Posts Tagged ‘Enron’
“Our country is now taking so steady a course as to show by what road it will pass to destruction, to wit: by consolidation of power first, and then corruption, its necessary consequence”*…
Scheduling Note: as a consequence of long meetings scheduled to start very early, (Roughly) Daily will be off tomorrow/Monday and Wednesday. There should be a post on Tuesday, and regular service should resume on Thursday…
Corruption in the U.S. has a long and costly history, intertwining both government and corporations. Our current moment is feeling especially “dirty“– and disfunctional— at both levels.
Eric Ries was a founder of the Lean Start-Up movement and the founder of the Long-Term Stock Exchange. His new book, Incorruptible: Why Good Companies Go Bad (highly recommended), tackles the issue head-on. Here, a short excerpt, explaining why…
Not all forms of making money are equal. Some create wealth; others destroy it. Over the centuries, when people have gone searching for the moral logic of capitalism, they always hit this same bedrock principle: Fully informed, uncoerced, voluntary transactions create surplus value because both parties end up better off.
Think about your last genuinely good purchase. You valued the product more than the price you paid, so you are better off. But the seller, too, is better off (otherwise they would not have sold). Both parties are wealthier. When this happens, it’s a bit of a magic trick. In an instant, new value exists that did not a moment before. This wealth was not stolen; it was generated.
But this only works when the exchange is truly voluntary and informed. Remove any of these conditions and the mechanism breaks.
This is why embezzlement, coercion, fraud, bribery, and deception are wrong. It’s not only because they are illegal or even immoral. It’s because they corrupt the fundamental premise of our entire economic system. They transform transactions meant to create value into ones that destroy it.
This trajectory is so common these days that we hardly know what to call it. The answer is simple. Since every version of it shares the same value-destroying logic, regardless of whether the violation is illegal or even immoral, we should use the same word to describe them all: corruption.
Our modern sense of “corruption” has become catastrophically narrow. What I’m talking about is something much broader than bribery or embezzlement. (After all, the Latin corrumpere means “to break completely.”) Corruption breaks the logic of capitalism itself.
Every Ponzi scheme, every hidden externality, every unit of extracted value is a drag on our whole economy’s potential. These corruptions don’t just harm their immediate victim; they erode trust, increase transaction costs, and destroy the civic infrastructure that makes efficient markets possible. The hidden economic costs are staggering. The truth is that capitalism succeeds not because of these widespread violations but despite them…
As the “father of capitalism” himself, Adam Smith, said: “Justice… is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society… must in a moment crumble into atoms.” (Theory of Moral Sentiments, Chapter III)
Diagnosing the disease that threatens us: “Corruption, Defined,” from @ericries.bsky.social.
* Thomas Jefferson
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As we grapple with graft, we might recall that on this date in 2002, three days after being found guilty of obstruction of justice for shredding the thousands of documents and deleting emails and company files that tied the firm to its audit of Enron, accounting firm Arthur Andersen was preparing its appeal.
Legal department member Nancy Temple and David Duncan, the lead partner for the Enron account, were cited in the legal action as the responsible managers in the scandal because they ordered subordinates to shred relevant documents. Duncan himself pleaded guilty in federal court in Houston to obstruction of justice on April 10, 2002, saying that he had ordered the destruction of documents and also personally destroyed documents.
The conviction was later overturned by the U.S. Supreme Court (on the grounds that the jury had not been properly instructed on the charge against Andersen). The Supreme Court ruling theoretically left Andersen free to resume operations. However, the damage done to the Andersen name was so great (not just from the Enron scandal but also from others involving Andersen accounting malpractice, such as WorldCom a year after Enron) that it did not return as a viable business even on a limited scale in the years after the ruling.
Although only a small number of Arthur Andersen’s employees were involved with the scandal, the firm was effectively put out of business; the SEC is not allowed to accept audits from convicted felons. The company surrendered its CPA license and 85,000 employees lost their jobs.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning”*…
In the past few decades, the Gini coefficient—a standard measure of income distribution across population segments—increased within most high-income economies. The United States remains the most unequal high-income economy in the world. The disparity reflects a surge in incomes for the richest population segments, along with sluggish or even falling incomes for the poorest, especially during bad economic times.
At the same time, the middle class is shrinking. The percent of Americans in the middle class has dropped since the 1970s, from 61 percent in 1971 to 51 percent in 2019. Some have moved up the income ladder, but an increasing number are also moving down. The middle class has also shrunk considerably in countries like Germany, Canada, and Sweden, but other advanced economies have generally experienced more modest declines.
From the introduction to the Petersen Institute for International Economics report “How to Fix Economic Inequality?”
Founded by Pete Petersen (Lehman Brothers Chair, Nixon’s Secretary of Commerce, and co-founder, with Trump supporter Stephen Scharzman, of investment giant Blackstone), and overseen by trustees who include Larry Summers, Alan Greenspan, and George Schultz, PIIE is hardly a “progressive” think tank. But they are worried: quite apart from its obvious humanitarian toll, inequality at the scales that have emerged is highly unlikely to be sustainable (even at the human cost that we’ve so far been willing to pay). Put more bluntly, it is ever more likely to torpedo the domestic (and large hunks of the global) economy and indeed to threaten the stability of democratic society.
