Asymmetrical Information

If Mr Delong emails me, I will be quite happy to put him in touch with reputable and knowlegeable people, not paid to do so, who believe that Skilling and Lay, at the very least, may be innocent.

You fail to understand that DeLong is simply not interested in information that fails to confirm his theory. Why do you think he deletes virtually all comments on his blog that present dissenting information (and then bans the commenters)? Because he's interested in what they have to say? I think not.

Running the risk of asking a stupid question:
I haven't followed the case all that closely, but last time I looked the "pump and dump" theory of Enronomics had been killed off evidence that Enron's balance sheet had no big income holes in it at the time of the collapse.

Huh?

but how can a moral person be unwilling to watch that which they are eager to do?

Come on Jane, that argument's too simple to be true. Most people have no problem with authorizing the killing of animals for food, but, "If you like sausage, you shouldn't watch it being made." (Or was that laws?)

And I would argue that if you are not willing to personally slaughter an animal, you should not eat meat . . .

Before you ask, yes I do, and yes I have.

We know that this is true; we do almost nothing to prevent it; and we send people there anyway.

And if we're California Attorney General Bill Lockyer, we make jokes about it and Kenneth Lay.

I admit some appeal to your argument; there's actually a reasonable case that involuntary imprisonment for a long period of time is worse than, say, waterboarding.

Jane Galt, of course Lay and Skilling could have taken pleas like their co-defendant Causey.

And why didn't you tell us Skilling and Lay were bound to be convicted back when we could have made some money off of this information by betting for conviction on tradesports. In fact convictions were not certain except in hindsight.

And it is not true that the only solid evidence against Skilling and Lay came from Fastow. Enron was hopelessly insolvent with books which bore no relation to reality. It is no great stretch to find Skilling and Lay criminally responsible for this.

I recall the relevant phrase is, "Ask a stupid question, get a stupid answer" -- so it seems to me that Mssr. Delong dropped himself right into a cocked hat with that setup.

However, I am VERY curious about this:

"...evidence that Enron's balance sheet had no big income holes in it at the time of the collapse..."

My understanding is, the balance sheet DID have big holes, created by Fastow's practice of establishing entities that financed each other. The "bank run" effect was the death blow, without which Enron may have survived in some form. (Reportedly AOL had done something similar to Enron in its own dealings, but made a clean getaway with the cash obtained by the Time Warner buyout/merger.) But "no big holes"? Where does that come from?

JG,

Some actual Pluck!~

You go Girl!

It is important to realize here that the issue tried in the Lay/Skilling case was not "Who is responsible for the fall of Enron?" but rather whether Lay and Skilling committed specific acts of fraud, i.e., intentional deception. That is a much, much simpler question.

It is oversimplifying but not by much to say that the law here is as follows: The prosecutor has to show (1) on date D, the defendant knew X, but (2) on date D+1, the defendant told somebody not-X, and (3) the defendant had a reason to lie when he said not-X.

Often (1) and (2) can be established by documents -- corporate memoranda, filings with the SEC, transcripts of investor calls, etc. Point (3) is often obvious.

To make that more concrete: Suppose CFO gets a memo from corporate accounting dated June 1 that says sales won't be more than $100 million for the quarter. On June 2, CFO says on an investor call that he expects sales to be in excess of $200 million for the quarter, and the stock soars. On June 3, CFO cashes in a bunch of options. That's a cut-and-dried fraud case that you can make with three documents: the June 1 memo, the June 2 transcript, and the June 3 brokerage statement. The Lay/Skilling case was more complicated, but the template is the same.

Cases of this type are not fundamentally different from a passing-bad-checks case or any other fraud case routinely tried to a jury.

Keeping that in mind, it seems to me that JG's objections to DeLong's conclusions aren't particularly specific to this case or even to white collar prosecutions in general. Yes, people flip on co-conspirators, and it's not always the least guilty person who gets the best deal. Yes, juries do not always reach the right decision. Yes, jail is a blunt instrument. But those concerns are just as applicable to a run-of-the-mill narcotics trafficking case, which for the most part is DeLong's point.

Megan,

An interesting and thought provoking article. You'd do well in a courtroom raising "reasonable doubt".

However, one thing you missed out on.

If Skilling and/or Lay were actually innocent, but their conviction was very likely because of the public pressure associated with the case, then surely their best strategy was complete openness and co-operation with the prosecution instead of the standard court-room games? There is no law saying you have to be adversarial unless you have made a plea bargain, after all.

