"The Smartest Guys in the Room"

[Beet]

I am currently reading this book by journalists Bethany McLean and Peter Elkind, about the fall of Enron, written in 2003. It is shocking. I would say it is as good as anything written today-- better, actually, than most of what is written-- at explaining the current economic crisis.

Basically, McLean and Elkind show how Enron gradually morphed during the 1990s from a natural gas company to a giant hedge fund posing as a natural gas company, how they pioneered tools like mark-to-market, securitization, special purpose vehicles, effect rape of GAAP accounting standards, incestuous relationships with the people who were supposed to be overseeing them, and other financial shenanigans to create a ponzi like mirage of false profits. In the process, Enron became more of an investment bank than a utility company. Because of massive distortions in pay incentives across the company, the CEO, Jeff Skilling, and his top executives, became obsessed with the short term stock price, the actual productive parts of the company were sold off or dwarfed, and they just kept taking on more and more hidden debt and counting that debt as profit until they imploded.

Further, McLean and Elkind show how what happened to Enron was part of much larger and broader forces in the US economy, beginning in the 1980s and exploding in the 1990s. It wasn't just a few bad apples like Lay, Skilling, and Fastow, or even just Enron and Arthur Andersen. The fraud at Enron was aided and abetted by banks and Wall Street, lawyers, and even many analysts. Furthermore it was symbolic of broader trends and it was out in the open for anyone who cared to take a close look at Enron's reports-- only very few actually cared enough to do so. Anyone who had read this book in 2004 or 2005 must have had some inkling that all was not right on Wall Street.

In retrospect, Enron was the Canary in the coalmine. But the collapse of such a large company and the publication of this book, which warned of all of the above weaknesses, failed to prevent Wall Street from repeating Enron's behaviors. The reason is probably that while a few Enron executives went to jail, many others made thousands of even millions and got to keep them. For example, Rebecca Mark, who led Enron's international ventures to $2 billion in loses in her 10 year career, sold $80 million worth of Enron stock at the top and got to keep most of it and avoid charges. In other words, no matter how public, how clearly fraudulent some of this financial behavior is, it will continue to be repeated so long as it is rewarded.

If Geither & Bernanke are borrowing money just to finance more consumption, then there is at least one similarity between Enron and the entire economy, even now: taking on more debt for non-productive purposes, to roll over problems into the future. I don't think it will have an Enron-like end, if only due to the U.S.'s superpower status (which is, at the end of the day, resting on our unchallenged military might) and the fact that our debt is denominated in our own currency. But it's hard to see how it ends well and it's time to start turning the ship immediately.

IMO, a fall in the US dollar and a rise in import prices, even if it causes some inflation in the short term, would not be the worst thing in the world. It would incentivize the US to produce more and consume less. This is where the market was naturally dragging things in 2006 and 2007...

[opebo]

Nonsense.  What is needed is a return to responsible regulation as was implemented in the 1930s and 40s. 

Of course no other countries will allow a substantial fall in the US dollar.

[Southern Senator North Carolina Yankee]

Opebo is right about the other countries. To allow a decrease in the US dollar and thus appreciation of there own currencies in an expanison is one thing but to allow a massive drop the dollar in a Global recession would be catasrophic for especially Export dominated economies like Germany and Japan and for the middle east(continued decline in US oil consum ption). These countries can now respond and not risk internal cristiscm.

But Beet is right that the market was naturally forcing a slow decline in the dollar and thus a decline in our imports and a boom for our exports. The trouble is when 2008 hit the US dollar surged halting export gains and the decline in consumer spending caused our imports to plummet in Q2 and Q3, other countries then bought less of our stuff hitting our economy with a decline in Exports in the 4th Quarter 2008 and 1st Quater 2009. This is where we need to go. The dollar will not start rising with such a trade gap(which is now growing again, despite the decline in imports, because our exports are getting hit now) , it has to narrow and the balance of payments needs to become positive again. I think that if anything causes the GDP to stablised will be the stablising of Exports in either Q2 or Q3(I figure that it the drop in imports occurred over two quarters I think that it would be the same or three for Exports). Without the decline in exports the GDP would have only declined about 4.5% in quarter one. We also need to maintain a 3% -5% savings rate as well. Anything below that would just produce another "economy based on mountain of sand" to quote President Obama. I wonder how much the increased savings rate has actually help stablised the financial sector and prevent a massive catastrophe among small Banks. We need to also get control over consumer credit. Instead of bombarding already indebted College students with credit card offers before they even graduate they should be bombarded with offers of risk free saving and investing options after they graduate. Finally of course we need to have a complete revamping of all our banking regulations dating back to the Depression and a restoration of mark to market accounting as soon as conditions allow for it.

[Southern Senator North Carolina Yankee]

I am currently reading this book by journalists Bethany McLean and Peter Elkind, about the fall of Enron, written in 2003. It is shocking. I would say it is as good as anything written today-- better, actually, than most of what is written-- at explaining the current economic crisis.