Other sources suggest that they have very good reason for concern:
• Even as the stock market hits new highs, 26 million Americans are suffering food insecurity (See also: “The boom in US GDP does not match what’s happening to Americans’ wallets.”
• The distribution of assets in the US (and other developed economies, but most egregiously in the U.S.) is even more skewed than income: see data in the PIIE report and “The Asset Economy.”
• And lest we think that this issue is confined to the U.S., social democracies throughout the developed world are feeling the same pressures (albeit mostly less dramatically).
FWIW, your correspondent doesn’t have terrifically strong confidence in the remedies mooted in the PIIE report. Even as the authors recognize that the issues are deeply structural, they confine themselves to recommending (what seem to your correspondent) relatively timid and incremental steps– which, even if taken (and most require legislative or regulatory action) are more likely to slow the polarization underway than to reverse it.
But they are worth contemplating, if only to provoke us to more fundamental measures (e.g., here). And in any case, it’s telling– and one can only hope, encouraging– that determined champions of the very neoliberal economics that have gotten us here recognize, at least, that unless we change course, we’re speeding into a dead end.
* Warren Buffett
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As we agree that fair’s fair, we might recall that it was on this date in 2001 that Enron, once #7 in the Fortune 500, declared bankruptcy. Six months earlier, it’s stock had traded as high as $90; it closed November 30th at 26 cents, wiping out billions in wealth (a appreciable part of it disappearing from employees’ pension plans). At the time, Enron had $63.4 billion in assets, earning it the honor of being the nation’s largest bankruptcy to that date. (It would be surpassed by the WorldCom bankruptcy a year later.)
Jeff Skilling, Enron’s CEO served 11 years in prison on several counts of fraud; Andy Fastow, Enron’s CFO, would served about 5 years. Chairman Ken Lay was also found guilty, but died before his sentencing. Enron’s accounting firm, Arthur Andersen (at the time a leader among the “Big 5”), which at least “missed” the egregious fraudulent practices in their audits of Enron, was effectively forced to dissolve after the scandal.
I’m so blue…
Readers can try their hands at recognizing the identifying hues of tech brands, NFL teams, and NHL clubs at Name that Blue.
[TotH to @mattiekahn]
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As we cogitate on color, we might recall that it was on this date in 2001 that energy high-flyer Enron (which had blue, among other colors, in its logo) declared bankruptcy. The company, to that point a widely-cited exemplar effective corporate management (Fortune named it “America’s Most Innovative Company” six years in a row), turned out to have been innovative in an altogether different way: it was revealed that Enron’s performance– it claimed revenues of nearly $101 billion during 2000– was largely the product of institutionalized, systematic, and stealthily-executed accounting fraud. In the aftermath, the Sarbanes-Oxley Act was passed; Arthur Andersen, the auditing firm that certified Enron’s results (and was, in the most charitable construction, asleep at the switch) went out of business; 11 financial institutions (among them, Deutsche Bank and Citicorp) paid over $20 billion dollars into the bankruptcy creditors’ account in recompense for having colluded with management… and “Enron” became synonymous with “corporate fraud and corruption.”
Speed!
There is more to life than simply increasing its speed.
– Mahatma Gandhi
I took a speed-reading course and read War and Peace in twenty minutes. It involves Russia.
– Woody Allen
There’s lots of skepticism about the virtue of speed. Still, when demand is high, “time is money”… a lesson not lost on The Broad Group, a Chinese company that has long been successful in manufacturing and selling ingenious environmentally-friendly central air conditioning systems powered by natural gas and/or waste heat, and that has now moved onto “sustainable building.”
Broad’s approach to construction involves careful planning, the use of prefabricated elements– and speed. Broad Sustainable Buildings erected the 6-story Broad Pavilion in Shanghai Expo 2010 in 1 day, the 14-story New Ark’s Hotel near Broad’s headquarters in 6 days, and the Broad Pavilion at 2010 United Nations Climate Change Conference in 8 days.
But their most recent feat is surely their most audacious: a 30-story tall hotel prototype, raised in 360 hours– accomplished a week after the same team built a 15-story building.
click to see a time-lapse video of the hotel going up
Read Jim Fallow’s Atlantic piece on Broad and its leader in pdf here.
As we watch the skyline change before our eyes, we might recall that it was on this date in 2001 that California used rolling blackouts to cut off power to hundreds of thousands of people. Gov. Grey Davis declared a state of emergency and ordered the Dept. of Water Resources to buy and sell electricity to help alleviate the crises; PG&E defaulted on $76 million in short term debt.
Exactly one year later, on this date in 2002, Enron, whose trading arm had manipulated the energy market and contributed mightily to the power shortages in California (and elsewhere), “fired” accounting firm Arthur Andersen, citing its destruction of thousands of documents and its accounting advice. (For its part, Andersen said its relationship with Enron ended in early December, 2001, when the company slid into the biggest corporate bankruptcy in U.S. history.)
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