Posted 9:29 PM by Robert

What Were the Media Smoking In That Gun?

Some people associate The Man Without Qualities with Enron matters, especially the skepticism expressed here regarding the evidence of accounting and related frauds in that case. That is fine.

There is also the quite separate matter of Enron’s role in the recent California energy crisis, a matter in which two memos from Enron’s attorneys Stoel Rives (there are two versions of this memo – one from December 6 and one from December 8) and Brobeck have caused some fuss in the media and the blogospere. The Man Without Qualities has not commented on these memos (or the earlier story about a request by an employee of ISO, the State-created energy network, to Enron that it hike prices in at least one case in order to deny profits to a third party), because I have simply not been able to take the fuss seriously. For example, as Arnold Kling has pointed out, any sensible person with even slight knowledge of how arbitrage works (a group of people that may be smaller than one thinks, since it omits Harvard President Larry Summers, who, well into his economics Professorship at that institution, publicly stated that he believed arbitrageurs had no legitimate role in the economy) who actually reads the memos should be left with the belief that the memos describe almost nothing but ordinary arbitrage moves decorated with silly names (Death Star, Fat Boy, etc). I agree with Mr. Kling. Almost any extensive further discussion is bound to become rant.

It is worth noting a few points to entice the reader to go look at the memos. As the reader may have learned from the media, one memo (the one by Stoel Rives) is supposedly much worse for Enron that the other memo. But even the Stoel memo – described as the worst kind of “smoking gun" by Enron’s critics, such as Paul Krugman - quotes one Enron trader as describing one strategy as the “oldest game in the book” and then goes on to observe that “interestingly, this strategy appears to benefit the reliability of the ISO grid!” Does that sound like a "smoking gun?" The Brobeck memo is much more sophisticated and does much to explain why the Enron tactics did not amount to serious infractions. As Matt Miller put it: “[E]xperts parsing the details [of the “shocking memos] in court will show these practices are largely legal and common, they'll never work as a basis for getting California's money back.” There is one big lesson to be learned from these memos: Do not hire an attorney who has judgment so bad as to use terms in a memo (even a "confidential memo”) he or she writes to you like “Death Star”, “Fat Boy”, etc. instead of more boring terms such as “Strategy 1”, “Strategy 2”, etc.

It is indeed curious how commentators such as Paul Krugman, and even good ones such as Matt Miller, can be moved to rely on complex “conspiracy” theories in connection with Enron. Mr. Krugman finds conspiracies among “energy companies.” He seems to be referring to more than just Enron, but can’t quite seem to find evidence for that other than some unspecified “circumstantial evidence.” Mr. Miller finds a very different conspiracy: “[T]he Bush administration continues a campaign of revenge on Golden State voters. … One insider tells me there's already talk that by disclosing those damning internal Enron memos, the Federal Energy Regulatory Commission (FERC) is shrewdly scheming to leave California in the lurch yet again.”

The Man Without Qualities is never an easy fan of such complex “conspiracies” for reasons described in prior posts, and considers the easy acceptance of conspiracies to be a kind of pretentiousness which is a sign of neither intelligence nor mental health. Without rehearsing the points again, it is enough to say that such conspiracies are extremely hard and expensive to organize, maintain and keep secret, are very likely to be discovered, and have a huge downside if they are discovered. This means they are unlikely and should not be easily inferred for want of another explanation.

True, the releases of the memos have all the characteristics of actions taken by those with serious manipulative political agendas – and such people rarely wish to reveal all they know. But they are even more rarely involved in a complex conspiracy or near conspiracy, because those are a lot of work and hard to organize, and maintain, etc. It is one thing to release a document to the media because one thinks it will advance one’s agenda (that’s done every day and many political reporters rely on such “leaks” for their livings), it is quite another to enter into an agreement or understanding with others to coordinate their actions – especially where the conspiracy would require the cooperation of a great many “others” whose coordination requires the breach of laws, contracts or fiduciary obligations with a high likelihood of discovery.

Here, even Mr. Miller – by far the more rational and insightful of these two writers - at a minimum needs to posit a conspiracy involving the entire FERC (and its staff), and the President (presumably including many of his advisors, close and not-so-close). Does the conspiracy also include the California Republican Party? The California Republican Congressional delegation? How about the millions of California Republicans who had to pay those high rates? And all the sitting United States Attorneys and their assistants in California and Washington DC who are charged with rooting out such conspiracies? What about the bankruptcy judge who has jurisdiction over the Enron case, and the Federal District judge handling the Lerach civil action against Enron and Anderson and hordes of other defendants? Wouldn’t those judges have a right to know if the information they are receiving in their respective cases is false and being manipulated by a White House led “conspiracy.” Shouldn’t Mr. Lerach be adding the President and all the members of the FERC as civil defendants?

Mr. Paul Krugman, suffering a severe relapse into his propensity to see conspiracies in many places, says it “turns out that Enron was indeed rigging the markets, with schemes that had smart-alecky nicknames like Fat Boy, Death Star and Get Shorty. Who said business isn't fun?” Mr. Krugman does not even quote from the “smoking gun” memos other than the “smart-alecky nicknames,” which should alert his readers to the sad prospect that the memos don’t really contain very much to support Mr. Krugman’s thesis. If they did, Mr. Krugman would have included the “smoking gun” language in his column. (Perhaps one could rephrase the argument in elliptical Krugman-speak as something like: “My favorite Krugman assertion was that he had the ability to quote directly from the “smoking gun” memos to support his argument; and that it would have been profitable for him to do so, but he decided not to. That Paul Krugman must be a swell guy!”) Mr. Krugman’s column does not rise above the intellectual equivalent of a stuck-out-tongue. Why answer that in detail?