Basically, McLean and Elkind show how Enron gradually morphed during the 1990s from a natural gas company to a giant hedge fund posing as a natural gas company, how they pioneered tools like mark-to-market, securitization, special purpose vehicles, effect rape of GAAP accounting standards, incestuous relationships with the people who were supposed to be overseeing them, and other financial shenanigans to create a ponzi like mirage of false profits. In the process, Enron became more of an investment bank than a utility company. Because of massive distortions in pay incentives across the company, the CEO, Jeff Skilling, and his top executives, became obsessed with the short term stock price, the actual productive parts of the company were sold off or dwarfed, and they just kept taking on more and more hidden debt and counting that debt as profit until they imploded.

Further, McLean and Elkind show how what happened to Enron was part of much larger and broader forces in the US economy, beginning in the 1980s and exploding in the 1990s. It wasn't just a few bad apples like Lay, Skilling, and Fastow, or even just Enron and Arthur Andersen. The fraud at Enron was aided and abetted by banks and Wall Street, lawyers, and even many analysts. Furthermore it was symbolic of broader trends and it was out in the open for anyone who cared to take a close look at Enron's reports-- only very few actually cared enough to do so. Anyone who had read this book in 2004 or 2005 must have had some inkling that all was not right on Wall Street.

In retrospect, Enron was the Canary in the coalmine. But the collapse of such a large company and the publication of this book, which warned of all of the above weaknesses, failed to prevent Wall Street from repeating Enron's behaviors. The reason is probably that while a few Enron executives went to jail, many others made thousands of even millions and got to keep them. For example, Rebecca Mark, who led Enron's international ventures to $2 billion in loses in her 10 year career, sold $80 million worth of Enron stock at the top and got to keep most of it and avoid charges. In other words, no matter how public, how clearly fraudulent some of this financial behavior is, it will continue to be repeated so long as it is rewarded.

If Geither & Bernanke are borrowing money just to finance more consumption, then there is at least one similarity between Enron and the entire economy, even now: taking on more debt for non-productive purposes, to roll over problems into the future. I don't think it will have an Enron-like end, if only due to the U.S.'s superpower status (which is, at the end of the day, resting on our unchallenged military might) and the fact that our debt is denominated in our own currency. But it's hard to see how it ends well and it's time to start turning the ship immediately.

IMO, a fall in the US dollar and a rise in import prices, even if it causes some inflation in the short term, would not be the worst thing in the world. It would incentivize the US to produce more and consume less. This is where the market was naturally dragging things in 2006 and 2007...

This is not the fault of deregulation. Over regulation caused the same thing in the Penn Central in the 1960's. You had two doomed companies merged together and then for the sake of survival they hid the truth literally maintaining three different sets of accounting books(The honest one which only CEO Alfred Saunders and CFO Bevan saw, The one for the investors that only they saw, and the one for the regulators that everyone else saw). There were differences with Enron, Two different motivations survival vs. profit, two different causes over regulation vs. deregulation, One same result, Collapse.

[opebo]

This is not the fault of deregulation. Over regulation caused the same thing in the Penn Central in the 1960's. You had two doomed companies merged together and then for the sake of survival they hid the truth literally maintaining three different sets of accounting books(The honest one which only CEO Alfred Saunders and CFO Bevan saw, The one for the investors that only they saw, and the one for the regulators that everyone else saw). There were differences with Enron, Two different motivations survival vs. profit, two different causes over regulation vs. deregulation, One same result, Collapse.

Haha, good lord man, surely you realize that the entire economy has collapsed due to lack of regulation in the present case, while the 1960s were the absolute pinnacle of american economic success and well being..  who the hell cared about or even noticed the fall of one company in the booming 60s?

[Southern Senator North Carolina Yankee]

This is not the fault of deregulation. Over regulation caused the same thing in the Penn Central in the 1960's. You had two doomed companies merged together and then for the sake of survival they hid the truth literally maintaining three different sets of accounting books(The honest one which only CEO Alfred Saunders and CFO Bevan saw, The one for the investors that only they saw, and the one for the regulators that everyone else saw). There were differences with Enron, Two different motivations survival vs. profit, two different causes over regulation vs. deregulation, One same result, Collapse.

Haha, good lord man, surely you realize that the entire economy has collapsed due to lack of regulation in the present case, while the 1960s were the absolute pinnacle of american economic success and well being..  who the hell cared about or even noticed the fall of one company in the booming 60s?

Had that railroad been shut down it would have shut down the Auto and Steel industries in the midwest and Northeast as well as many other industries from ILL to MA and MD to MI. Because of the merger btw the two there was no competition in the NE like there is now or there was before. So when it went bankrupt, yea everyone noticed. It created a panic in Washington, phones ringing off the hook with millions of workers, and business owners screaming at their Congressmen and Senators to do something. Can you imagine the impact if the Steel and Auto industry just shut down in 1970 in one night. The millions that would have been out of work.  It is reason the Nixon administration began deregulation of the railroads. I suggest you read the book "The Men Who Loved Trains". Heres the wikipedia article http://en.wikipedia.org/wiki/Penn_Central_Transportation_Company

THis quote is near the top of that page

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Year I am sure no one cared or noticed

[○∙◄☻¥tπ[╪AV┼cVê└]

Here's our current mess explained.

