The Friday Rant

As the woes of Enron and Global Crossing rip through the markets, taking down any company that has anything even marginally questionable in its financials, it seems that a full scale witch hunt is on. Bill Mann understands why Ken Lay took the Fifth, thinks the canonization of Sherron Watkins is overblown, is baffled that skating can manage to make boxing look legitimate, and clearly has had too much coffee this morning.

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By Bill Mann (TMF Otter)
February 15, 2002

OK, I know every wag-mouthed talking head has an opinion on how it is that you can "avoid the next Enron." In fact, without a doubt, I've added to the noise, given the media opportunities that inevitably arise when a columnist babbles on long enough about a subject.

I've got some bad news for people trying to "avoid the next Enron." The next Enron will not look a thing like this Enron. We've got Congress running every which way trying to fix stuff that isn't broke, and failing to take a long look at the things that are broke. Until they dig deep down and a) make the penalties for security fraud painful enough to make people think twice before they try to deceive us, and b) take on the conflicts of interest at big-money banks, we will all remain at risk.

Look, we don't need to have hard ceilings on how much a person can keep in company stock in a 401(k). That's stupid. We do need a mechanism by which employees can get independent advice on the composition of their company-provided retirement plans. We do need reform on expensing stock option grants. We do need you guys to enforce the laws already on the books! It's called fraud, and Enron is only the last in a long line. See Cendant (NYSE: CD), Waste Management (NYSE: WMI), Rite Aid (NYSE: RAD) Bre-X, ZZZZ Best, and so on. Grrrrrrr.

If you've seen the news in the past two days, you've no doubt been deluged by a few common stories:

1) Ken Lay took the Fifth. (I'm going to cease assuming that people don't know who he is.)

2) The same Enron Vice President, Sherron Watkins, who wrote the anonymous warning letter to Lay in August warning that Enron was endangering itself, did testify before a House Committee, and said she thought that Lay wasn't the ringleader.

3) Apparently, figure skating is fixed.

4) Have we mentioned Enron? Here's how to avoid it, things like it, and chronic halitosis. By the way, run away from telecom.

5) "The Axis of Evil" trio have gone out and bought curtains together, or something. Canada, angry about the figure skating thingy, has applied to join the Axis "so won't nobody mess with us again, eh."

My thoughts on the above are below.

1) It should be no surprise to anyone that Ken Lay took the Fifth. He had nothing to gain by speaking, and he was absolutely right that his fate had already been sealed by the Senators and Congressmen he faced. I do not excuse Ken Lay for his actions and non-actions, but we should not begrudge him due process. I say this with the full knowledge of having read the entire 200-plus page Powers Report (highly recommended, and better than a John Grisham novel to boot) that it is pretty clear that Ken Lay is at least guilty of lack of oversight and terminal stupidity. The truth may never come out, but it's not going to be any more likely to come out in an atmosphere where calling someone an insult to carnival barkers is considered heightened political commentary.

2) Sherron Watkins took the stand in the House of Representatives and was treated as a conquering hero for having the courage to stand up to the badduns in charge of Enron. Helloooooo? There's a problem here. A whistleblower, as she is being called, generally blows the whistle to the police or another enforcement authority. Ms. Watkins, while courageous in her actions, told the bad people that they were being bad. She did not tell the rest of us that they were being bad, and when her August letter was not acted upon did not pursue other avenues. Had her letter contained an "or else," or had she pursued it with the authorities, well, she'd be worthy of the mantle of "hero." As it was, she was just "courageous." Let's leave the "hero" term for people who actually place themselves directly in harm's way for the direct benefit of others. You know, like Carrot Top.

I'm sure, though, that Ms. Watkins' message -- that Ken Lay was duped by those he hired to run Enron -- was about as welcome in Congress as Osama bin Laden's mother saying he was just "misunderstood." Congress needs an ironclad villain in order to really get itself into a lather, and for the collapse of Enron they had zeroed in on Ken Lay as the representation of all things evil about greedy corporations. I'm sure that the last thing Congress wanted was an avenue for Mr. Lay to say, "Look, I was duped, too!"