Of course, in an ideal world, this would be the best strategy for ANY innocent person.

One faces the tricky issue of evaluating the executives for having created 'plausable deniability.' It disappointed me that Scrushy in his major case with the government was able to achieve that. In the case of Lay and Skilling, the indicators pointed to their having attempted to create it. The recent brouhaha re: the 'Path to 9/11' illustrates the method well. The argument for Clinton was that Tenet hadn't 'gone to him to ask' re: an operation against bin Laden but there is the suggestion that it was bruited to him institutionally and personally not to do so (for reasons of plausable deniability on Clinton's part). Heck, you ask the public to 'fess up and change to caning prisoners and, in the process, compare that to our current plausable deniability with regard to what happens in prisons.

Agree with Al that DeLong is not much interested in debate. I suspect that as a professor of impressionable students, the temptation to only retain comments that help make you look good must be overwhelming.

That said, I agree with much of what he says here, although I find his snarky "stupid" comment obnoxious, and typical of his kind. It's often just a lazy way to dismiss those you disagree with. Perhaps his target is stupid in the same way as Reagan and GWB?

I don't agree that Fastow should get a pass on jail just because it is barbaric. After all, we put other non-violent criminals there rather than find some other method of punishment.

The common perception is that Lay, Skilling et. al. were engaged in a fraud in which they used bad accounting to hide declining earnings, which were eating a hole in their balance sheets. Essentially what they are supposed to have done is used Special Purpose Vehicles, whose profitability was tied to the Enron stock price, to inflate their earnings in order to hide holes elsewhere. They did this in order to cash in on their stock options before the house of cards came tumbling down. But as I understand it, the government's indictment does not support this belief; apparently, the balance sheet was fine. The government's case rested on improperly concealing volatility, which would presumably have created future problems, but hadn't yet. The problem with this is twofold; Skilling/Lay said it wasn't true (I didn't follow the case closely enough to know whether they were full of it or not) and that the SPE's were created for valid accounting purposes before Fastow looted them; and the volatility might not have tanked the company. So it does seem to have been the frenzy that followed Fastow's exposure, rather than actual underlying problems, that brought Enron down. Enron was basically a financial firm, and no financial firm, no matter how basically sound, can survive having its credit destroyed.

That doesn't mean the firm was sound underneath; perhaps its volatility exposures really were scary and enormous (I don't know how big these exposures were relative to the rest of the company, for example). But my understanding the firm didn't go under because it wasn't making money at the time of the collapse; the government seems to be saying that it was. If the government's indictment was correct, they were the equivalent of LTCM a year before the Russian bond debacle.

I'd still like to know Kenny-Boy Lay's real cause of death. That official "heart disease" version is about as believeable as the National Enquirer.

The major problem with these cases was that people had been doing this openly with no problems from the government. AOL's capitalising of its CD giveaways being the most brash example.

The sad part is that the worst scandal, MCI-Worldcom, didn't get anywhere near as much publicity or villification as it deserved. Capitalisig maintenance costs!!! But Enron touched a nerve somehow, and became this big fraud.

The same tragedy sideswiped Olis into serious jail time (now reduced to 6 years) for a debatable call on an accounting treatment. It is a very bad idea to criminalise disputes over the accounting treatment of a given transaction, especially when it's in a grey area (capitalising marketing or maintenance spend is very much not a grey area, but is treated as such by prosecutors). This is just one part of the destruction inflicted on our economy and society by the vicious ideology and envy of Democrats as exemplified by BJD.

BJD is a Maoist bully, and he's a Berkeley Prof. Shocking.

What happened at Enron will be the subject of business case studies for decades. However, what happened was predictable and was the direct result of the accounting industry's yielding to demands from financial analysts for "forward looking" financial statements. Accountants, until the mid-1980s were nothing more than scorekeepers. They produced statements that were based on "historical cost". Financial analysts demanded financial statements that did a better job of predicting future cash flows and values. This was a mistake, just as it would be a mistake to ask the scorekeeper to tell you who won the game before it's been played. Still, it's what the users of financial statements wanted.

