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Laying Enron to Rest

By Allan Sloan
Newsweek

June 5, 2006 issue - Enron was the company that was going to change the world. And now, by God, it has—but not in the way that it had in mind. Once, Enron was the quintessential New Economy company, seeming to churn out ever-growing profits from mundane businesses like natural-gas pipelines and water and electric-generating plants as ephemeral dot-coms crashed and burned. Enron was going to replace sclerotic government regulation with Adam Smith's invisible (and efficient) hand of the free market. Everyone was going to save money, and Enron's shareholders were going to get rich.

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Instead, Enron imploded five years ago, turning almost overnight from No. 7 in the Fortune 500 into a bankrupt hulk. This shocking collapse transformed Enron from deregulation's poster child into a symbol of corporate dysfunction. Instead of making the world safe for capitalism, the Enron Era set off a corporate scandal wave that leapt the species barrier, morphing from a business-pages-only story into a national psychodrama. We saw crying Enron employees whose jobs and life savings both vaporized when Enron melted down, taking their 401(k) accounts with it. Then there were Enron's close ties to George W. Bush, our first M.B.A. president, which lent a decidedly political aspect to the scandal. Enron became grist for the 24-hour news cycle, and was seared into the national consciousness like no other business story since the Great Depression.

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The FBI's Enron task force examined the astounding total of more than four terabytes of data—equal to about 20 percent of all the information stored in the Library of Congress. Amazingly, prosecutors managed to distill this information overload into a relatively simple case. They charged Lay and Skilling primarily with misleading investors, employees and regulators, not with causing the fall of Enron. Often, prosecutors throw the kitchen sink at defendants, hoping that something will stick, and cases tend to get so bogged down in details that everyone—including the jury—loses sight of the big picture.

This time the government simplified, simplified, simplified, and shrewdly appealed to jurors' emotions. In Lay's case, the government pounded away at how he'd sold millions of dollars of his Enron stock back to the company in undisclosed transactions at the same time he was touting the shares to employees as being incredibly cheap. "The stock sales meant a lot; it defined the word 'intent'," juror Doug Baggett said at a jurors' news conference after the decision was announced.

Lay surprised many people who knew him when he melted down on the witness stand under cross-examination. Not long after talking in his direct testimony about having made $25 million of charitable donations over a three-year period, Lay was sassing the lawyer cross-examining him, refusing to answer some questions without adding his own accusations against the government. The display of temper hurt Lay with the jury. "He had a bit of a chip on his shoulder that made me question his character," said juror Wendy Vaughan. The joint Skilling and Lay defense—that Enron was a perfectly sound company done in by The Wall Street Journal, Wall Street speculators and a few turncoats like former chief financial officer (and chief government snitch) Andy Fastow—just didn't resonate. Fastow, who received a 10-year sentence as part of a plea bargain in return for his testimony, now looks like the smartest guy in the room, considering the decades-long sentences that Lay and Skilling seem likely to get.

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Even though large parts of corporate America have been scared straight by the Enron scandal, signs of financial excess reminiscent of Enron's heyday and the 1990s stock bubble have reappeared. Enron flew high in an environment in which investors expected to get consistent double-digit returns from owning stocks. An entire investing generation got used to making 20 percent a year with little effort. That's how much the Standard & Poor's 500 returned from August 1982 through early 2000. But even though we're now in a single-digit world, people are still pursuing the Enron-esque myth that companies and portfolios can grow to the sky and that huge returns are available without much risk.

Hence we've had the proliferation of hedge funds, many of which now produce subpar returns. We've seen investors rush into high-risk "emerging markets" that did fabulously well for a few years but now seem to be submerging. We've had stampedes into—and now out of—commodities. And there was the nonsensical idea that you couldn't go wrong buying a house at any price in any market. Many housing speculators now see they confused luck and the availability of low-interest mortgages with being smart.

Enron seems like a fever dream, an illusion from the past that business unfettered could solve all problems, that all we needed to do was get out of the way of corporate titans like Ken Lay and Jeff Skilling and Bernie Ebbers and Dennis Kozlowski and the dot-com guys and the venture capitalists, and let them work their magic on behalf of all of us.

The convictions of Lay and Skilling write finis to that delusional era. The convictions have a feeling of closure about them (even though you never know what will happen on appeal).

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With Carol Rust in Houston, Keith Naughton, Jennifer Ordoñez and Judy Ganeles

The (snip) material left out is mostly background about the people involved and a bio on Lay's coming into power. The full story is at link

Each generation seems doomed to learn the same sorry lesson that there is no free lunch. Every dishonest scheme will exact it's price eventually and that greed, deception, lust for power are all a form of gluttony whose finale is fatal to the life we cherish.