Funny site, Enron's secrets of success

[Roger Baker]

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http://www.infinitejest.org/1/cards.html

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It is probably no coincidence that Enron's CEO, Ken Lay, was the largest 
single contributer to
George Bush's presidential campaign.



http://www.salon.com/tech/col/leon/2001/11/09/enron/index1.html



...But, in brief, what appears to have been happening is that executives 
of Enron, including the former CFO (ousted last week) Andrew Fastow, 
were involved in setting up partnerships that did business with Enron. 
 From outside sources, these partnerships borrowed billions of dollars 
which were then invested in Enron -- in the purchase of assets for Enron 
or in other ventures. Precisely what kind of assets remains unclear; 
what is known, however, is that the executives of Enron who were 
involved in the partnerships made millions of dollars in management fees 
by brokering and administering the deals.

The potential conflicts of interest are obvious -- and have caught the 
SEC's attention. Even those of us who are not adept in the ways of high 
finance can sense that there might be something wrong with a CFO getting 
a cut out of deals that he brokers with private partnerships, of which 
he personally is a member. That seems to be why, just a day after a 
conference call with Wall Street analysts in which Ken Lay defended 
Fastow, the company unceremoniously dumped its CFO. And on Thursday, two 
other high executives, including the company's treasurer, were also 
dumped, on the heels of the news of Enron's earnings restatements.

What's less obvious is how the shenanigans fit into Enron's overall 
business strategy. By setting it up so outside partnerships borrowed 
money that was then used to fuel Enron's growth, Enron avoided the 
necessity of carrying that debt on its own books. The sums involved 
total billions of dollars -- a ledger entry that would have had a 
substantial impact on quarterly profit-and-loss figures. Additionally, 
carrying that debt on the books would have lowered Enron's overall 
credit rating, thus making it more difficult to raise money to fuel 
further expansion.

Enron, as is well documented in a lengthy Texas Monthly feature on the 
company this month, has always employed cutting-edge financial 
accounting strategies. For example, while fuddy-duddy old-school 
corporations would be inclined to book profits from a deal across the 
whole course of the deal's term -- periods that could stretch for 
years -- Enron apparently preferred booking all its profits up front, 
and then moving on to the next speculative market. For Enron, innovation 
wasn't confined to creating new markets for gas and electricity, but 
also for blazing new trails in the arcane world of bookkeeping.

Certainly it comes as no news flash that corporations play games with 
their quarterly numbers in order to make the bottom line look good and 
keep the stock price healthy. That's practically a business model for 
many companies -- including many of our dear departed friends from the 
dot-com world. What's depressing, if not surprising, is that the 
investigations always come after the damage has already been done -- 
after the investors have already been fleeced, and, in the case of 
Enron, after the executives have already sold off hundreds of millions 
of dollars worth of stock at the top of the market.

In a truly transparent marketplace, corporations wouldn't be able to get 
away with that kind of shady business. If Wall Street's best analysts 
can't understand a financial statement, then warning bells should be 
going off at the SEC. Prevention is a lot cheaper than a cure.

In the past, Enron has justified its opaque financial statements on the 
grounds of competition -- it would lose its competitive advantage, 
according to executives, if it told everybody exactly what it was doing. 
And there is a certain amount of sense to that: It's hard to compete if 
you let the world know exactly what you are up to, every step of the 
way. But just the same, there are responsibilities incurred by becoming 
a public company, and one of those is that you are, well, public. You 
are taking the public's money and you owe it an accounting. Already, 
class actions suits are mounting.

What Enron's case proves is that we can't trust companies to determine 
what information should fairly be withheld for competitive purposes and 
what should be revealed to the public. That ought to be the government's 
job, which implies tighter scrutiny, stricter regulations and more bite 
in penalties for violating them.

But don't hold your breath waiting for the results of the current SEC 
investigation. This is George W.'s world now. And if his administration 
is willing to broker a deal for Microsoft that lets the company get off 
with the mildest of judgments -- even after a conservative-dominated 
federal appeals court ruled that the company illegally abused its 
monopoly power -- then what do we imagine might be likely to happen to 
one of his best buddies, Ken Lay?



