FOOL ON THE HILL
Outraged Over Enron

When it comes down to it, Enron's executives took advantage of U.S. accounting rules for their own benefit. They hid, they obfuscated, and there was no one there willing to mind the store on behalf of individual investors. Where was the board? Where were the auditors? But most importantly, where were the regulators, who have the ultimate responsibility to protect investors from those who would deceive. Some indignation from the top would help.

Format for Printing

Format for printing

Request Reprints

Reuse/Reprint

By Bill Mann (TMF Otter)
January 17, 2002

I'm somewhat bemused by the efforts of some in Washington and the media to turn Enron (NYSE: ENE) into a political scandal. Who called whom when? Did President Bush know Ken Lay was on the line? Was Bob Rubin, former Treasury Secretary and current bigwig at Citigroup (NYSE: C), asking for a bailout of Enron in order to save some of his own company's bacon?

Who cares? Seriously, these things are comically beside the point. Enron was a big Texas energy company and George Bush was a Texas politician and a former oil industry executive. Is it any wonder that he and Ken Lay had some long-term knowledge of one another, or that they were acquaintances, or friends? None of this in any way means that George Bush somehow had any knowledge at all of Enron's accounting practices. He took Enron's claims at face value, just like almost everyone else (except for, maybe, Enron's accountants, who signed off on Enron's earnings reports and then destroyed as much evidence as they could).

On the one hand, the trace of phone calls is supposed to shine some light on the substantial influence held by Enron over our nation's chief executive. At the same time, none of the chief executive's minions lifted a finger to help Enron get out of a mess of its own making, in spite of this influence. By this logic, I guess we should take a much closer look at how the airline companies influenced air travel policies: at least they got a couple billion dollars to bail them out in time of need.

We even have Henry Waxman, a congressman from California, griping that the Bush administration did nothing to help save the pensions and retirement plans of all the Enron employees. While I can only deal in conjecture here, I can only just imagine what Waxman would be saying if Bush HAD stepped in to protect those retirement plans, because guess which individuals had the largest amount of money in Enron's retirement plans? Yep, that's right, the Enron executives. Bush can't win for losing on this one, I guess.

But Mr. President, please at least act MAD about what happened. You have a few top executives who have made hundreds of millions in ill-begotten gains on stock that was propped up by virtue of their own machinations to hide company risk. I do not care if there is nothing technically illegal about it. There are tons of things that are not technically illegal that are still complete and utter outrages. The actions taken by the Enron executives and their auditors do more to undermine the power of American capitalism than any external threat like Communism ever could.

We're getting into a nice frothy snit over whether people who held Enron stock were duped. Heck yeah, they were duped, but unfortunately equities do not come with a "no-dupe guarantee." The money lost is just that, lost. And we can talk about lessons all we want, and we can discuss all of the various ways in which the government can protect Americans from themselves by legislating diversity in retirement plan holdings, particularly in regard to the employer's stock. Pardon my French, but that's just plain stupid, and it addresses the wrong problems with the wrong solutions.

Added restrictions are not the answer, education is
There are a few problems, of course. First, we have moved rapidly away from defined benefit plans such as pensions to the defined contribution plans such as 401(k)s. Unfortunately the paucity of financial education in this country means that giving many people control over their retirement plans is sort of like giving a chimpanzee a gun, some corn liquor, and the keys to the Cadillac.

Need proof? How about all these poor schlubs from Enron who were already retired and still had their retirement plans tied up in one company. It is a recipe for disaster, and they just rolled snake eyes. But it's infuriating that Enron employees were locked into holding their company contributions of Enron stock until they were 50, and until recently could unwind only a quarter of their position in a given year. What is the point of calling a plan "self-directed" if the employees cannot direct a component of it to an investment that is appropriate? The companies no longer have the obligation to fund a pension or manage investments, but the employees cannot choose where to invest? That is an outrage, and it needs to be changed.

The damage, though, goes way beyond Enron, because it calls the entire American market's integrity into question. America and its investors have been able to sit up on the mountaintop, confident with the knowledge that the Securities and Exchange Commission is charged with "protecting investors and maintaining market integrity." On the balance, the SEC does an admirable job, and because of their efforts, the United States stock markets are the destination of choice for scores of millions of international investors. We can even call it "the SEC Premium," if you want. For this very reason, The Motley Fool has counseled American investors that there is no need to invest overseas, that shareholder protection is inferior in nearly every other market. Disclosure laws in Japan? Forget it. Trust the regulators in China? Not a chance, particularly in light of the fact that the government is the majority owner in many companies. Germany? Good regulatory framework, but its accounting rules are a shambles.

Here, we thought, we had the best of all worlds, even though there are always going to be shysters, and there will always be another dupe. But Enron is different, because it calls into question whether we can trust anything from any public company. None of the checks worked, because the system is corrupt. Many investors are getting wise to the fact that they cannot trust the opinions of Wall Street analysts due to conflicts of interest. But financial filings are not opinions, they are stated as fact, and reviewed and signed off on by an independent auditor. As it turns out, we cannot trust the auditor, because in this case Enron's accountant, Arthur Andersen, KNEW, starting at least in February, that something was deeply rotten in Houston, and they did nothing, and still signed their approval on two additional disgusting farces parading as quarterly reports.

Arthur Andersen, the company, seems that it will pay the price for its complicit actions in deceiving shareholders, as it is now the target of scores of lawsuits, not to mention potential civil and criminal cases. But unless the pain is felt by the individuals who skirted the law at Enron and their conspirators at Andersen, there will be nothing to stop this from happening again. The penalty for gaming the American markets must be severe, it must be painful, and it must deprive the perpetrators of the money they so desperately crave.

Enron shareholders have no chance at all to be made whole once again, nor should they be. But the appearance that the United States markets are corrupt must be fought with ruthlessness.

Hit 'em where it hurts, and look angry about it. This is no time to play politics.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann has some stupid "Teletubbies" jingle going through his head. He does not own any of the companies mentioned in this article. The Motley Fool has a disclosure policy.