Interesting Enron article

Interesting article:



JONATHAN CHAIT
Was Enron Just a Dream?
Cox will return the SEC to its lax old ways.
Jonathan Chait

June 17, 2005

Remember Enron? In calendar years, the scandal occurred just three years ago, but in political time it's been eons. Back then, in the wake of news reports showing how Enron had fleeced its investors and put its employees at risk, the public was up in arms.

"Suddenly there may be a political price to pay for not acting," the New York Times reported. President Bush professed "outrage" over the scandal and declared support for reforms.

Those days are long over. Today, all the pressure comes from business lobbyists who chafe at tough new restrictions and the Securities and Exchange Commission breathing down their necks. They yearn for the good old lax pre-Enron days. And Rep. Christopher Cox (R-Newport Beach), Bush's nominee to head the SEC, is just the man to give it to them.

Bush's taste in SEC chairmen was best reflected by Harvey Pitt, his first appointee in 2001. Before his nomination, Pitt spent most of his career representing the industries that the SEC regulates. He began his SEC tenure by replacing career staffers with fellow industry representatives, declaring an amnesty against previous violators and promising, "We aren't going to play 'gotcha.' " Most notoriously, he called for "a kinder, gentler" SEC.

This suited Bush just fine until Enron broke the next year. At that point, having an obvious industry lap dog as SEC chairman proved to be too much of a liability. Bush had to replace Pitt with William Donaldson, an old-line Republican (which is to say, a Republican who occasionally disagreed with the business lobby). Donaldson, a longtime Bush family friend, had a reputation for integrity, but he was not expected to make waves.

Instead, he proved unexpectedly tough. Businesses howled, and now that everybody has completely forgotten about Enron, Bush feels free to force out Donaldson and replace him with the distinctly Pitt-like Cox.

Cox's defenders offer two rationales. The first, and most obviously hilarious, is "consensus."

As Sen. Richard Shelby (R-Ala.) told the New York Times, "I have long thought that the lack of consensus on a number of big issues was very troubling, with 3-to-2 votes, and especially with a Republican chairman slipping from the other two Republicans on several big votes. Under Chris Cox, you are probably not going to have much of that." No, you're probably going to have 3-to-2 votes going the other way. How will this produce consensus? I'm not sure, but I believe it would work something like Bush's 2000 campaign promise to end partisan acrimony in Washington.

The second rationale, offered with a somewhat straighter face, is that Cox is (in Bush's words) "a champion of the free-enterprise system." This description reflects a common confusion between support for free enterprise and slavish espousal of anything businesses desire, which may or may not have anything to do with free markets.

Cox endeared himself to the business lobby not only through his general pro-business views but specifically with his long-standing crusade to let businesses disguise the cost of stock options. Stock options are a perfectly fine way for businesses to compensate their employees and give them an incentive to participate in the company's growth. The trouble is that corporations can treat them as a cost in their tax statements, without disclosing the cost in their financial statements. In other words, they make themselves look poor to the IRS and rich to their stockholders. Government regulators and reformers in Congress have tried to end this double standard — claiming support from such capitalist icons as Alan Greenspan and Warren Buffett — but corporate lobbyists have squelched them for years, with Cox as their chief water carrier.

How does it help the "free market" to let companies deceive their shareholders? It doesn't. Economists understand that markets are inefficient when one party has reason to believe that the other is withholding crucial information. (That's why many car buyers steer clear of the used car market.) The same problem applies to capital markets when investors can't be sure that management is leveling with them.

Bush, apparently, doesn't see it that way. In fact, according to his former Treasury secretary, Paul O'Neill, Bush asserted in one meeting that post-Enron uncertainty in the markets was caused by "SEC overreach."

So, in Bush's way of thinking, the problem wasn't that executives were getting away with too much, it was that they were getting away with too little. If that is indeed what's ailing the economy, then the appointment of Cox is an excellent cure.

 

Sounds like someone's makin' an en' ron aroun' the law. Eh?

 

He he he!

He he he!


Abner

 

Abner, thanks for the link to enro interesting article.

 

Glad you Enjoyed it!

Glad you enjoyed Abdullah! Welcome aboard!


Abner

 

It seems to me that so long as the people investing in the various securities markets were sophisticated and paid essentially full time attention to their investments, much regulation was really neither necessary nor desirable. Capitalists RISK THEIR CAPITAL! Criminal fraud could be, and was, punished as a crime.

But NOW, with the slow, agonizing death of the defined benefit pension, virtually ALL working Americans are invested whether we like it or not. The "Ownership Society", I suppose. But where do you draw the line? SOME risk is inevitable and the invester must take his losses on the chin. But how much is too much?

I don't know. I wish I knew more about accounting.

 

The worker is as invested with a defined benefit plan as with a defined contribution plan.

The defined benefit plan is partially funded and requires future profitability for full pension benefits. The defined contribution plan is what it is each year.

