1/18/2002 12:00:00 AM - George Will
WASHINGTON--Jeff Skilling, Enron's CEO until last August, who less than two years ago said Enron's stock, then at $80, should sell for $126, also said traditional companies like ExxonMobil ``will topple over from their own weight.'' Today the unbearable lightness of being Enron (stock price when trading was suspended Tuesday: 67 cents) proves that the famously innovative company pioneered a new way to topple.
Eleven months ago Skilling impatiently told Bethany McLean of Fortune: ``Our business is not a black box. It's very simple to model. People who raise questions are people who have not gone through it in detail.'' That was exactly wrong. Enron thrived partly on the sloth of Wall Street analysts uninterested in details or reluctant to admit that there are things they do not understand--things like Enron's deliberately opaque and possibly illegal relationship with various ``partnerships'' run by Enron officers.
Problems revealed by Enron's collapse are rooted in recent changes in the legal, financial and accounting professions. Sandy Williams, a Foley & Lardner attorney specializing in energy matters, believes the trouble began with an epidemic of aggressiveness in the 1980s, when all three professions began to think of themselves as ``can do'' people--``problem solvers'' who ``think outside the box.''
But sometimes the box is there for a reason, such as protecting human beings from human nature. Sometimes clients need ``can't do that'' advisers who protect clients from themselves.
The increased use of stock options as compensation was, Williams says, supposed to have the salutary effect of getting corporate executives to inhabit the same economic universe as shareholders. However, the result was a hyperaggressive management cadre continually trying to impress stock analysts with ambitious targets for the growth in stock values. When the targets were met, the analysts raised the bar. Sometimes the ever-higher expectations could not be met without financial and accounting practices that were the equivalent of steroids.
Executives pursuing bonuses were fixated on quarterly estimates, as were the analysts who represented brokerages that were chasing investment bank business. Analysts give advice away. They are attention-grabbers. So analysts sometimes are instruments for pumping up the value of a stock, thereby attracting the sort of huge fees that Enron distributed to Wall Street for financial services.
Enron's implosion should not, but nevertheless may, have three immediate consequences, one of them constitutional:
--There are serious arguments for Vice President Cheney's resistance to congressional attempts to force the release of information on meetings his energy task force held with industry executives when formulating administration energy policy. The arguments pertain to the confidentiality, hence the forthrightness and quality, of executive branch deliberations. But resisting Congress will be politically difficult in the Enron aftermath.
--Enron's assiduous, not to say promiscuous, cultivation of both parties with contributions bought no Washington help in Enron's terminal crisis. Indeed, Washington probably was particularly unhelpful because it was wary of perceptions arising from Enron's largess. Nevertheless, this event will be used to justify more government regulation of political giving and spending.
--Congressional opponents of partial privatization of Social Security will recklessly use the mismanagement of one company to foment general fear of equities markets. The mess that California made of energy deregulation last year would have been about as costly even if Enron had never existed. However, Gov. Gray Davis' re-election campaign this year will be made easier by blaming Enron.
Washington's benign neglect of Enron's pleas for help with its credit rating indicates something has been learned since 1979. Then a New York financial consultant was asked his opinion of the Carter administration's plan for a bailout of the Chrysler Corp. The consultant said: The danger is not that the bailout will fail but that it will succeed. Then government policy will be to rescue all ``TBTF'' private sector entities--those supposedly ``too big to fail.'' The consultant was Alan Greenspan.
A TBTF policy breeds moral hazard--incentives for bad behavior. Entities that assume there are government safety nets beneath them will take more risks than prudence would otherwise permit. Lenders who recently exposed themselves to large losses in Argentina remembered the 1995 rescue of reckless lenders to Mexico. It is axiomatic: Minimizing the consequences of folly maximizes the amount of folly.
However, the primary cause of Enron's collapse was not risky behavior arising from belief in a net under them. Rather, the cause was the growing arrogance of executives who became confident that no one was looking over their shoulders, watching--and understanding--what they were doing.