This 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.
ENRON NAMED MOST INNOVATIVE FOR SIXTH YEAR
FOR IMMEDIATE RELEASE: Tuesday, Feb. 06, 2001
HOUSTON — 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.”
Enron placed 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.”
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.
Enron is 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 geniuses.
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.
EFFICIENT 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 price history.
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 Business Journal:
November 24, 2000
Enron puts down profit warning rumors
Energy and communications giant Enron Corp. has dispelled rumors of a potential profit warning.
“All 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, read Prof. Partnoy’s testimony.
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.
WHY JOURNALISM FAILED
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 it.
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 on January 24.
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 positively sunny.
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 PR.
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. . . .
SILENCE 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 Post.
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 Lay.
“What 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.
YOUR TAX DOLLARS AT WORK
Congressman Ron Paul has said it best: get government out of business guarantees and subsidies.
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 themselves.
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 of lawyers.
P.P.S. 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.
February 6, 2002