology.
As a species, humans just don’t behave very well in crowds. There
is a tuning fork inside each one of us which, when struck the
right way, makes us move together in tragicomic formation. All
it takes is some technological novelty and the jingle of profit
and the crowds hum in manic earnestness. In the 1990s, investors
got the sweetest siren call of the century. Investing in the Internet
made our portfolios sing and our tuning forks resonate. It didn’t
take long for behavioral feedback loops to kick in. (“I bought
at $20, it’s now at $40, hey this is easy, I’ll buy more”). Add
in plenty of leverage and we were on a rocket ride to NASDAQ 5000.
Here is the reality: the market is no wiser than investors are.
The best-informed investors are still people. They get caught up
in manias and panics. The economists’ assertion that the stock market
uses the best information out there is true. It uses it; it even
maximizes it; but it does not pay much attention to it when mania-driven
lemmings are telling their brokers to buy. The brokers respond to
“buy” orders, and the feedback loop continues. Until it ends.
In any case, during manias and panics, most of the best and the
brightest are caught up in the same public psychology. They go with
the flow. They add their confirmations to the lemmings. This is
especially true in manias. The greed factor is the stuff of direct-mail
packages and interviews by the media. When panic hits, the media
try to avoid giving space and air time to prophets of doom because
their message hurts advertising revenues. “If things are this bad,
may we had better not spend money,” thinks the businessman. In manias,
prophets of boom sell advertising.
Deep inside all of us, there is a Ponzi-scheme button waiting for
some crook to press. This is the reality that the efficient-market
hypothesis never quite gets around to dealing with.
Enron is the post-dot-com era’s best example of fund-driven mania.
Fund managers should have known something was wrong, just by looking
at the chart of Enron’s
From early 1992 to early 1998, Enron’s shares rose from $10 to $20.
Over the next year, they rose to $30. Over the next year, they rose
to $40. That was on January 2, 2000. Then, in a matter of 14 days,
the price went to $70. By September, 2000, it was at $90. That was
the peak. Beginning in October, it started down. This was seven
months after the decline of the NASDAQ had begun. It was still above
$80 a year ago.
There should be reasons — solid, documented, third-party-verified
reasons — why a stock that was worth $30 in early January 1999
was worth $90 in mid-2000. If the stock market was smart in 1999,
it should have been equally smart in mid-2001. The rise in price
was achieved in the face of collapsing NASDAQ prices and falling
S&P 500 prices. There should have been a horde of journalists asking
“Why?” But all we got was press releases dressed up as financial
reporting. When the stick started down, we got more press releases
disguised as straight reporting. Here is an example from the Houston
Enron puts down profit warning rumors
Energy and communications giant Enron Corp. has dispelled rumors
of a potential profit warning.
of our business are performing extremely well, and we are very
comfortable with consensus analyst earnings estimates of 35 cents
per share in the fourth quarter and $1.65 for the full year 2001,”
says Jeff Skilling, Enron president and chief operating officer.
. . .
Enron shares closed at $77 3/4, up $2 3/16, in Friday’s abbreviated
trading day on the New York Stock Exchange. The shares had fallen
to $75 9/16 on Wednesday, down from $80 last week and a high of
$90 Aug. 23.
Enron had revenues of $40 billion in 1999 and $60 billion for
the first nine months of 2000.
There was no analysis, just official denials and PR department explanations
that explained nothing.
The fact was this: Enron’s profits were based on derivatives, which
in fact were producing massive losses. How could this be? For details,
We are living in a world in which a Big-5 accounting firm was either
hoodwinked by, or winked at, numbers that were completely surrealistic
— the complete opposite of reality. The steady decline of Enron
stock all through 2001 was accompanied by official denials, assurances
of future profitability, and insider selling on a scale never before
seen. All the way down, Enron received no significant criticism
from the media. The financial press would not believe what the market
was telling them. Enron’s officials said that what the market was
saying had to be wrong, but it was right. Sadly, it was right several
years too late.
What went wrong in the media? Skepticism had failed. The press refused
to look at the numbers: rising insider trading and falling share
prices. They took as gospel the reassurances of senior officials
who were bailing out. So did the investors who held onto the stock.