Reluctantly, the accounting industry agreed. At first, only marketable securities were carried on a "current value" rather than an "historical cost" basis. Over time, more assets were reported using an other-than-historical-cost approach. Plenty of professionals, both academics and practicing accountants, warned that permitting companies to report their assets on a current value basis -- without any requirement of arms length transactions to measure value -- would cause significant misstatements of income (whether intentional or not). Bringing into income the estimated increase (or decrease) in a firm's assets may make the financial statements more useful; it's certain to make them less accurate.

Which brings us to the Special Purpose Entities (SPE) used by Enron. The new accounting rules made the SPEs use by Enron (and many other firms) possible. The purpose of the SPEs was to allow Enron to currently book the income they expected to earn over the life of a bundle of contracts. (The contracts were used to fund the SPE. Under the new accounting rules, Enron was required to "mark to market" it's interest in the SPE -- bringing into income the current estimated value of the contracts, which reflected the estimated present value of the income Enron expected to earn over the life of the contracts.) Far from smoothing Enron's income, this approach risked greatly amplifying volatility: If a set of contracts has a "duration" of 10 years, a slight change in the underlying price of the commodity can have a significant impact on the contracts' value and, thus, income. For as long as Enron bet in the right direction, the SPEs generated accelerating increases in Enron's earnings. (Absent the SPEs, Enron would have only recognized the income on each contract as it was earned.) However, when the energy market moved against Enron, the SPEs magnified that result. As Jane said, a credit crisis ensued and Enron was doomed.

Does this mean that Lay, Skilling, et al, did nothing wrong? No. It means that they could have behaved in a perfectly legal manner and Enron still would have blown up in their faces. As happens with hedge fund managers from time to time, very smart people can sometimes get crushed when the markets move against them. It does not require that the firm (or their accountants) did anything illegal or unethical.

I sat on a jury once where a murder had made a plea bargan for a reduced sentence to testify against the person who gave him the gun. Under the law the a person who knowingly supplies a murder weapon is as guilty of murder as the person who pulls the trigger. The jury was so outraged they would not convict the defendent of murder, only for gun possession. This sort of thing is all to common in our justice system so why only protest when it is white collar crime.
As for punishment, I like the idea of setting up colonial style stocks, and letting everyone who lost money throw rotten tomatoes at them. You could make it a traveling road show to give everyone a chance.

Jane Galt, The SPE's had no valid accounting purpose unless you believe hiding the true condition of a company to be a valid accounting purpose. The SPE's were created to make Enron's books look better than was justified by the true economic condition of the company.

As I understand it, Enron was borrowing against an earnings stream that didn't actually exist. When this was revealed it was obvious that Enron could not service its debts. In other words it was hopelessly insolvent.

There is a small (but I believe growing) school of thought on Enron which argues that Enron was a fairly healthy business--done in not by deteriorating financials, papered over by accounting fraud, but rather by a collapse in trust in the market place, helped along by appallingly bad financial journalism, which basically caused a bank run. Since Enron was a trading operation, which requires liquidity to stay in business, profitability was irrelevant; they were killed by a credit crunch.

I am curious about something, Jane. Who, exactly, constitutes this "small but growing school" of independent analysts who have reached conclusions that almost precisely match the Jeff Skilling spin on Why Jeff Skilling Bore No Responsibility For Enron's Going Bankrupt? Where have they published their solid, rigorous analyses supporting such a claim? Who are these supposedly "bad" financial journalists who brought Enron down with their terrible reporting?

Well, the infamous Jason Leopold, for one, who wrote many of Dow Jones' Enron stories, as well as the one for Salon that got him and Paul Krugman in trouble via the mythical Thomas White email.

I don't think there is any question that the reporting on Enron was appalling. Over and over, I read about some supposedly scurrilous accounting practice that turned out to be standard in the industry. The accounting professors I talked to had difficulty getting a handle on what had happened, because so much of what they read was clearly ridiculous.

More broadly, it seems clear at this point that the credit collapse, rather than unprofitability, is what brought Enron down; on a cash basis, hte business was all right.

James Shearer, there are legitimate reasons to use SPE's, and most of the ones employed by Enron appear to have been reasonable structures used to isolate liability on energy development projects from the parent company by keeping them at arm's length. There are somewhere between 6-8 questionable ones (the "Raptors", and the other ones whose name temporarily escapes me) that Skilling claims were legit hedges against investments, and the prosecutors say were fraudulent. However, even given that they were fraudulent, it's not clear to me that they were big enough to make the company insolvent. (As I say, I haven't studied it that closely . . . but it doesn't sound like you have either.) After all, AFAIK the ratings agencies knew all about them, except for Fastow's criminal activities, so their revelation should not in itself have given the market much new information about creditworthiness.