The defined benefit plan punishes the worker for leaving the company prior to the age/time-in-service of full entitlement. The defined contribution plan is a "portable pension."

The defined benefit plan is not sustainable in an age of growing lifespans. Like Social Security, it was meant for an average pay-out period of but a few years and not 25 - 30 years.

The trend you decry is a return to honesty and independence in the work contract. Neither employee nor employer makes false promises of eternal fidelity.

 

Doubtless you are correct but when you see a crooked Enron just disappear or a United Airlines using bankruptcy to cover mismanagement and the old folks get hurt...

It's just that so many people are now in the markets who really shouldn't be there. Take me, for instance:

I have a defined benefit retirement plan from the State. It's well funded and even if it weren't, it's backed by the full faith and credit of the State. But I also put money into the stock market because I get such a great tax write-off.

Now, I know NOTHING about finance. So, I follow the herd and put it in a low fee S&P 500 index fund. I have NO idea whether my fund manager is honest, nor can I really find out. Even if I decided to invest in individual securties, I have neither the time nor technical knowledge to determine which company will do best in the future.

Sure, I could go with a managed fund but they are high fee and 85% UNDERPERFORM the S&P historically. But again, I have no way to know whether what was true in the last twenty years will be true in the next twenty.

So I bear a risk that is essentially, for me, GAMBLING. Maybe that is how is has to be. But I don't much like it.

 

That hurt, for employees, is maximized with a partially funded defined benefit plan and minimized with a fully funded defined contribution plan. Other institutions' pension plans would have been but partially invested, if at all, in Enron.

There is the mattress and there is the "market" and nothing else. The smokescreen of government doesn't change that.

Be it with individuals or aggregates of people, the economic outputs must exceed the economic inputs or we starve.

The "full faith and credit of the State" is the privilege of taxation and nothing more.

So called "write offs" are usually deductions and not the implied exemptions.

Are you speaking of IRAs and/or 401Ks? Those are tax-deferred. Should your tax bracket be higher in retirement than now, you could be in for an unpleasant surprise.

The knowledge of finance, on a scale of 0 to 100, probably tops out at 50. Your index fund is a stock mutual fund. Bonds are, by historical standards, a lower-risk/lower-return investment.

Maybe we would benefit from ditching the false notion that corporations comprise the economy.

You don't much like what people have never much liked as the future has always been much a gamble. You secure and insure yourself as you can but there are no guaranties outside of religion.

The worst bet is on the promises of politicians.

 

Nosbourne, I suggest you look into taking a few online classes on finance. It might be a welcome distraction from your LLM degree! As a former English major and literature student I really have very little math or business background, but I found that studying finance and investment is really not as hard as I thought it would be.

You're also right on when you say it's gambling. If you study hard on the principles of the market you can reduce the percentage that is gambling, but not by much. I don't believe the government should encourage the habit gambling. Look at lotteries (or as The Onion called them "the poor man's stock market")... they're certainly not encouraging fiscal responsibility either for the people who buy the tickets or the states that rely on the income! I would like to see the government expand programs like TreasuryDirect that make it easy and cheap for people to invest low amounts and encourage saving, not so much gambling; and then also heavily regulate disclosure of information to ensure an open and fair market for those that do choose to gamble, but otherwise stay out of the game.

I also agree with you that the state of financial education in this country is terrible. If anyone wants to get educated on their own, it's all out there to find, but there's such a massive amount of misinformation it's easy to get distracted.

Your strategy with the index fund is not bad. However, there are two problems with it that you've probably already heard about before: 1) historical returns do not guarantee future performance 2) even if the indexed stock market does return a forecasted rate over a span of 20 years, if you're caught in a liquidity crunch and need the money at a certain year, then what if the market is in the middle of a downturn? You'll still have lost money. This last can be a huge problem that totally messes up someone's retirement plan. Of course you could hedge your index with something that performs better when the market is in a downturn, thus reducing your losses, but then you run the risk of over-hedging so that your portfolio always returns 0%.

Personally I prefer managed mutual funds and stocks. There are two pretty good ones especially like because they are mildly socially responsible and look at things like labor practices before they invest. The tickers are ARGFX and PAXWX. ARGFX is fairly risky, but PAXWX is pretty stable because it is a mixed fund that contains both stocks and bonds. Of course, since they've both been doing well lately now may not the good time to get in.

 

The smokescreen of government. That doesn't reduce the gamble but increase the stakes.

 

Does the notion of no false claims of eternal fidelity means that employer and employee should not promise eternal fidelity (period!) or does it mean that they should (gasp!) actually really mean eternal fidelity if they say it?

 

Good points!