Where was journalism’s vaunted skepticism? It’s long gone. The press
sees itself as an extension of the brokerage houses. If the press
starts telling the truth, reporters will lose their access to senior
officials, or even lose their jobs. The press lives on advertising.
Anything that reduces investors’ confidence is seen by publishers
as a threat to advertising revenues. They act as though they believe
that the stock market maintains the economy rather than merely forecasting
The press must preserve the public’s illusion of access by the press,
when in fact access is an informational liability. Any reporter
who has easy access to anyone in high places should be aware that
he is being given access in order to get management’s line to the
investors. Access is the bone that management throws to reporters.
The first master of this screening process in American history was
Teddy Roosevelt, who kept critical reporters away from his chummy
sessions with “his” reporters. The Soviet Union played the same
game with the entire press corps from the West in the 1920’s and
1930’s. Censors monitored in advance every story sent out of the
country. Malcolm Muggridge describes the system in his autobiography,
The Green Stick. (This is the best autobiography I have
ever read.) Everyone involved knew what was expected. The West’s
newspaper editors preferred running false with a byline from Moscow
rather than being cut off completely. Their readers wanted those
bylines. This is the “eyewitness news” syndrome. It is alive and
well today. The most notorious example of false reporting from the
USSR was Walter
Duranty of the New York Times.
All of the reporters were involved in the same kind of deception,
just not the same degree of access. The Communists even supplied
mistresses for some reporters. These women were spies. The reporters
probably knew this. They thought the exchange was worth it.
Reporters should allow management to tell its story. But reporters
should know that anything less than detailed, expensive investigations
will not get to the truth, if the truth is bad news.
This is another reason why most financial reporting is filled with
good news. It is mainly puff journalism. Puff journalism is low-cost
journalism. It is also low-risk journalism. No newspaper ever gets
sued for running puff journalism, not even after the entire market
collapses. This is the dot-com collapse’s message to reporters.
A negative report can have nasty fall-out. Worse; when a stock market
boom is in full force, the bad news will have no lasting effect
on the share price. Then the negative reporter must risk being ridiculed
for having published "false" bad news. After all, efficient
market theory says that the market’s wisdom is greater than any
individual’s wisdom. The bad news can be true, but the market, in
its greed-driven mania, ignores it.
Clive Thompson has written a devastating piece on this. It appeared
AS PIOUS JOURNALISTS CLUCK OVER THE ENRON MESS, THEY’VE FORGOTTEN
HOW THEY HELPED CREATE THE BEAST.
BY CLIVE THOMPSON | It’s amazing how nice journalists can be about
Enron. The company is clearly an enormous nexus of corruption
and lies, yet the pile of clips I’ve got here on my desk are all
Take, for example, this Dallas Morning News piece —
where a headline brands Enron a “global e-commerce leader,” and
the reporter gushes over how Enron is “a global go-getter” that
has “created a corporate culture that rewards risk-taking.” Or
how about this one from the Houston Business Journal? Writer Jim
Greer describes Enron as “sizzling” (twice in three paragraphs),
and warmly notes that “Enron has shown a widely recognized knack
for innovation that consistently generates additional sources
of revenue, potential profits and more capital.” Then there are
the raves from The Wall Street Journal and The New York
Times, the latter of which glowingly describes Enron’s president
as an “idea machine.” The list goes on and on and on — and
if you include the mess of plaudits from New Economy bibles like
The Red Herring, it’d take an hour to read this pile of fluffy
Given that Enron is about to collapse in the biggest corporate
scandal in years, what’s going on? Why so much sunshine?
Because this stuff was all written back in 1999 and 2000, when
Enron was receiving almost nothing but uncritically good press.
Things are different now, of course. Reporters in the last two
weeks have been incredibly tough on the company, digging through
its financial records and Elizabethan web of political cronies.
They’re finding all manner of dirt. Muckrakers have exposed the
enormous number of political checks Enron cut (for a grand total
of 71 senators and 188 congressmen). Pundits have bemoaned the
way Enron commandeered Dick Cheney’s task force on energy deregulation.
