Check It Out
Courier Article by Pam Locker
Sunday, March 28, 2004
Enron and Friends
Enron, WorldCom, ImClone, Tyco, Martha. We can't get through a day without being bombarded with headlines about the latest big business scandal.
Having never taken a business class but being dangerously close to that time in my life when I will have to rely on my "investments," I'm getting a bit nervous about my ability to "skim the cream" (as Martha would say). Here are a few books that shed some light on the grubby innards of the recent business debacles.
Bad Business by Robert B. Parker (G. P. Putnam's Sons, 2004).
For a quick and dirty grasp of the fall of Enron, read the latest Boston P.I. Spencer mystery. A routine divorce case turns into a probe of dubious accounting practices at energy giant Kinergy (think Enron), when two top executives are murdered.
Tucked among all the hilarious one-liners and eccentric characters that people Parker's mysteries are several important definitions. Mark-to-market accounting (pages 230-231) allows companies to count as current earnings profits they expect to earn in the future. A Special Purpose Entity or SPE (pages 278-281) is a separate legal entity created by a firm to "provide liquidity and/or obtain favorable external funding."
It turns out that Kinergy executives have been diabolically clever at utilizing mark-to-market and SPEs to the max -- thereby bankrolling new operations as well as masking incredible amounts of debt. When someone in their ranks threatens to blow the whistle, murder results.
The Smartest Guys in the Room: the Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind (Portfolio, 2004).
If you crave details, read this definitive 435-page investigative account. McLean, with her March 2001 "Fortune" article "Is Enron Overpriced?," was the first reporter to doubt Enron in a major journal.
This is not an easy read, especially for those of us who are financially-challenged, but the authors patiently explain key concepts over and over in the course of this fascinating saga. Ken Law, Jeff Skilling, and Andy Fastow sincerely believed themselves to be brilliant financial pioneers who were inventing a whole new industry – international energy trading. They lived for the deal, the next "big enchilada." They probably still believe they could have pulled it off – if only they could have closed just one more deal.
Origins of the Crash: the Great Bubble and Its Undoing by Roger Lowenstein (Penguin Press, 2004).
Lowenstein is a "Wall Street Journal" and "SmartMoney" journalist who has penned two previous financial best sellers.
Lowenstein chronicles how in the 1970s, "through four years on an Ivy League campus, (he) didn't hear a mention of the stock market." Stocks were considered too risky. The number of Americans who owned stocks actually declined by millions during that decade.
In the eighties this trend reversed itself, and by the nineties, of course, the stock market ruled. With it came an economy driven by stock price and EPS (earnings per share) and numerous opportunities for the greedy to excel.
Lowenstein blames outrageous executive compensation and lavish granting of stock options for fostering a climate where top company officials strove to keep stock prices up at all costs. He also shows how stock analysts, investment bankers, auditors, and accounting firms enabled and profited by their excesses.
Indeed, the entire economic climate favored the actions of executives who would soon meet resounding defeat. A leading industry magazine, "CFO Magazine," amazingly awarded its prized Chief Financial Officer Excellence awards to Enron's Andy Fastow in 1999, WorldCom's Scott Sullivan in 1998, and Tyco's Mart Swartz in the year 2000!
American Sucker by David Denby (Little, Brown, 2004).
"New Yorker" movie critic David Denby picked the absolute worst time to jump into the stock market – the year 2000. His wife of many years, author Cathleen Schine, had just left him, and he wanted to make enough money to buy her share of their upper West Side Manhattan apartment.
In an embarrassingly frank – and funny -- account, Denby describes the next year's emotional and financial turmoil. Of particular interest are his frequent visits to ImClone founder Sam Waksal's swanky digs (where he met Martha Stewart) and his stubborn contention that the big executives stole HIS money, not just some nebulous funds.
Pam Locker is a librarian with the Evansville-Vanderburgh Public Library. The opinions expressed in this column are personal and do not reflect policies or official recommendations of EVPL.