the pre-game report

On the eve of the Enron trial, LI watched the Smartest Guys in the Room yesterday. And we scanned the Economist tout sheet of the prosecuted and the let off. Of course, as we know, corporate law is designed, basically, to allow the governing class to rob people without the expense and fuss that comes from having to buy pistols and wave them in various strangers faces. That the prosecution has to prove an epistemological point to the jury – viz, that Skilling and Lay knew they were committing a crime by signing off on various deals to conceal Enron’s debt while pumping its stock, thus making it a crime – is funny in itself, like one of Zeno’s paradoxes – how can you prove someone knowingly committed a crime when the crime depends on knowingly committing it?

If I decide to knock somebody down, steal their credit cards, and use them, the police don’t have to bother convincing the jury that I knew I was committing a crime. But the more money one has, the more murky the line between the criminal and the legal becomes. Law is where class issues can no longer be latent. If they could, the governing class would simply have two sets of laws, one for them and one for the rest of us. That has practically been achieved by Congress and your state legislature, anyway, but they put both those laws together in one lawbook.

Of course, far be it from LI to discourage entrepreneurship. We surely don’t want to do that.

In LI’s opinion, Lay’s defense, here, should be watched carefully by the employee and investors he ripped off, since the defense is basically that he collected his total what, 400 million from his time at the company by doing one of the most pisspoor jobs ever concocted by a timeserving CEO supermensch. Useful info to have at the civil trial – although it is funny, corporate shills complain all of the time of useless due diligence laws and corporate greenmail by greedy lawyers, but outrageous fraud never seems to fall under these laws.

This, of course, was one of the things Enron, the movie, chose not to concentrate on, which is too bad, although understandable. They made the decision to be serious and not to juice up their account with the effects of unearned wealth on Enron’s bright lights. But … iIt wasn’t that the sex and money story line was peripheral to what happened at Enron – it was central. Rich Kinder, whose resignation moved Skilling into the top spot at Enron, resigned because he was having an affair with Ken Lay’s secretary – and Lay didn’t like it, although of course his second wife was his previous secretary, with whom he’d had an affair until he divorced his first and married her. They actually interviewed Amanda Martin for much of the Smartest Guys in the Room without ever explaining that she had a pretty well publicized affair with Ken Rice, one of the great looters at Enron – a dealmaker whose time as the head of the Enron Broadband division was one of the great jokes of the company. He spent more time, by all accounts, worrying about getting ever new motorcycles on Enron expense accounts “for” the division than he did about anything so mundane as the business itself, and what did he carry away from those grueling, three hour days? 53 million, more or less. It is very hard making decisions about which motorcycle your divison will use as its motorcycle symbol, as we all know. That is why we have to pay our upper management so well. They are so, well, smart.

Skilling actually is going to face the hottest time about the Broadband scam, which was a more than usually egregious goldbricking effort – a scheme that depended the synergy between Enron’s pipes and optical fiber, don’tcha know, and how all those easements and that infrastructure put Enron in the primo position to wire every household in America and pump in the videos.

And we are also all going to OZ on my balloon…

According to Elkind and Bethany McClean's must-read (if you care about Enron, you have to accept that tired clichĂ© in the case of two reporters who became central to the Enron unwinding) in this week’s Fortune, Rice and Causey are going to lighten the prosecutorial task as they have made deals to keep them from spening too much time away from the various millions that were left over from the fines. In the case of white collar law, unlike, say, bank robbery, you get to keep a considerable portion of your loot. We will see, although the preliminaries don't look good -- the government should combat completely the idea that this case is too complicated. Any housewife or bowling alley attendent knows how earmarked money works. The prosecutors should look to seed the jury with the divorced, because what Enron did is, on a grand scale, what many a husband seeks to do in divorce cases -- hide assets. In this case, negative assets. Lay, unlike HealthSouth’s Scrushy, is not a personable man – he is an arrogant prick, and is seemingly even unaware that he is an arrogant prick. He is the same man who used the Enron corporate jet to shuttle his kids to the French Riviera like it was a taxi-cab, all of course on the company ticket. Well, you have to do things like that, as any economist can tell you, to align the interests of the truly brilliant management with the company. Economists in the middle ages made the same kind of arguments for droit de seigneur. Economists exist to excuse the inexcusable – theologians of the pathomarkets.

ps – there are couple of warnings to take to Smartest Guys in the Room One is that there is a gaping hole in the political story told in the movie. The hole is the hand in glove relationship of Enron and the Clinton administration. The Hollywood affection for the Elvis president makes this kind of thing, apparently, hard to see. Simply put, the waiver by Wendy Gramm that allowed Enron to operate in the energy market largely without regulation was continued in the Clinton years even as it became obvious that that Enron was operating as a bank. The India deal became an issue between the U.S and India, as Clinton’s Commerce department, under Ron Brown, put pressure on India to cooperate with Enron, even as it became apparent that Enron had built the equivalent, in energy terms, of the Spruce Goose in India. The neo-liberals at Treasury and Commerce made it very hard for Latin American governments to resist privatizing water, for instance, which was another large Enron project – under Rebecca Mark, Enron ended up owning Buenos Aires Water. And to treat Gray Davis as the martyr of the brownouts is to understand nothing of the (legally) peculating Dem administration which put through the deregulatory program. Alas, in a discourse in which the only sides allowable are Clinton and Bush, how a company like Enron operates is essentially hidden. Maybe that is the reason for the pseudo-division? That energy should have been privatized in the first place, or deregulated, was unquestioned, even though the reasons for it were clearly either untrue or unproven. Almost all energy deregulation feathered in large, sometimes absurdly large, provisions for energy companies that had crippled themselves building unnecessary, expensive nuclear power plants – another boondoggle that went by the name of synergy and that energy execs love to foist off on gullible populations, and not only Iranian ones.

The second is more puzzling. While the film explains mark to market accounting, it doesn't really explain why it didn't work at Enron. While it is true that the way Enron used it was not good, mark to market accounting does have some good effects in theory -- for instance, it smooths out turbulence markets in goods, like natural gas, in which turbulence can act as a bar to use. The problems that can come with mark to market accounting -- massaging the numbers -- were aggravated not by the accounting itself, but by the parallel set up of the "incentive" structure. Dealers at Enron gained bonuses not on real profits, but on book profits. Enron basically screwed itself out of the advantage it could take from mark to market accounting by distributing benefits, asymmetrically, to the management. This is why Rebecca Mark, who, conservatively, cost the company 1 to 2 billion dollars with the massive losses in India and from the water purchases, could cash out with 84 million dollars, and Ken Rice could run the broadband division, that lost 30 million, and gain options worth 30 million. In essence, the company set up an incentive structure in which the incentive was to cheat the company.

And of course the dealers proceeded to bleed Enron. Something like 1.3 billion was taken out of it by execs in the last two or three years, according to Robert Bryce.