Fall of Enron

Economics Economics Questions
1

I don’t know the whole story. So I have two questions :

1/ Who is the culprit ? The S.E.C. ? Arthur Andersen ? The prohibition of Insider Trading ? Or… the principal–agent problem ?

2/ I don’t understand what this passage about “corporate law” is saying.

http://www.econlib.org/library/Columns/Mcchesneyenron.html

“Which raises a third, crucial lesson. Not only are shareholders already protected legally, but in the American legal system they are protected by state law. (I have not read of any Congressional committee evaluating the laws already protecting Enron shareholders, have you?) Although Ralph Nader and others tried hard to federalize corporate law in the 1960s and 1970s, nothing of the sort resulted. Just as there is no federal law of contracts, or federal law of property, there is no national corporate law. Similarly, any criminal fraud here is covered by existing state law. (There is a national system of securities regulation, but the Enron story is not about securities violations other than those already illegal by standards of traditional state-law fraud.)”

2

I havn’t read the article but… why can’t the culprit be Enron? We cannot forgive business of wrongdoings and place it all at the foot of the state. That is as silly as the leftist absovling the state of any wrongdoing and placing it at the foot of business.

3

Of course when people talk about Enron scandals they are talking about the accouting scandal that lead to their bankruptcy. I should have known that lol.

When I talk about Enron scandals I talk about this;

Before passage of the deregulation law, there had been only one Stage 3 rolling blackout declared. Following passage, California had a total of 38 blackouts defined as Stage 3 rolling blackouts, until federal regulators intervened in June 2001. These blackouts occurred mainly as a result of a poorly designed market system that was manipulated by traders and marketers. Enron traders were revealed as intentionally encouraging the removal of power from the market during California’s energy crisis by encouraging suppliers to shut down plants to perform unnecessary maintenance, as documented in recordings made at the time.[12][13] These acts contributed to the need for rolling blackouts, which adversely affected many businesses dependent upon a reliable supply of electricity, and inconvenienced a large number of retail consumers. This scattered supply raised the price exponentially, and Enron traders were thus able to sell power at premium prices, sometimes up to a factor of 20x its normal peak value.

“We want you guys to get a little creative … and come up with a reason to go down,” the Enron worker tells the plant employee on one of the tapes.

One Enron employee tells a colleague in another recorded conversation, “I’m just trying to be an honest camper so I only go to jail once.”

“Well, there you go. At least in only one country,” the other replies, and laughs.

“Yeah, [expletive], this isn’t a joke,” the first employee says

They had to do a rolling blackout through the town and there was a red light there he didn’t see," one Enron trader says on tape.

“That’s beautiful,” a second voice responds.

“I’m like, this is causing animosity throughout the state now,” the first says. “Cars are blowing up.”

And when states complained, the guys at Enron seemed to have a response.

“Get a f****** clue,” one says. “Yeah,” another chimes in. “Leave us alone. Let us make a little bit of money.”

I think I have filled up enough space here. But it most certainly goes on, and on, and on.

“Exactly,” says another trader.

4

I agree. But you didn’t answer my questions.

Why this kind of fraud was enabled through these “accounting practices” ?

Can someone identify the source of “this” problem ?

5

I know lol. I realized I always jump to the second scandal I talked about when people talk about Enron scandals.

I have nothing to link to you, but imo. I would say accountants do their job. That job is to hide (for lack of a better term, I don’t mean they do it mallicously) money. Some accountants get overzealous and actually hide money (this time malliciously). So the state says “you can’t do that” and tries to find ways to stop it, and do find them. But accountants are smart, so they find new ways to hide money, both as the regular part of their job, and malliciously.

So… overzealous and mallicous accountants hid way too much money, because of previous (and useless) state attempts to stop false accounting.

IMO, it is the same old story as always. People try to screw other people, the state steps in and confuses everything, and the crooks use that state confusion to screw more people… and then the whole house of cards falls down.

6

In the Enron case, Enron released misleading financial reports to their shareholders (and the general public). These mislead people into believing that Enron was more financial successful than it really was.

Arthur Anderson ‘audited’ these financial statements. However, the auditors from AA were a bit too cosy with the upper management at Enron. This means that they didn’t really audit the financial statements - instead they helped cover up fraud.

In the end, Aurther Anderson AND Enron Collapsed. I see this as the market working pretty well. Think about this for a second: a huge company AND the world’s BIGGEST accounting firm both collapsed (and some people went to jail). Those are some serious consequences.

In my opinion, the shareholders really need to insist upon is that the auditors are rotated frequently. Anyway, I think this may be a law in some places, but I don’t quite remember/

I also think that fiat currency/fractional reserve banking is to blame for a financial system (aka giant mess) where people are forced to ‘invest’ money into the stock market to avoid loss by inflation. This leads to giant institutional investors that don’t really do a very good job, and probably don’t monitor the performance and security of some of their investments. But this is a slightly different issue.

7

David,

“In the Enron case, Enron released misleading financial reports to their shareholders (and the general public). These mislead people into believing that Enron was more financial successful than it really was.”

Yes but, I don’t even know the source of the problem.

There were several hypotheses.

SEC’s regulation (and which one ?) ? prohibition of insider trading ? principal agent problem/information asymmetry (market failure) ? conflict of interest (which means market failure) ? or another law (which one ? corporate law ?) ?

8

principal agent problem/information asymmetry (market failure) ? conflict of interest (which means market failure) ?

Uncomfortable facts of life aren’t in and of themselves a “market failure”. It is more so a business failure, for failing to structure incentives in the firm properly. That it collapsed is the market functioning as it should, to the degree it was permitted to.

9

Jon Irenicus,

Conflict of interest, which cause the scandal, IS a market failure.
My question is : why is there a conflict of interest ?
Maybe the law allow it. If this is true, I’d like to know.

10

Conflict of interest, which cause the scandal, IS a market failure.

Scarcity IS a market failure.

…what?

11

Jon,

My question still get no answers.

Conflict of interest and accounting fraud : government failure or market failure ?

12

http://www.thefreemanonline.org/departments/enron-and-argentina-are-examples-of-market-failure-it-just-aint-so/#

here a link to this article hopefully it will answer your questions

13

the5thresistance,
Excuse me but…
My question deals with conflict of interest and accounting fraud. And DiLorenzo tries to avoid answering…

(I will pursue my research)