Man Without Qualities

Friday, April 15, 2005

The Amazing Shrinking Enron Scandal II: Even The Goat (Mostly) Escapes?

The Economist has also reviewed Kurt Eichenwald's book on the Enron scandal, CONSPIRACY OF FOOLS - A True Story, and (along with the New York Times) construes that book as absolving Messrs. Lay and Skilling of crimes - although not of gross negligence and incompetence - as in this passage:

If Mr Eichenwald is broadly correct, it will make depressing reading for the prosecutors who have accused Enron's former top bosses, Kenneth Lay and Jeffrey Skilling, of being the brains behind this massive fraud. Mr Eichenwald's criminal mastermind is Andrew Fastow, Enron's chief financial officer, who has already admitted numerous offences and is likely to be the main witness against Messrs Lay and Skilling. Mr Eichenwald describes how Mr Fastow and his henchmen, principally Michael Kopper, created a series of investment vehicles - such as LJM, the Raptors and Chewco - that bought assets from Enron, supposedly to reduce the firm's risk but in reality to generate huge fees and profits for Mr Fastow and his chums. Mr Eichenwald leaves the reader with the strong impression that Mr Fastow lacked even a basic understanding of the risks involved in this off-balance-sheet strategy.

As for Mr Lay, he seems to have known presidents George Bush senior and junior far better than he knew what was going on within Enron. Right to the end, he is described as failing to grasp the severity of the problems facing the company he built. Mr Skilling, too, seems entirely unaware of the crimes being orchestrated just below him in the corporate hierarchy - drinking too much, and swinging manically between jovial over-optimism and deep depression. His decision to quit suddenly as Enron's chief executive soon after taking the job (and just weeks before the company's problems started to become clear) comes across as entirely in character and unrelated to the fraud.

The Enron financial statements supposedly misrepresented the risks to which the company was exposed - it is the failure to describe those risks that caused the financial statements to not fairly reflect the financial condition of Enron. But if, as the Economist construes Mr. Eichenwald's presentation, it is true that Mr Fastow lacked even a basic understanding of the risks involved in this off-balance-sheet strategy how true can it be that Mr. Fastow committed intentional fraud in doctoring the Enron financial statements with those very off-balance sheet devices? Doesn't Mr. Eichenwald's approach (as summarized by the Economist) lead to the conclusion that the misrepresentations in Enron's financial statements were the work of a man who simply didn't understand the risks he was misrepresenting? If Mr. Fastow didn't understand those risks, then even his actions would amount to at most gross negligence - which is not a basis of "actual fraud." And by now-common agreement Mr. Fastow was the worst of the bunch and the center of the "conspiracy."

And so it would be that the entire Enron scandal would be exposed as the result of mere gross negligence and incompetence - in effect, a very expensive "O, never mind?" Mr. Eichenwald doesn't actually reach any such conclusion, and actually seems to castigate Mr. Fastow as the master-criminal. But it's hard to see how one becomes a master criminal by misrepresenting risks about which one "lacked even a basic understanding."

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