June 01, 2006
Scenes from downtown Houston, post-verdicts
Posted by NRapoport

I was walking around downtown Houston yesterday and passed by a convenience store in our tunnel system (think:  Minneapolis skywalks, but underground, to avoid the heat of the sun).  On the wall nearest the store's door was the classic Houston Chronicle (collector's edition) headline, "Guilty! Guilty!"  It struck me that, if a downtown convenience store has that headline up on the wall after last week, then it's clear that Houston's still angry about the whole Enron mess.  And that anger isn't just from employees and shareholders--it's from the hundreds of small businesses, like this store, that lost serious income from Enron's collapse.

Sure, the bankruptcy gave some people closure, and the guilty verdicts (one more today, in the broadband retrial) are giving some others closure.  There's still the sentencing phase to go through on the criminal side and the civil trial still waiting in the wings, so the closure's by no means complete.  Here in Houston, we may never get closure, because we knew the people involved so much more intimately than the rest of the country knew them.  We remember seeing Ken Lay at various events and thinking to ourselves, "There's Ken."  (Never "there's Mr. Lay"--he was always "Ken" to us.) 

The cognitive dissonance that many of us felt when the whole Enron debacle was unwinding is probably still there, to a much lesser degree.  How could we have missed so many clues that Enron wasn't what it seemed?  The clues were there, if we'd only paid attention to them.  (For one article about the clues, you might want to take a look at an article that my husband and I wrote, Dr. Jekyll & Mr. Skilling: How Enron's Public Image Morphed From the Most Innovative Company in the Fortune 500 to the Most Notorious Company Ever--also available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=505662).   For me, the most obvious clue was Bethany McLean's article on whether Enron's stock was overrated.  So why didn't we pay closer attention?

I really do think that cognitive dissonance was one of the biggest reasons Enron did what it did (and did it for so long).  The board's cognitive dissonance led it to waive the conflict of interest rules to let Fastow engage in self-dealing--not such a atrange leap, given how many directors had their own consulting deals w/Enron.  The triangulation of blame that the Powers Report described (board blamed accountants and lawyers, lawyers blamed accountants and Enron, accountants blamed lawyers and Enron) is yet more evidence of cognitive dissonance:  "We're all smart, good people, and what we're doing MUST be correct--it's just 'aggressive.'"  The cognitive dissonance of the market included people saying, "OK, so Enron is a black box.  But it's making money, so I should buy stock anyway."  For Houstonians, too, it's hard for us to believe that someone so famous and so earnest-looking might not be as attuned to staying on the straight and narrow as we had thought.  To be honest, I've followed all of the developments in Enron, and I'm still struggling with cognitive dissonance myself. 

When you add cognitive dissonance to the fact that no one seemed to be minding cash flow after Rich Kinder left Enron and to the fact that the market had nowhere near the correct information that we all needed, it's not that hard to see why Enron failed.  The question is whether there's really anything that we can do about it that would stop future Enrons, and I'm pessimistic.

This is my first blog ever, so please be kind....

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