Reporters have grimly tracked the way that former Enron CEO Kenneth
Lay sold off his company stock steadily over the last year, making
out like a bandit while warmly assuring guileless employees and
investors that the share price wasn’t about to collapse. Today’s
reporting on Enron is the epitome of excellent business and political
writing: thorough, nuanced, and committed to the public weal.
All of which raises the question — where in hell was this
critical acumen back when it was actually needed? Why wasn’t anyone
paying attention to Enron’s shenanigans before its executives
systematically fleeced the American public and walked off crowing
into the sunset?
Sure, Enron is a political scandal — but it’s a journalistic
one, too. Editors and writers were asleep at the wheel, for some
truly humiliating reasons. . .
But please — this stuff wouldn’t have been that hard to figure
out. The company’s freakishly tight political connections were
as plain as day, had any major editors really bothered to worry
about this. And while Enron’s book-cooking was quite secretive,
there were analysts who’d been regularly warning about the company’s
through-the-looking-glass financial statements, such as John Olson
of the Sanders Morris Harris Group. But journalists didn’t pay
attention to him until it was far too late. . . . And if you want
some truly grim warning signs, consider that Enron was trying
to get into pornography last year. I mean, porn? Why weren’t business
and political writers picking up on this stuff?
Because they helped create Enron. Indeed, to read this old Enron
coverage is to revisit the journalism of the dot-com boom —
some of the most cringing and obsequious media ever produced.
Like high-school yearbook poetry, it’s painful just to look at.
. . .
This was not an environment where critical journalism thrived.
And that spelled big trouble for the public, because let’s face
it — corporations like Enron will always lie and dissemble
and cook their books. . . .
But as we read each new day’s fresh record of Enron atrocities,
as we cluck over the mess, we might well reflect on our role in
it. . . .
IS GOLDEN BUT EXPENSIVE
Partnoy criticized the professional “gatekeepers”: accountants,
bankers, SEC regulators. Some of them were paid fat fees to serve
as consultants. There were conflicts of interest. But it was not
just professional “gatekeepers” who were paid off. So were intellectual
“gatekeepers.” This appeared in the Washington
Lawrence Kudlow, a National Review contributing editor
and co-host of CNBC’s “America Now,” disclosed last week that
he’d gotten $50,000 from Enron — two $15,000 speaking fees
and a $20,000 subscription to his New York economic research firm.
. . .
Kudlow says he should have disclosed the payments in a National
Review piece on Enron the previous week. “If I had to do it over
again, I would have put it in there. I acknowledge that,” he says.
Bill Kristol, editor of the Weekly Standard, was paid $100,000
for serving on an Enron advisory board over two years. In November,
the Standard disclosed his service in a largely positive article
about Enron by contributing editor Irwin Stelzer, who served on
the same advisory board, which was assembled by former CEO Kenneth
Enron and Lay deserve to be remembered for is leading the fight
for competition. . . . Enron fought to allow customers and suppliers
to strike whatever bargains they found mutually advantageous.
. . . Enron did challenge and defeat the establishment,” Stelzer
wrote. . . . Wall Street Journal columnist Peggy Noonan, who got
$25,000 to $50,000 for helping Lay with a speech and annual report,
says, “Whether I had worked with Ken Lay or not,” the company’s
behavior “would have made me angry and I would have thought about
it for a while and then done a column. . . .
New York Times columnist Paul Krugman, who got $50,000
from the Enron advisory board, blames the flap on “conservative
newspapers and columnists. . . . Reading those attacks, you would
think I was a major-league white-collar criminal. . . . Part of
a broader effort by conservatives to sling Enron muck toward their
left,” he writes.
Then there is Enron’s visible link to Bush. That link is Ralph Reed,
formerly the director of Pat Robertson’s Christian Coalition, now
the Chairman of the Republican Party of Georgia. Until very recently,
he was a consultant for Enron at $10,000
to $20,000 a month, the article says. What kind of political
consulting is worth that much money to a derivatives trading firm?
They may call it consulting. But what was the money for, really?
Enron’s top officials understood how the game is played today. You
pay big money for services rendered — any services — and
you buy silence, and maybe even a bit of praise. But, mainly, you
buy cooperation in high places.