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It is probably no coincidence that Enron's CEO, Ken Lay, was the
largest single contributer to 

George Bush's presidential campaign. 


               


<underline><color><param>1A1A,1A1A,FFFF</param>http://www.salon.com/tech/col/leon/2001/11/09/enron/index1.html</color></underline>




...But, in brief, what appears to have been happening is that
executives of Enron, including the former CFO (ousted last week)
Andrew Fastow, were involved in setting up partnerships that did
business with Enron. From outside sources, these partnerships borrowed
billions of dollars which were then invested in Enron -- in the
purchase of assets for Enron or in other ventures. Precisely what kind
of assets remains unclear; what is known, however, is that the
executives of Enron who were involved in the partnerships made
millions of dollars in management fees by brokering and administering
the deals. 


The potential conflicts of interest are obvious -- and have caught the
SEC's attention. Even those of us who are not adept in the ways of
high finance can sense that there might be something wrong with a CFO
getting a cut out of deals that he brokers with private partnerships,
of which he personally is a member. That seems to be why, just a day
after a conference call with Wall Street analysts in which Ken Lay
defended Fastow, the company unceremoniously dumped its CFO. And on
Thursday, two other high executives, including the company's
treasurer, were also dumped, on the heels of the news of Enron's
earnings restatements. 


What's less obvious is how the shenanigans fit into Enron's overall
business strategy. By setting it up so outside partnerships borrowed
money that was then used to fuel Enron's growth, Enron avoided the
necessity of carrying that debt on its own books. The sums involved
total billions of dollars -- a ledger entry that would have had a
substantial impact on quarterly profit-and-loss figures. Additionally,
carrying that debt on the books would have lowered Enron's overall
credit rating, thus making it more difficult to raise money to fuel
further expansion. 


Enron, as is well documented in a lengthy Texas Monthly feature on the
company this month, has always employed cutting-edge financial
accounting strategies. For example, while fuddy-duddy old-school
corporations would be inclined to book profits from a deal across the
whole course of the deal's term -- periods that could stretch for
years -- Enron apparently preferred booking all its profits up front,
and then moving on to the next speculative market. For Enron,
innovation wasn't confined to creating new markets for gas and
electricity, but also for blazing new trails in the arcane world of
bookkeeping. 


Certainly it comes as no news flash that corporations play games with
their quarterly numbers in order to make the bottom line look good and
keep the stock price healthy. That's practically a business model for
many companies -- including many of our dear departed friends from the
dot-com world. What's depressing, if not surprising, is that the
investigations always come after the damage has already been done --
after the investors have already been fleeced, and, in the case of
Enron, after the executives have already sold off hundreds of millions
of dollars worth of stock at the top of the market. 


In a truly transparent marketplace, corporations wouldn't be able to
get away with that kind of shady business. If Wall Street's best
analysts can't understand a financial statement, then warning bells
should be going off at the SEC. Prevention is a lot cheaper than a
cure. 


In the past, Enron has justified its opaque financial statements on
the grounds of competition -- it would lose its competitive advantage,
according to executives, if it told everybody exactly what it was
doing. And there is a certain amount of sense to that: It's hard to
compete if you let the world know exactly what you are up to, every
step of the way. But just the same, there are responsibilities
incurred by becoming a public company, and one of those is that you
are, well, public. You are taking the public's money and you owe it an
accounting. Already, class actions suits are mounting. 


What Enron's case proves is that we can't trust companies to determine
what information should fairly be withheld for competitive purposes
and what should be revealed to the public. That ought to be the
government's job, which implies tighter scrutiny, stricter regulations
and more bite in penalties for violating them. 


But don't hold your breath waiting for the results of the current SEC
investigation. This is George W.'s world now. And if his
administration is willing to broker a deal for Microsoft that lets the
company get off with the mildest of judgments -- even after a
conservative-dominated federal appeals court ruled that the company
illegally abused its monopoly power -- then what do we imagine might
be likely to happen to one of his best buddies, Ken Lay? 



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