""I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010" - Senator Byron Dorgan on the repeal of Glass-Steagall in 1999.

[Southern Senator North Carolina Yankee]

Here's our current mess explained.

""I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010" - Senator Byron Dorgan on the repeal of Glass-Steagall in 1999.

Hindsight is 20/20

[○∙◄☻¥tπ[╪AV┼cVê└]

Here's our current mess explained.

""I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010" - Senator Byron Dorgan on the repeal of Glass-Steagall in 1999.

Hindsight is 20/20

Dorgan's forwardsight was 20/20. He clearly warned people against the repeal. For what it's worth, I believe I opposed it at the time, too.

[Southern Senator North Carolina Yankee]

Here's our current mess explained.

""I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010" - Senator Byron Dorgan on the repeal of Glass-Steagall in 1999.

Hindsight is 20/20

Dorgan's forwardsight was 20/20. He clearly warned people against the repeal. For what it's worth, I believe I opposed it at the time, too.

I thought you meant he just said that recently. Well in that case Dorgan truly is an FF. Gramm Leach BLiley was a poorly written. I do not favor complete and utter deregulation as in this case cause of what it leads too. In general I prefer only to regulate when absolutle necessary and when it is necessary I think that regulations should be simple and easily understood making for easier enforcement. We should not go on a regulation binge instead we should learn from our mistakes and instead of going to the extremes, make pratical laws that provide more benefit to the economy then harm. We need to review all our financial regulations going back to the Depression.

[Beet]

...

There is a subtle difference. Regulation hurt the railways' core business by preventing them from taking the physical steps necessary to adjust to changing market conditions (which in some cases, union contracts that tied the hands of the Detroit Three worked the same way).

In this case, Enron's core business (natural gas) was sound, but deregulation of the financial side of its business caused a basic change in incentive structures. Rather than work to try and create the best product in the most efficient way, Enron employees tried to simply make money by trading and manipulating financial numbers. This in turn may or may not lead to significant changes in physical behavior. The key point though, is that it is very widespread that individual actors, even a large number of them, acting in their own self- interest do not necessarily do what is good for the company, or the economy as a whole, in the long run. Financialization, while in theory supposed to make markets work better, because of its complexity is easily manipulated and thus allows the separation of individual payment from value added.

[Sam Spade]

Oh, I agree on Enron being the canary in the coal mine.  Of course, there were other canaries down there, specifically LTCM and the tech company jokes, the latter which were doomed to fail from day one.  But it's the big one (along with WorldCom too).

Glass-Steagall is interesting.  Though the games, including the games at Enron, were occurring before this, Glass-Steagall allowed these games to expand exponentially.

Of course, we want to keep the games going today - cap and trade was a classic Enron idea.

[Southern Senator North Carolina Yankee]

...

There is a subtle difference. Regulation hurt the railways' core business by preventing them from taking the physical steps necessary to adjust to changing market conditions (which in some cases, union contracts that tied the hands of the Detroit Three worked the same way).

In this case, Enron's core business (natural gas) was sound, but deregulation of the financial side of its business caused a basic change in incentive structures. Rather than work to try and create the best product in the most efficient way, Enron employees tried to simply make money by trading and manipulating financial numbers. This in turn may or may not lead to significant changes in physical behavior. The key point though, is that it is very widespread that individual actors, even a large number of them, acting in their own self- interest do not necessarily do what is good for the company, or the economy as a whole, in the long run. Financialization, while in theory supposed to make markets work better, because of its complexity is easily manipulated and thus allows the separation of individual payment from value added.

I believed I mentioned those differences in my first post. I wasn't arguing for or against deregulation I was arguing for caution and reason and that we enact sensible legislation that solves our current problems but doesn't lead to unintended consequences like the impact on small business owners who are hurt the most by regulations.

[Beet]

...

There is a subtle difference. Regulation hurt the railways' core business by preventing them from taking the physical steps necessary to adjust to changing market conditions (which in some cases, union contracts that tied the hands of the Detroit Three worked the same way).

In this case, Enron's core business (natural gas) was sound, but deregulation of the financial side of its business caused a basic change in incentive structures. Rather than work to try and create the best product in the most efficient way, Enron employees tried to simply make money by trading and manipulating financial numbers. This in turn may or may not lead to significant changes in physical behavior. The key point though, is that it is very widespread that individual actors, even a large number of them, acting in their own self- interest do not necessarily do what is good for the company, or the economy as a whole, in the long run. Financialization, while in theory supposed to make markets work better, because of its complexity is easily manipulated and thus allows the separation of individual payment from value added.

I believed I mentioned those differences in my first post. I wasn't arguing for or against deregulation I was arguing for caution and reason and that we enact sensible legislation that solves our current problems but doesn't lead to unintended consequences like the impact on small business owners who are hurt the most by regulations.

Oh, I agree. Sorry that I missed your last sentences in the first post. Another issue is that even if you have the right laws in place, they can be subverted if you have the wrong people/people dynamics.