Man Without Qualities

Thursday, February 14, 2002

“A Conspiracy So Vast …!”

Oliver Stone’s movie, JFK, competes with Plan Nine From Outer Space to be considered the most incoherent and witless creation ever committed to celluloid – but a movie based on the New York Times coverage of the Enron matter would surely threaten both of those trash classics.

As the Stone movie swells to maculate giraffe, a mysterious and wholly-invented “Mr. X” – played with appealing spooky goofiness by Donald Sutherland – “explains” the Kennedy assassination by rattling off a series of unconnected activities that eventually appear to implicate all the United States armed forces, its intelligence services, most foreign governments, the ever-complacent media, Congress, the Vice President, perhaps every male in the Dallas white pages, The Man Who Could, the Woman Who Wouldn’t, Moses, Christopher Columbus …! It is a conspiracy so vast that it keeps its secrets by the simple expedient of leaving virtually no one outside the conspiracy to whom the conspirators could spill the beans!

Not to be outdone, Patrick McGeehan of the New York Times has today discovered in his breathless excitement that Enron's Deals Were Marketed to Companies by Wall Street!

Imagine that. Investment banks sell complex “off-balance-sheet products” to companies to dress up their balance sheets. Perhaps the Times will tomorrow discover that when the businessman knows the publisher, that Newspapers Sometimes Run Puff Pieces About Businessmen In Trouble! It would be a very economical article to produce. Much of the data would be available from unimpeachable sources sitting right down the hall.

The Times article reels off a long list of prominent companies and investment banks involved in these “shady practices” that truly outclasses in spooky tone and sheer silliness Mr. Sutherland’s efforts. Further, although McGeehan never seems to make the connection, it is fairly clear that many major accounting firms other than the hapless Arthur Andersen must have signed off on these transactions. IT IS SURELY A CONSPIRACY SO VAST...!

What the Times and much of the media seem to be having a lot of trouble understanding is that every time the Enron practices are shown to be more widespread, those very practices are more likely to actually NOT have been inconsistent (or at least deliberately inconsistent) with generally accepted accounting principles, applicable disclosure laws and Securities and Exchange Commission regulations and the good faith custom and practice of the accounting profession. What the Times recounts is strong evidence in this direction.

Since the Times and other media have demonized “off-balance-sheet” products, perhaps a simple example would be of some help to those struggling to understand:

1. Suppose the public company Yo-Yo-Dyne owns a Boeing 747, which Yo-Yo-Dyne bought with $100 Million in borrowed money. Yo-Yo-Dyne has mortgaged the aircraft to support that very loan.

2. One day the Chief Financial Officer of Yo-Yo-Dyne tells the board that Wall Street thinks Yo-Yo-Dyne has too much debt on its balance sheet. What can be done? Well, the CFO says, Citigroup says that if Yo-Yo-Dyne sells its aircraft to Citigroup and leases it back for many years then, under generally accepted accounting principles, the $100 Million purchase money aircraft debt is TAKEN OFF THE YO-YO-DYNE BALANCE SHEET! But Yo-Yo-Dyne still gets to use the aircraft just as before.

3. A careful and highly ethical member of the Yo-Yo-Dyne board asks: “But isn’t that aggressive accounting? Wouldn’t we be misleading the market? After all, our principal purpose in doing this transaction is dressing up the balance sheet, even though there may be some other benefits from the transaction that we really don’t care about and are definitely not WHY we are doing it."

4. The CFO replies that the board should not worry because the lease will be a “true lease” (not a fiction or a secret "ownership" of the aircraft), and all accounting rules and practices will be followed. Those benefits that Yo-Yo-Dyne doesn’t care about are nevertheless real, and will justify the transaction under all applicable laws, regulations and practices. After the transaction is done, the structure will be described in the notes to Yo-Yo-Dyne’s financial statements. That is: AN OFF-BALANCE-SHEET TRANSACTION JUST MOVES THE OBLIGATION AND ASSET OFF THE BALANCE SHEET AND ONTO THE FOOTNOTE!

The purpose of the above example is definitely not to suggest that Enron’s transactions were so benign as this simple sale-leaseback. Actual accounting fraud may or may not be demonstrated in the Enron case - although media and political hysteria makes finding the truth difficult. For one thing, Enron’s transactions were far more complicated than what is described above. That complexity created a larger area in which deceptive games might have been played. But complexity also creates more opportunities for good faith and merely negligent errors – or just disagreement with those (such as the Enron executive committee) viewing these transactions with all the benefit of hindsight.

But this much is clear: The more widespread the Enron practices are shown to be, the more likely they were NOT malevolent.

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