Enron Whiners

Email Print
FacebookTwitterShare

Baloney
About Employees Losses

Many
commentators in the media have wailed on the observation that many
Enron employees have seen their 401(k) plans go from $1,000,000+
down to a small fraction of that amount. What is NOT pointed out
by these commentators is that those plans which experienced such
large values were, of course, as a result of highly inflated stock
prices which were run up as a result of a very real irrational exuberance
that no one was complaining about when it was happening (and, I
would add, reflected a 500 to 1 price/earnings ratio at one point).

Indeed,
how much did these 401(k) plan owners ACTUALLY CONTRIBUTE? If one
were to examine the total amount of contributions an employee could
have possibly put into the plan, I suggest to you that the figure
is going to be much, much closer to what the current post-crash
value of Enron stock is now compared to what the high point value
was.

It's
a mathematical exercise: up to year 2001, the maximum that an employee
was allowed to contribute to a 401(k) program was $10,500 per year.
When you consider that Enron has only been in business 10 or 15
years (and only became a very large company with many employees
only 4 or 5 years ago), it is mathematically impossible for anyone
to have actually contributed any significant amount of money into
their plans. So when we see an Enron employee interviewed on the
6 o'clock news, as I did recently, and he tells us that his 401(k)
program was worth $1.5 million last summer and now it is worth $25,000,
I would suggest to you that that particular employee didn't – and
mathematically couldn't have – contributed much more than that into
the plan in the first place!

So,
the media weeps over the great "rip-off" perpetrated against
these 401(k) owners, yet the loss that occurred was from an amount
highly inflated to begin with.

No
One Was Forced To Contribute to a 401(k)

No
one ever seems to mention that employees are NOT forced to contribute
to 401(k) plans. Employees are free to not participate in the plan
and, instead, take the pre-tax money that would have into the plan
as take-home salary. Of course, that would have meant paying income
tax on it. Now, virtually 99% of employees in the U.S. that are
eligible to participate in 401(k) plans do so. Why? BECAUSE OUR
PROGRESSIVE TAX SYSTEM IMPOSES SUCH A HIGH TAX BRACKET ON WORKERS
THAT THEY WOULD BE FOOLS NOT TO. It doesn't take much to find yourself
in a 28% federal income tax bracket (or, in a state where there
is also state income tax, such as California, you can be in a combined
federal and state income tax bracket of 31% once a paltry $26,250
in taxable income for the year is reached). So, employees freely
invested in the 401(k) program knowing beforehand that the amount
of the plan that went into Enron stock WOULD be going into Enron
stock. But they didn't have to if they didn't want to.

What
Employees Should Have Done

The
whole argument that once the stock started to go down the employees
were forced to endure this loss because they weren't allowed to
sell the Enron stock is, simply, a crock. If an employee truly wanted
to save the value of his Enron stock in his 401(k) plan from an
impending loss, all he had to do is go to a stock broker and either
sell Enron stock short or buy put options. It's called "hedging"
and is an investment technique that has been used for the last 100
years and virtually every brokerage house in the United States is
able to provide this service. Virtually 100% of the value of an
employee's already rediculously over-inflated 401(k) plan could
have been maintained had the employee truly wanted to maintain it.
The reality, of course, is that the employees probably didn't believe
that the stock value would go down, which means that they were fully
prepared to absorb the risk. And when it started to free-fall, they
probably continued to believe it would recover. Well, tough luck,
that's the way the stock market works and if an employee didn't
want to have his money in the market, he shouldn't have participated
in the 401(k) program in the first place.

Executives
Were Properly Treated Differently

We
continually hear that Enron executives were allowed to sell THEIR
Enron stock at a high price yet the poor lowly exploited employees
were forced to keep their stock and weren't allowed to sell. Well,
the first thing to say about that is that what is probably being
referred to here is that the Executives had stock options OUTSIDE
of their 401(k) programs which were given to them as a form of compensation
separate from any 401(k) program. In order to exercise the value
of the option, they probably had to sell the option when it came
due, something that works completely differently from the rules
inside a 401(k) program. Indeed, those executives probably had 401(k)
programs in addition to their stock options and, of course, the
rules that prevented the lower-rung employees from selling their
Enron stock within their 401(k)s also would have equally applied
to any executive with a 401(k) program, too. But we never seem to
hear about this.

March
18, 2002

Tony
Kondaks [send him mail]
lives in Mesa, Arizona. See his website TaxTimeBomb.

LRC
needs your help to stay on the air.

Email Print
FacebookTwitterShare