Remora

Kurt Eichwald, NYT's man on the spot, pens one of those baffled by it all news analyses of Enron's business structure. He notices -- as man and dog tend to do, once their noses are rubbed in it -- the nature of the stuff before him, and gently cries, why, this is not gold dust!

He takes the Cuiaba project -- which we have commented about, back in January was it? -- as an example of a fools gold mislabeled the real stuff. Here's his summary:

"For example, among the examples of failed business dealings cited in the complaint is a power plant construction project in Cuiab�, Brazil. This effort, known as the Cuiab� project, was troubled from the inception, according to the complaint. It rapidly went $120 million over budget and had numerous risks and impediments to keep it from being profitable, the complaint says � problems that were well known throughout Enron.

"The Cuiab� project was so problematic," the complaint says, quoting a statement from an unidentified Enron employee who worked on the effort, "that no buyer would be interested in purchasing the project from Enron."

In the standard world of corporate endeavors, the results of the effort were easily predictable. The doomed project would have to be shut down and then written off, with the marketplace reacting to the stumble in a predictable fashion: Enron shares would drop, the company would remain in the doghouse for a few months, and perhaps a few heads would roll.

But with the partnership scheme described in the complaint, all of that was sidestepped. Instead, Enron shifted enough of the failed project to LJM to remove it from its books, in a transaction that appeared to be a sale. Through that transaction, Enron was able to recognize $65 million in income in the final half of 1999, when it was struggling to meet its financial projections."

Now, why would Enron do that?

The answer, dear reader, is that Enron was just responding to the kind of "entrepeneurial structure" people like Michael Jensen had advised in the 80s. Economists of the red meat school (you know, the ones who want to the poor to work harder in their maquilladoras over the river, so that eventually, as the soil is fertilized with their bones, accumulated over the generations, one of their great great grandchildren might enjoy the rare executive perk) -- yes, the governing classes' shock troop theorists, that is who we are talking about, in a word -- had promoted the idea that no amount was too great for the entrepeneurial exec to earn. Steve Jobs gets one billion dollars for last year? Why, he earned it. Larry Ellison walks off with seven hundred million dollars while his company wallows in shortfalls? He deserves it. These, of course, are the same troopers who we can count on to come out whenever the discussion turns towards raising the minimum wage. Heavens, that just hurts the poor!

So, what do you do? You establish a bonus structure that parallels your accounting structure. The latter is designed to make all deals seem immediately profitable, by various pathetic tricks. And that stimulates the greed gland (located south of the hypothalamus), because guess what? You get a nifty bonus on big deals like that.

Thus, one can only laugh when Eichenwald brings out the true blue market as darwinian force argument:

"But in the end, Enron and its executives were given a harsh lesson about the realities of market discipline. By failing to promptly take their medicine for the wrong-headed mistakes committed over the years, the executives allowed Enron's business problems to build up, hidden behind a thick curtain of obfuscation.Then, finally last year, when errors discovered in the partnerships required certain of them to be moved back onto Enron's books, the curtain began to part."

Right. What executives? Skilling? Out by June, 2001. Lay? Having used the company as a slot machine, by November, 2001, he'd gotten all he was going to get out of the beast. How about Thomas White, our secretary of the Army, and the presumed head of Enron's energy unit? Out by February, 2001, when his stock options were primo. The harsh lesson, here, is for the suckers, not the execs. Folks like the Enron employees who couldn't get their money out of the place when the accounting department froze their 401ks on a technicality.

So what is an exec to do if the rules of the candystore look like they are changing? Well, hit back, and sound the great themes of America, liberty and loot, uh, scratch that, justice for all. The FT has a report on the annual meeting of Pigs of America, uh, scratch that, the Business Council, an annual reunion of CEOs. This kind of gas is being vented at this event:


At the press conference to launch the event on Wednesday, he [Esrey, CEO of Sprint] and other members of the Council's committee pointed out that a combination of new legislation, tighter credit, depressed markets, and stricter regulation was stifling risk-taking at US companies."This is a climate that doesn't reward risk-taking - yet the fundamentals of business are to take prudent risks at the right time," said Carly Fiorina, chief executive of Hewlett-Packard. She said she was pleased that the group had completed its takeover of Compaq Computer already, because in the current environment "you're less likely to undertake bold moves even if you feel they're right".

Bill Harrison, chief executive of JP Morgan Chase, warned that attempts to reform Wall Street - led by Eliot Spitzer, New York attorney-general - might further weaken the sector. "I just hope we don't go too far with these things [so] that we damage what's made Wall Street great and what's made this country great."

What can one say about a JP Morgan man bitching about being investigated for penny ante stuff -- you know, bilking the greedy masses of billions of dollars and the like -- by this Spitzer fella?
Laughter in the dark, laughter in the dark.