TAX DOLLARS AT WORK
Congressman Ron Paul has
said it best: get government out of business guarantees and
Enron provides a perfect example of the dangers of corporate subsidies.
The company was (and is) one of the biggest beneficiaries of Export-Import
Bank subsidies. The Ex-Im bank, a program that Congress continues
to fund with your tax dollars, essentially makes risky loans to
foreign governments and businesses for projects involving American
companies. The Bank, which purports to help developing nations,
really acts as a naked subsidy for certain politically favored
American corporations — especially corporations like Enron
that lobbied hard and gave huge amounts of cash to both political
parties. Its reward was more that $600 million in cash via six
different Ex-Im financed projects.
One such project, a power plant in India, played a big part in
Enron’s demise. The company had trouble selling the power to local
officials, adding to its huge $618 million loss for the third
quarter of 2001. Former president Clinton worked hard to secure
the India deal for Enron in the mid-90s; not surprisingly, his
1996 campaign received $100,000 from the company. Yet the media
makes no mention of this favoritism. Clinton may claim he was
“protecting” tax dollars, but those tax dollars should never have
been sent to India in the first place. . . .
The point is that Enron was intimately involved with the federal
government. While most in Washington are busy devising ways to
“save” investors with more government, we should be viewing the
Enron mess as an argument for less government. It is precisely
because government is so big and so thoroughly involved in every
aspect of business that Enron felt the need to seek influence
through campaign money. It is precisely because corporate welfare
is so extensive that Enron cozied up to Congress and the Clinton
administration. It’s a game every big corporation plays in our
heavily regulated economy, because they must when the government,
rather than the marketplace, distributes the spoils.
Independent outsiders who have influence with the media are put
on the corporate payroll as consultants or as speech writers or
corporate convention speakers. For a handful of big-name speakers,
$25,000 for a 45-minute speech is the going rate.
This money buys silence. It also buys prestige for the company that
shells out the money. (David Brooks, in his great little book, Bobos
in Paradise, has a chapter on how the very rich buy the
fawning support of the eloquent.) But when it finally blows up,
they tell the middle-class press, “I’m shocked. Shocked!” These
self-deluded scribblers really think that they are worth all of
that money, just for their eloquence. Who are they kidding? Only
The government-business alliance subsidizes the arrogance and moral
corruption of men like those who ran Enron, who bankrupted the company,
lied to the employees, and took millions of dollars before they
bailed out. As Ron Paul says, the U.S. government paid taxpayers’
money to Enron’s high-rolling crap-shooters. This is normal. It
has gone on for a generation. It will not change soon. If it did,
how could ex-Congressmen become millionaire lobbyists?
You will be assured by “industry spokesmen” on cable TV financial
channels that “there will be no more Enrons.” There will be lots
of them. The magnitude of the derivatives market guarantees it.
You will hear from Washington that “new checks and balances are
needed.” What we will get, at best, is more red tape.
Reporters look at a stock market buoyed up with historically low
profits, declining capital investment, and phony accounting, and
they refuse to force the PR department behind every corporate press
release to verify the facts. Reporters were bloodied retroactively
by Enron, but nobody is blaming them for their part in promoting
this debt-ridden disaster, except for Clive Thompson.
It is possible for a reporter to make a mistake or be fooled. If
Arthur Anderson was fooled, why not some reporter on a deadline?
But the problem is not one reporter and one company. The problem
is the blindness of an entire profession. The NASDAQ revealed this
blindness for anyone to see, yet even the people who lost money
in the NASDAQ cannot see the truth: the symbiotic relationship between
the conventional press, driven by advertising, and the industries
the investigate has placed blinders on editors and reporters.
P.S. Enron’s ex-officers will probably all wind up bankrupt, but
their defense lawyers will do very well. Class-action law suits
are multiplying like May flies — 100 so far. Investors who
bought shares from these people in 2001 will protest against insider
trading and fraudulent accounting. Then there will be law suits
from employees who lost money in their Enron retirement plans. The
IRS will collect its ton of flesh. Don’t pity these guys, but don’t
be jealous. Life with lawyers is no fun except, possibly, for wives
They will keep their debt-free mansions and penthouses because of
the Texas homestead law, but they will have to pay air conditioning
bills every summer. They live in Houston.