Good points Ted:

Speaking of promises, I heard that in the U.K. an airline company has to completely sell all of it's assets to make good on pension promises. In other words, the corporation can't just declare bankruptcy and say "Oh well, you worked for us for 30 years years, too bad!". At some point, promises need to be kept. When an airplane employee signed on to work for XYX company 30 years ago, would not be logical to assume he/she believed their employer would make good on their pension promises? Don't they deserve something? I guess some would argue, well that's just the way it is. That may be the case, but it does not make it right.

Take care Ted!


Abner

 

Yes. People can promise as they will but the wise will know the impossibility of guaranties of future performance.

A contract is good for as long as the contracting parties are willing to fulfill the requirements of the contract. When some party is no longer willing or able to fulfill the requirements of the contract is when it is best to terminate the contract.

Of course if you say it then it is so. That is why there are no divorces.

Would you wish to limit the ability of an employee to leave some particular employment or of a spouse to leave some particular marriage for having been forced to declare some vow to initiate the relationship?

 

"Government smokescreen"? Well, maybe so, but if a U.S. government security is worthless, the value of my stock holdings will be the LEAST of my worries. (Our multi-billion State pension plan is largely in U.S. government securities.)

Since I personally believe that MAJOR inflation will occur in the next five years, I suppose I SHOULD be buying gold and silver bullion. But, whereas I would be quite willing to have a client stake his future freedom on my ability to guess what will sway a judge or jury, I wouldn't bet anyone else's BUS FARE on my financial acumen. So, I'm staying in stocks...

I think that the advantage of the index fund is its diversity. Whatever that means; it's what they say at Motley Fool.

 

Well, the security in a US government security is in the government's ability to tax the members of the productive economy. But an overtaxed productive economy will cease to be productive. Reach that point and we have a Weimar level collapse.

That's why I said you don't reduce the gamble but raise the stakes.

The classic definition of inflation is "too much money chasing too few goods." Have you no faith in Alan "Who is Ayn Rand?" Greenspan?

 

I disagree... because you will incur lots of fees to do that! The safest bet in that scenario is inflation-indexed bonds, such as TIPs or Series I savings bonds.

 

Actually, Decimon, I was looking to see whether anyone would opine as to whether it is ever feasible to contract for the old-style guaranteed lifetime employment that seems to have been the norm from the 1940s until maybe the 1980s. The typical MBAer's answer, based upon his/her B-school brainwashing, is: "Well, you can't fight it! You just gotta go with the flow! Guaranteed lifetime employment is gone and gone forever! Adapt or die!" (Hint: MBAer types are not very good at challenging the way things are or working for change.) I was just wondering whether anyone would attempt an analysis of why guaranteed lifetime employment seems to have worked for about a generation or so but no longer seems to work now. Or whether anyone might be bright enough to visualize whether there could ever be a future time when guaranteed lifetime employment might work again.

That said, I think that there are very definite historical reasons why guaranteed lifetime employment worked so well in the 1940s context. Now, in order for guaranteed lifetime employment to work, both parties must be willing and able to fulfill the terms of the contract. Now, if you remember our history, the people who comprised the workforce of the 1940s had just survived the decade of the Great Depression and many people had essentially lost everything. So, no doubt, many employees were looking for the security of guaranteed lifetime employment. How could businesses offer guaranteed lifetime employment? Economic expansion! After a decade and a half of economic shortages pursuant to depression and war, a lot of pent-up demand was let loose. The United States was probably the only major power that had not suffered widespread economic destruction from the war (hence, all the competitors were flat on their backs). And then there was this little demographic expansion called the Baby Boom (caused, no doubt, by returning GIs "making up for lost time"), which sustained the economic growth for the long haul. So, that, I suppose, explains why guaranteed lifetime employment worked for about a generation. Now, is it possible that some day there might again exist conditions under which guaranteed lifetime employment mifght be do-able? Who knows?

With regards to your questions, Decimon, of course, there always have to be various terms and conditions governing a contract and how or when it might be terminated. For example, two married people may very well have promised "till death do us part." But, should one of the parties to a marriage commence sleeping around, or should one of the parties to a marriage make a habit of beating the other, it would not come as any big surprise if the aggrieved party were to file to have said marriage contract terminated. Of course, we would want a guaranteed lifetime employment contract to include clauses specifying when either the employee or the employer has the right to terminate the contract.

 

I'm sorry but there has never been any guaranty of lifetime emploment in the US and that has never been the norm.

I was born in 1945 and was quite familiar with people whose lives spanned the Depression. My parents, for instance.

And thank you for the excuse to link to this . It's good to see mainstream economists finally realizing what free-market economists have known all along.

 

Interesting! I wonder, though...Herbert Hoover was President in October 1929 when the Crash began. (In slow motion, the crash continued to crash through 1932). Hoover continued in office until March 1933, presiding over a federal government committed to doing NOTHING because running a federal deficit was a major sin and because the market would correct itself if left alone. In that dismal period, productivity, wages and prices continued their awful slide...