It now seems to reasonable to believe that it was the credit collapse, rather than an actually unsustainable business model, that did Enron in. Whether the volatility problems *would* have done the company in in the future is a question I have no opinion on. I'm not claiming that Skilling and Lay were innocent. I'm claiming a) The their innocence was irrelevant to their conviction b) that Fastow, the most clearly guilty person got the lightest sentence and c) that most people are absurdly ignorant of what actually happened in Enron. They're the Mike Milkens of the new millenium; if you ask most people what Milken did wrong, they'll tell you "junk bonds", even though this was a) not illegal and b) not what he was convicted of and c) not even why the SEC was mad enough at him to pursue him on a trivial stock parking charge.

I note, in passing, that if Skilling were innocent, then his explanation of what happened would be . . . what actually happened, and believing it would be no more wacky than believing Cory Maye's version of events over that of the local cops. And if your question is "Do I know of people, not in Skilling's employ, who are qualified to judge and believe this version of events?" then yes I do. I am not going to print their names on my weblog, because that's not my place. But I've never met Skilling, don't have a dog in this fight, and am not attempting to advance any particular theory of his innocence.

The question of "Why not worry about this stuff when it happens on a small scale?" is worth answering, because I do worry about those things. It's just that these guys are famous, so they make a good illustration. I am willing to believe that prosecutors might have cut a deal to make headlines in this case precisely because I believe that such things happen all the time to poorer and darker skinned people who have the misfortune of being accused of . . . er . . . blue collar crimes?

Jane Galt, Fastow hasn't been sentenced yet but if he gets the agreed 10 years this is not the lightest sentence. Most of the other Enron defendants including Causey pled out for less. 10 years is not a light sentence for a cooperating witness. For example Sammy "the Bull" Gravano got 5 years.

As for your other comments to put it bluntly I don't think you know what you are talking about. Do you have some references for your claims that Enron was basically healthy?

how can a moral person be unwilling to watch that which they are eager to do?

Should we make everyone who eats at a steakhouse watch the slaughter of the cow that provided their upcoming meal?

What twits like Delong never consider is that abusive prosecutorial techniques developed prosecuting enron like cases will soon be used against less well off citizens in other courts.

Excellent coverage of the Enron trial and some of the legal issues involved can be found on the blog of a Houston attorney at this link Houston's Clear Thinkers, lay skilling trial coverage

One of the biggest abuses was the way the prosecution prevented any exculpatory testimony to make it's way into the trial.

"the Enron Task Force refused Ken Lay and Jeff Skilling's request to have the prosecution recommend to U.S. District Judge Sim Lake that half-a-dozen former high-level Enron executives who have declined to testify during the trial on Fifth Amendment grounds be granted immunity from having their testimony used against them in a subsequent prosecution.

Those witnesses -- several of whom have been mentioned prominently in testimony during the trial -- would likely provide exculpatory testimony for Lay and Skilling if they were to testify. The Lay-Skilling defense team limited their immunity request to those six witnesses even though the Task Force fingered the unprecedented number of the Task Force identified over 100 former Enron executives as unindicted co-conspirators in the case for the transparent purpose of preventing the jury from hearing the full story of what happened at Enron."

Houston's Clear Thinkers, main blog

OK. I'll bite. Who?

Imprisonment has one advantage that other punishments do not -- it keeps the criminal off the streets, where he can victimize the innocent. Given recidivism probabilities on violent offenders, a three-strikes-and-you're-out approach to non-murder violent felonies (two floggings and then life imprisonment with a sentence of hard labor) would be reasonable.

I have no objection to the desth penalty beyond the potential error rate, but I'd reserve it for persons already serving a life sentence (or fugitive from justice after being so senenced) who subsequently commits homicide, or persons who commit homicide with intent to escape criminal punishment (you kill a cop to escape, a witness so he can't testify, or a few other, rarer scenarios such as murder for purposes of judge/prosecutor/juror intimidation).

And sure, televise it; it won't change things. Executions used to be public entertainment, and it was dignified sentiment against the yahoos who watched that brought its end. (Well, the French made executions non-public because too many people used their executions to grandstand . . .)

>Morally, I should think a public whipping post vastly preferable--and more effective--than a one-year jail term.

