6/16/2014

#57 Enron Blues (2002)

All Rights Reserved © 2002 Thomas W. Day

In the same mournful vein that the media has used to describe the "death of innocence" on September 11th, we're now learning that many Americans may be losing confidence in the stock market because of the fall of Enron.  I'm sure that my readers were just as surprised to learn that some executives may be incompetent, greedy, unethical, and seedier than G.W. Bush.  It's new news to me, for sure.

One of the Rat Rants I really regret not writing was the inspiration I had, at the beginning of the Bush II Administration.  GW's crew began government "reorganization" by laying off 56 SEC investigators and accountants.  I thought, "here we go again."  Reagan started his eight years of carpet bagging by sandbagging the FDIC field force, laying the groundwork for the eighteen trillion dollar S&L rip-off.  George I stumbled around looking for a bright, shiny object to distract us from Neil Bush's involvement in Silverado S&L and he found Iraq and Desert Storm.  The Clinton years gave us a little break from government intrigue.  Now, we're back to business as usual.

I will always wonder at the logic of a country that hates a President who does a good job for the nation, while boinking an intern or two, and loves a President who is impotent, but puts the shaft to us all.  Darwin was wrong, "survival of the species" is not a primal drive.  Personally, I don't care where the President stuffs his cigars, as long as I don’t get stuck with a share of a multi-trillion dollar debt.  I guess I'm morally-challenged, but I'd rather he screw one or two Americans rather than doing it to us collectively.

Seriously, though, how can anyone be surprised at the lack of ethics in executives?  How could anyone expect anything else?  The executive offices of the Misfortune 500 is nothing more sophisticated than a collection of wolf packs, with an occasional shark when there's enough water to support truly amoral behavior.

Enron is the tip of the ice planet.  The SEC doesn't have a small percentage of the resources or motivation necessary to investigate large corporations.  Investment brokers and market analysists have their fingers in the pie so deeply that they take breaks to keep breathing.  If you believe that a Board of Directors offers some protection from executives cleaning out the company piggybank, it's a wonder you haven't pulled all your teeth, put them under a pillow, and called that a "retirement plan."  Directors are just other companies' executives, spreading the wealth among the wealthy.  There is too much to gain and too little to lose for executives in modern corporations, so don't expect enlightenment or revolution from that well fed 1%.

Money and stock investments are acts of extreme faith.  Each time we accept scraps of paper for our weeks of drudgery, we're cooperating in a fantasy of faith.  When we ship those scraps of paper to a New York Stock Exchange broker to swap our money for shares in a company, we've stepped into the realm of the Twilight Zone.   But as long as we all believe in the same fantasy, the system, mostly, works.  The aspect of those fantasies that presses reality to the breaking point is the hope that the ruling class will act in our, and its own, best interest.  When we start to notice that the ruling class is inbred, short-sighted, greedy, and stupid, an economic depression happens almost the moment a critical mass faces reality.

Modern management and economics is working hard to bring us to terms with the real world.  Management, as usual, isn't doing this intentionally, but it's happening as a byproduct of the usual mismanagement incompetence.  Modern management has the tools and the incentives to completely upset the economic apple cart.  They don't have the good sense to realize that they're sitting in the cart with the rest of us apples.

The nearly universal practice of giving execs buckets of short-term stock options (or stock, outright) for practically any minor success is one of the things that is going to tear the economic playhouse down.  This practice isn't even a well intentioned concept gone wrong.  It is a stupid, lazy, ineffective way to motivate execs to do their jobs half-competently.  Extravagant salaries and more perks than royalty ever dreamed of aren't enough to motivate back-stabbing, ineffective corporate zombies.  Fear of prison and poverty would do better.

Enron demonstrated what a little Mafia-style, money-laundering accounting could do to a stock value; and to executive off-shore bank accounts.  Companies that don't actually produce a product have limited opportunities for gang-banging the stock holders.  Companies that do produce products have a wide collection of modern quality management tools to abuse plus the usual suspects in accounting manipulation.  Modern executives' basic compensation packages are the equivalent of a bank stuffed with unmarked bills in an unlocked safe.  Modern execs make Bonnie and Clyde look like petty shoplifters.

The very tools that moved Japan into the position of product quality leadership, in the 1970s, are providing executives with the ability to scam stockholders and skate around the SEC.  The same tools revived American manufacturing in the 1990s.  The design principles in TQM (Total Quality Management) gave us the ability to design products to precise criteria.  With moderately competent engineers and a reasonably alert quality assurance system, a company can plan, design, produce, and predict products' to exacting specifications; including MTBF (Mean Time Before Failure) specs. 

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n many industries (medical devices, computers, transportation, and energy, for examples), one or two breakthrough products can light a fire under a stock price.  The failure of those same products, at a time further into the product lifetime, will douse that fire and put out the sparks of future successes.  The short-term planning aspect of executive stock option incentives practically begs for abuses of this sort.  With only the very unlikely threat of a whistle-blower tossing a monkey wrench into the money machine, executives are encouraged to take advantage of the short term at the expense of the long term. 

It's not particularly difficult to build an amazing product that doesn't work as advertised, is unreliable, and costs more to build than the selling price.  Fooling the media, regulatory agencies, and the general public is so easy that I suspect P.T. Barnum didn't account for population increases, because 21st Century suckers are born a lot more often than every minute.  Reliability is, mostly, a reputation statistic.  A CEO who is willing to sacrifice a company's reputation for millions of dollars in options can afford to squander a company's good will.  After all, he won't be around to worry about rebuilding the reputation. 

Accounting is pretty much a shell game.  Enron has shown us just a few of the dozens of ways that accountants can hide negative cash flow.  Stick around.  We're going to learn that a lot more companies possess this kind of management creativity.

January 2002

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