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November 01, 2005

Enron: How To Guide The Perplexed?

Posted by David Zaring

When Ken Lay’s prosecutors and defenders stand up before the judge for the motions to dismiss, and the jury (jury selection begins this week - sorta) in the opening statements and the closing arguments, they will have to say:

“Ladies and gentlemen, this case is about x.” And x will, if you believe the stories about how long juries actually focus on such a statement, have to be about two or three sentences long.

What will they say?

When I’m trying to figure out what happened in a corporate (or political) scandal, I like to ask: what did this firm (or lobbyist) do differently than any other firm? Or, put another way, why wasn’t Enron copied – and therefore outed? I mean, was Dynergy just giving up when Enron was popping? No one hired Andersen and Vinson & Elkins and told them to advise them the way they advised the hottest company in the country? I like to ask these questions because I figure the answers will help to point out whether what’s going on in these cases is an ex post effort by outraged prosecutors to criminalize normal-but-inept business practices, or something different.

Here, I guess – and I’m no expert – is what I’d say at the beginning of an Enron argument, though who I’d be arguing for isn’t exactly clear: the Enron story is a story of the end of an asset bubble combined with the placement of a bad seed – Andy Fastow – in a position where he could enrich himself, and buy or badger off a bunch of mediocre seeds. Plus a ridiculous tolerance for accounting-driven securitizations.

Then I’d spend the rest of the day explaining myself. (As Ken Lay, purportedly and insanely, if true, plans to do as well.)

It’s risky to solicit comments at the end of long posts (and my posts are looooong!), but I’d love to hear other views. So Conglomerate readers – how would you encapsulate Enron to educate the judge and jury? No expertise necessary – as, I suspect, the above post suggests.

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Comments (4)

1. Posted by Christine on November 1, 2005 @ 10:13 | Permalink

David wrote: "Or, put another way, why wasn’t Enron copied – and therefore outed? I mean, was Dynergy just giving up when Enron was popping? No one hired Andersen and Vinson & Elkins and told them to advise them the way they advised the hottest company in the country?"

Every energy company in Houston was trying to copy Enron. The only problem was that Enron did not share its play book. I had friends who were representing other entities in joint ventures with Enron and they complained that Enron was not forthcoming about how exactly they were making profits. Houstonites joked that Enron had a magic spinning wheel spinning straw into gold.

That being said, energy companies were trying to copy what they could see. They pumped up energy trading. They adopted mark-to-market accounting. Even the regulated utility, HL&P decided to "join 'em" and split into a regulated utility and a deregulated utility.

And, every other major energy company (including Dynegy) has been under investigation for the past 3 1/2 years by the DOJ for "manipulating the market."

2. Posted by Christine on November 1, 2005 @ 10:17 | Permalink

Oh, but to answer your actual question -- the prosecutors will say, "Ladies and Gentlemen, this is a story about greed." If I were the defense, I would say, "Ladies and Gentlemen, this is a story about numbers and a story about trust. My client, Ken Lay, has spent his life thinking about numbers. He believed in numbers. And he trusted the men that showed him the numbers."

3. Posted by David Zaring on November 1, 2005 @ 17:41 | Permalink

Christine - You're a born litigator, clearly. As for the other, sounds like the keys for Enron lay in the "broadband division" and the dodgy securitization deals no one could figure out.

4. Posted by nb on January 3, 2006 @ 13:03 | Permalink

It's "Dynegy," not Dynergy.

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