At my public high school in the mid-1990s, male students who received detention were given the option of getting paddled instead of serving the detention. Despite the fact that it involved a fairly serious whooping, delivered by a burly shop teacher with a 3/4-inch-thick paddle into which he had drilled holes so it could be swung faster, it was a surprisingly popular option. Popular enough that the female students complained that the boys got to take their whooping and go to football practice and the girls had no other option but to sit there and stew for two hours.

Anecdote /= data; make of this what you will.

I haven't followed the trial coverage closely, but I did read Rebecca Smith and John R. Emshwiller's Enron post-mortem, 28 Days. (Smith and Emshwiller were the WSJ reporters that initiated much of the early Enron coverage and followed it closely thereafter.)

It's been a while since that reading, but from what I recall, the SPEs in question were of questionable use from the very beginning and wholly rotten by the time Fastow was finished with them; and Lay's and Skilling's exact involvement was an unsettled question that possibly only Fastow could answer for certain (or make up).

I'd still like to know Kenny-Boy Lay's real cause of death. That official "heart disease" version is about as believeable as the National Enquirer.

Yup, it's pretty rare for older men who have spent their lives in high-stress environments at the helms of high-growth businesses to succumb to heart disease and...wait, what?

Do you have some references for your claims that Enron was basically healthy?

Once again, I'd like to see these, too.

I guess your reference to Jason Leopold was supposed to answer my question about "bad financial journalist." I'd be a lot more persuaded if you had referred to even a handful of specific errors in his coverage of the case, rather than an irrelevant allusion to the Thomas White story.

One element that bears mentioning is Enron's corporate culture.

In the early / mid-90s I worked with Enron, and their approach to our service provision (worldwide project support) was unmitigated arrogance. Hands down, the most arrogant clients we ever dealt with.

Though that is anectodal, it's consistent with everything I've read in the meantime about Enron's internal mindset.

And while a) arrogance is of course not illegal, b) in certain industry segements it's practically de rigeur, and c) I have no idea whether the Enron executives under investigation in fact projected the same arrogance I encountered, it would be entirely consistent if they did meet investigative efforts with a wall of arrogance.

Human nature being what it is, that approach wouldn't have won the Enron folks any favors from the prosecutors.

Cheers,

I'd be a lot more persuaded if you had referred to even a handful of specific errors in his coverage of the case, rather than an irrelevant allusion to the Thomas White story.

Um, how is it "irrelevant" that Leopold fabricated evidence against an Enron executive?

James Shearer:

What Jane is saying, and apparently you fail to grasp through any adequate understanding of accouting, is that the financial statements,prima facia, were an adequate representation fo the transactions that were undertaken according to GAAP. Anyone willing to dig through the statements was capable of understanding the company's true financial position - any many did and profited greatly from shorting the stock...Jim Chanos to name just one. One couldn't however testify to the "choice" of accounting treatment and/or Andy Fastow's theft from the GAAP financial statements.

The validity of the creation of the SPEs is somewhat in doubt as to whether they represented transactions with specific economic purposes. The disputed economic purposes were DIRECTLY the result of Andy Fastow's creation and HIS financial gain by their construct.

Do you have any PRIMARY evidence to the fact that Enron was not?

Mark, Jason Leopold appears to have been the source for many of the more lurid accusations against Enron, such as the fake trading room. And as Dan says, fabricating evidence against an Enron executive isn't exactly irrelevant here.

But his certainly wasn't the only bad financial reporting. Just one example: early on, I read an article breathlessly reporting that Enron had misled shareholders by booking 103% of their trades as revenue--the full value, plus the commission! Obvious fraud! Of course, it was no such thing; they booked all the revenue, and then took out 100% of the trade as an expense, leaving a 3% profit. This is normal for commodity traders; it may even be mandatory. Anyone who a) knew anything about accounting b) tried to figure out what was going on was similarly stumped by bad reporting.

I don't mean to say that the problem was exclusively bad reporting; speculative fever can develop on the short side just as on the long side. And Enron may well have been too risky. But they don't appear to have been undone by an actual change in their underlying financial position, nor by market's sudden knowlege of same; it is my understanding that the debt ratings agencies knew about the SPEs all the time, so the collapse in creditworthiness appears to have been an iterative phenomenon rather than a sudden revelation of bad underlying financials.

