Friday, May 26, 2006

Closing Chapter

After reading about the verdicts in the trial of Enron chiefs Lay and Skilling, I went back and reviewed what I’d written on the case over the last couple of years. I was certainly wrong in thinking that Ken Lay’s philanthropy in Houston might get him off the hook with a Houston jury, but I correctly assessed that it would be impossible for them to watch Mr. Skilling on the stand and imagine an Enron in which large-scale financial manipulations could occur without his knowledge. Notwithstanding this mixed record, I believe that some of my other comments on Enron bear repeating, as a reminder that the context of this episode encompassed much more than the downfall of two men with Texas-sized egos.

From February 2004:
"Enron must also be viewed in the context of its times, in order to separate the chicanery from genuine innovation. It is easy to forget that the Enron mystique of the late 1990s arose not just from its earnings and stock price growth--both now seen as the result of overly "sharp" financial engineering--but from a variety of genuinely novel and clever--in the best sense--approaches to an industry that was going through major changes, some of which were not readily apparent to its largest players. For a few years, all the other energy players had to look at Enron and wonder what they themselves were doing wrong. It is too comforting and facile to write off that whole period as an anomaly based solely on legal and accounting transgressions.

We should also remember that Enron…appeared to possess the laudable knack of learning from its mistakes without becoming paralyzed by them. It would be fascinating to see someone reconstruct the financials of the real business, minus the swindles created to pump it up. The whole thing sank when Enron committed the cardinal sin (besides breaking the law) that any trader can make, and Enron was fundamentally a trading company. A trader can never, ever do anything to make the people he is dealing with doubt his credibility. The moment their financial house of cards started to collapse, it became impossible to sustain their trading volumes, and the death-spiral began.

There is something seductive and reassuring about watching successive Enron executives do the "perp walk", as we endow them in our minds with all the Seven Deadly Sins. Beyond the headlines, though, is what I believe to be a much more interesting and complicated story of a company that went out of its way to hire smart and clever people, gave them their run, but then let them down badly by never learning (or bothering) to rein them in when their ideas went out of bounds."

From June 2004:
"F. Scott Fitzgerald once said, "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." We might do well to apply this skill in many areas, but I see particular value in looking at Enron this way. This company created remarkably innovative financial products that addressed entire categories of previously unidentified consumer and business needs, but it also engineered conflicts of interest for its finance officials that were dazzling in their scope and degree of deception.

Meanwhile, I continue to believe that the wreck of Enron contains valuable nuggets of business innovation that will be mined by future entrepreneurs, when the market is again ready for them." (I don’t think you’d have to look very far for examples of this happening already, within trading companies and hedge funds.)

From the start this case has had all the morbid fascination of a car accident, and I’m sure there are any number of additional books, insider exposes, and perhaps even a feature film--not to be confused with last year's documentary and the previous TV movie--in the works. This week’s verdicts are surely not the last word; appeals could go on for years, despite the depleted personal finances of both men. In the meantime, Messrs. Lay and Skilling will have many years in which to contemplate the ultimate outcome of their ethical lapses.

Energy Outlook will observe Memorial Day and resume postings next Tuesday. Have an enjoyable long weekend/bank holiday.

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