Yeah, and you're bankrupt. We know.

3) Although I don't really care about figure skating unless it comes with blocker pads and a goalie mask, I find myself amazed by the current scandal surrounding the awarding of a gold medal to a Russian pair that was clearly outperformed by Canadians Jamie Sale and David Pelletier. That figure skating judges have acted with patriotic slants for decades is a poorly kept secret. But the fact that a bunch of sequin-covered twirling doilies could make boxing look clean by comparison is utterly baffling. Remember, this is the same sport where one competitor had a hit put out on her rival. Maybe a pairs skating rematch could be the undercard for the Mike Tyson Lennox Lewis fight in Beirut.

4) Telecom carriers, including Qwest (NYSE: Q) and Cable & Wireless (NYSE: CWP) are being tarred and feathered due to the questions about their accounting. Qwest, which has tons of debt, is bearing the worst of it, with its lenders running in fear from a potential collapse. An analyst came out yesterday and said a Qwest bankruptcy was at worst a remote possibility. Sound familiar? That's why people are running scared. Apparently people are questioning a few deals, including fiber swap deals in which a company sells fiber capacity to another company only to lease it back, allowing both to recognize revenues in a cashless transaction. Global Crossing, among others, were masters at doing this.

Qwest has problems, ones that have frankly taken me by surprise for their severity, but I've long questioned the leadership of CEO Joe Nacchio (and abjectly failed to heed my own advice.) But these issues are not as simple as the crowing media seems to believe. Telecom is a big incestuous mess. Sometimes it is more economic to lease fiber from another carrier than to use some of your own, even if its on the same routes. Just watch -- every single carrier in the next quarter will disclose some exposure it had to Global Crossing, because they were providing service to Global Crossing. Even carriers that have not laid a single inch of their own fiber are on the hook. This is just not as simple as it seems, and companies like Cable & Wireless seem to be getting ripped down in concert with other telecoms in the wake of Global Crossings' abominations.

5) Well, there is no #5. I just thought that was a funny concept, Canada applying to become a member of the Axis. Instead I offer this pondering: On Tuesday, a JP Morgan Chase (NYSE: JPM) analyst reiterated a "buy" rating on Capital One (NYSE: COF). Do you think that maybe the timing of this reiteration and the announcement two days later that JP Morgan had taken a 5.9% ownership stake in Capital One is coincidental?

I am consistently amazed that the web of conflicts of interest through which Wall Street analysts must wend. Perhaps there is nothing sinister here, and it actually was coincidental. But I would be hard pressed to find an analyst (with the exception of, perhaps, Mike Mayo) who would dare cut ratings on a stock that his or her employer owned in meaningful amounts. It just would not happen. Until these conflicts of interest have the light of day shined upon them and are exposed for public inspection, this will never stop. The stopgaps of not allowing analysts to own stock in companies they cover won't do it, neither will the cessation of financial benefit to sell-side analysts from pulling punches. It's not the analysts, stupid. It's the banks!

Like it matters what really needs to be done. Ask yourself: If there were some way that the potential risk of Enron's meltdown could have been meaningfully addressed by regulators before it collapsed, would there have been any will on their part to do so? And let me ask you another question: What is the difference between a potential disaster averted and one that never existed to begin with? The answer to the second question gives you the answer to the first. In January of 2000, after the Y2K bug failed to cause any of the forecasted havoc to our computer systems, many people were upset about the money spent to make so many systems "Y2K Compliant." The problem with this logic is that we don't have any way of knowing if we were making much ado about nothing or if the resources deployed to fix the problem actually worked.

Whew, I'm exhausted! Have a great weekend!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann's weekend will include much hockey. He owns shares in Qwest and Cable & Wireless. For his complete list of holdings check his profile. The Fool has a disclosure policy.