"This is normal for commodity traders"

Megan, I think you are wrong here. This is normal for regular businesses (revenues are what you take in when you sell stuff, subtract cost of goods sold to get gross profits) but not for trading companies (Buy IBM for $100, sell it for $101, revenues are a $1, not $101.) Enron's decision to book revenues that way was legal (this was widely reported before they blew up but I'm not sure why it was legal) but misleading. That was the source of the "7th biggest company in the country" statistic, they were 7th biggest in revenues because of the misleading statistic. (I work at a small trading company; if we counted sales that way we would have revenues bigger than Microsoft.)

Let's see:

*Enron guys may be innocent.
*Average people are too stupid to be on juries.
*Wouldn't it be nice if convicts made money for the government?
*Against the death penalty, for beatings!

Quite a post. It sounds like a bet to see how many people you can tick off at once. Did you forget to mention that you hate puppies?

Reagan Fan, Jan doesn't hate puppies, not at all. In fact, she loves them--as long as they're well blended, that is. :-)

According to Fortune that isn't standard practice. Just the opposite in fact. More of what you'd call a loophole.

FORTUNE Monday, April 15, 2002 By Carol J. Loomis

...
So how valid are Enron's mountainous revenues? To answer that you need to understand a bit about energy trading contracts. These are commodity contracts, mainly for natural gas, oil, and electricity, and they are entered into by traders hoping to earn a profit on future shifts in market prices. The traders are not only energy companies but also--and this is a fact that's important to our revenue tale--Wall Street firms such as UBS Warburg, Salomon Smith Barney, J.P. Morgan Chase, and Morgan Stanley.

So let's imagine a contract for $1 million of natural gas (we'll skip the btu details), to be delivered six months from now. If a Wall Street firm sold this contract, nothing called "revenues" would ever be created. Instead, the firm would periodically mark the contract to market--that is, measure the profit or loss earned on the contract--and, when time came to report, put that dollar result into an income statement item called "trading gains and losses" (which is considered revenue on the FORTUNE 500). In accounting parlance, this is known as reporting "net."

But in the 1990s many energy and utility companies, with Enron apparently acting as Pied Piper, began to report a lot of contracts "gross," meaning that in our example they put the $1 million value of that contract directly into revenues. They concurrently offset those revenues with a roughly equal cost for the gas, and thereafter measure profit and loss just like the Wall Street firms. All other things being equal, they end up with an identical profit to what the Wall Street firm makes. But there's obviously a monster difference in reported revenues--zero dollars in the Wall Street case, $1 million in the energy case.

Here's Forbes' take explaining that Enron's massive revenues were made up of buying and selling the same gas over and over. Those inflated reveues (and their accounting chicanery) allowed them to borrow massively to bet on a number of money losing businesses, broadband trading, thier retail trading effort, their services outsourcing, internet investments, etc. In the meantime the ease of entry into the energy trading market meant their actual business was much less profitable and getting more so every year.

How about making rape in prison a capital offense?
I whole-heartedly agree that it is horrid. Tacking on longer sentences isn't much of a deterrent for lifers, so remove them from the pool. Get a real deterrent.

I'd still like to know Kenny-Boy Lay's real cause of death. That official "heart disease" version is about as believeable as the National Enquirer.

Yup, it's pretty rare for older men who have spent their lives in high-stress environments at the helms of high-growth businesses to succumb to heart disease and...wait, what?

64 isn't particularly old by today's standards. As for high-stress business environments causing heart disease, if I'm not mistaken that's more of a stereotype than medical reality. Do you have some evidence otherwise?
I'll also note that sudden deaths from heart disease are much less common nowadays than in the past. While heart disease is still the leading cause of death in the United States, many of the deaths are more a matter of old age than what we think of as real heart disease.
Given the alleged cause of death, and the extremely convenient timing, I have a right to be skeptical.

How about making rape in prison a capital offense?

Most evidence suggests that it's much less common than feared.

I think tar and feathers is more in accordance with American traditions than a public whipping post.

First the disclosure: I worked for Jeff Skilling at Enron and I knew Andy Fastow reasonably well – went to lunch several times and he worked an office or two down from mine. I never met Ken Lay.

It was clear to me from the outset that the prosecutors were looking for the quickest route to the top of the organization under the theory that the highest ranking evil-doer is the most culpable. It was arguable that Ken Lay was not entirely aware of what was going on, but not Jeff Skilling, so they targeted him and Lay was along for the ride.

