Man Without Qualities

Wednesday, July 24, 2002

Reasonable Procedures

J.P. Morgan and Citigroup both say that they did no major wrong in their relationships with Enron.

The Man Without Qualities believes that is probably objectively correct, for all of the reasons described in previous posts. But both banks will have to contend with the obvious facts that the standards are being changed on them ex post facto.

Also, just because the banks probably did no major wrong doesn't mean they didn't know all about what Enron was up to, or that they didn't grasp the significance of what Enron was up to. To that extent the banks' current positions - which assert that they, too, were bamboozled by Enron - may ultimately result in a great deal of trouble for the banks and their representatives, including under the False Statements Act.

No, these banks and their representatives almost certainly knew everything they needed to know about Enron's finances and accounting, especially as to how the banks' own products were being disclosed. The banks may even have had doubts about Enron's disclosure. But they also probably concluded that a reasonable person could conclude that what Enron was doing was within the envelope of reasonable business judgement and procedures - relying in part on Arthur Andersen to reach that level of comfort. All of that is consistent with similar processes leading, say, the Enron board of directors to similar deferential conclusions. It's the same infinitely receding hall of mirrors that characterizes most serious questions of corporate responsibility.

Perhaps the board and these banks should have looked harder and thought more for themselves. They may have been negligent. Perhaps seriously negligent. They may be held accountable for more than that.

But it is interesting that while the feds are apparently towing away members of the Rigas family and their entourage by the truckload in handcuffs today for alleged bank fraud and the like, nobody at Enron or Andersen - and now Morgan and Citibank - has yet to be indicted.

How long has it been now?

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