Lessons of Enron: How could no one have seen it?
Bankruptcy forces a look at accounting, Wall Street practices, and pension plans.
NEW YORK AND BOSTON
The company had fabricated revenues. Wall Street, which had run the stock price up, was fooled. Thousands of people lost their life savings. Regulators scrambled to pick up the pieces while Congress held hearings to determine what went wrong.Skip to next paragraph
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No, it's not Enron. The company in question was Equity Funding, an insurance firm based in Los Angeles that went bust in 1973.
Flameouts have long been a feature of American business. In fact, every few years, a new scandal seems to surface, often with the same ingredients: corporate greed, gullible accountants, high-powered connections, and broke investors.
But the latest such collapse is a particularly spectacular one. The name "Enron" has already become shorthand for "disaster," a symbol of what can go wrong when hubris spreads through an executive suite and financial reports become a skim coat over wide cracks in finances.
If nothing else, Enron's collapse will prompt a hard look at accounting practices, retirement plans, and other key aspects of US capitalism - as well as the enforcement powers of the Securities and Exchange Commission.
"When the seventh-largest corporation crashes and burns, the wreckage is diverse and scatters in many directions," says Robert Reischauer, president of the Urban Institute in Washington.
The degree to which Enron has fallen is summed up by the fact that its stock may now be worth more as a souvenir than as a certificate of ownership. Bob Kerstein, an accountant and financial historian, is offering Enron stock certificates on his collector web site, Scripophily.com, at $100 a pop. Or he was - right now he's sold out.
Thus a firm that once was seen as an economic pioneer is now keeping company with Disney figurines and pillows crocheted with sayings that purport to be witty.
"They will be great collectibles," says Mr. Kerstein of the Enron certificates.
Not that scandal in the financial markets is anything new. In the 1920s, for example, investors bought shares in Grey Goose Airways, which promised to build a plane with wings that flapped.
Even after the Securities and Exchange Commission started patrolling the markets in 1934, fraud-tinged bankruptcies continued. In recent years, large corporate collapses have included that of the Bank for Commerce and Credit International (BCCI), which entangled Washington insiders, and Lincoln Savings Bank, which cast a long shadow over Congress.
Only two years ago, the SEC brought fraud charges against the executives of Cendant Corp. - a corporate bust that costs investors billions.
"History just repeats itself - fraud and greed," says Kerstein.
One of the reasons for the modern-day scandals could be changes on Wall Street itself.
In the past, most brokers made their money on commissions earned from the buying and selling of stock. This led Wall Street firms to employ stock analysts who scrutinized earnings statements looking for clues about the basic business. The analysts issued buy or sell recommendations, which could result in commissions.
Yet commissions have dropped dramatically over the past 20 years, particularly with the advent of discount brokers and online trading companies. As a result many brokers have downsized their research staff.
The role of the analyst has changed, too, says Don Straszheim, a former chief economist at a big securities firm.
"The analyst is much more focused on how can I bring investment banking business to the firm instead of providing valuable investment advice to the institutional investors," says Mr. Straszheim of Straszheim Global Advisers in Westwood, Calif.
This shift was most noticeable during the 1990s when the dot.com boom took off. Recruiters on Wall Street looked for analysts who could attract new business. They got paid $10 million or more. And many of those analysts became deeply committed to the companies they had helped finance.