I am confident that the specific charges against Skilling and Lay by no means represented the only unethical, immoral or illegal deeds at Enron of which Skilling, at least, could have been presumed to be aware. They were simply the ones that most quickly provided the prosecutors with a case that they could reasonably expect to win. Whether this is the way prosecutors would work in a Panglossian world is beside the point.

One down-side for the cause of justice is that a number of individuals at Enron who were guilty of some fairly serious crimes were bypassed because they did not lie on the path from the front door of the building to Jeff Skilling’s office. All they got was a momentary near-death experience.

As for the credit-death of Enron, I’m not buying it. That may explain the fall of the stock from $0.57 per share to zero, but the fall from $87 to $0.57 per share was because their business model had been exposed as a sham. Enron-On-Line was like selling dollar bills for $0.95, Azurix failed, and the Broadband business was an unmitigated disaster which Skilling and friends were frantically covering up. The earnings were more volatile than the management had let on, which meant that Enron needed more equity capital than it had just to maintain even its mediocre credit rating. When the off-balance sheet funding became public it was clear that Enron was significantly more levered than it had led the markets to believe. A combination of businesses that had been secretly losing money, risky earnings that required more risk capital and more debt than they had admitted to largely wiped out the equity. At that point no one wanted to lend them money because they had no unlevered assets to back the debt with. Hence the credit crunch, aka Skilling’s run on the bank, happened because Enron was a bad business, not the other way around.

That’s not to say that nothing silly happened on the other side. Attacks on mark-to-market accounting by financial Luddites, people doing hard prison time for wash trades or misrepresenting facts to reporters – there’s plenty there to criticize. But I can’t accept the notion that Enron was a perfectly healthy company driven to the brink by idiot creditors or idiot credit markets.

The scale at which Enron had been overstating its profits was amazing. It had--it claimed--$13 billion of stockholders' equity in the spring of 2001. Yet all of that was gone by winter.

How could Ken Lay have been "not entirely aware" unless he had decided that he wanted to be "not entirely aware"?

Given the alleged cause of death, and the extremely convenient timing, I have a right to be skeptical.

You have a right to be skeptical. You don't have a right to have your skepticism taken seriously.

Let's check the list -- you have no evidence that he died from something other than a heart attack, no evidence that the doctors as Aspen Valley Hospital were bribed or coerced into lying about his cause of death, no evidence that the doctor who performed the autopsy on him and found extensive evidence of a history of serious heart disease was bribed or coerced into inventing that story, no explanation for who Lay's death was supposedly "conveniently timed" for... but you're skeptical that he died of a heart attack, because 64 "isn't that old".

Yeah, *that's* rational...

Thanks, Dan. I still can't believe this Peter chap takes himself seriously on that point. Maybe he's in denial aboutt his own family history or something? I hope he had his cholesterol checked recently. A not-insignificant number of people (men especially), even in this day of medical wonders, begin suffering serious or fatal heart problems in their late 30s to early 50s.

I'm not saying that there was any great conspiracy regaring Lay's death, or that the official version isn't believeable, just that under the circumstances there should have been some investigation beyond what the local coroner conducted.

Brad DeLong asks:

"How could Ken Lay have been "not entirely aware" unless he had decided that he wanted to be "not entirely aware"?"

This could happen easily enough, even people who want to be entirely aware about something often aren't for various reasons. It would be hard for even the best CEO to keep track of everything going on in a big company like Enron. So it would be normal and reasonable to concentrate on certain things while leaving other areas to your subordinates. And it is easy to deceive yourself without consciously deciding to do so. While I have no problem with Skilling and Lay being held criminally liable because I believe they knew corners were being cut I don't believe they understand just how far Enron's accounting was off. Otherwise they would have had a better exit strategy.

Two comments: First, when the level of dishonesty becomes very large in relation to the size of the company, it's definitely the CEO's job to know what's going on. Nickel-and-dime stuff might go on in the shadows, but not huge stuff.

As for exit strategy, when you start deceiving people, it's not always possible to 'unwind' your deceptions. By the 'Otherwise they would have had a better exit strategy' principle, almost any fraudster who got caught could plead innocence.

If jail really were merely a dull spell of menial service jobs and mediocre food, I suspect many Americans would think it wholly inadequate to the demands of justice...Nor do I think citizens of other countries are any better, before someone attacks me; human beings have all sorts of tawdry impulses."

I don't know how other people think about their jails, but developed countries do tend to have less violent jails.

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