By DAVID MOON, Moon Capital
January 27, 2002
If you live by the sword, you might die by the sword.
For several weeks, I have been amazed at the amount of attention given the
collapse of Enron. First, it was the daily reports in the general press.
Not just the Wall Street Journal; Enron stories have graced the front page of
this paper. Network news anchors treat the story as if it was something as
significant as, say, Gary Condit. Then came the Congress, regulators and,
finally the FBI. Why?
Enron is not the first company to produce misleading financial
statements. Arthur Andersen is not the first accounting firm to blow an
audit. (Nor is it the first time for Andersen; the Big Five accounting
firm recently paid the largest SEC-imposed fine to settle charges related to its
preparation of faulty Waste Management audits.) Other corporate executives
have sold company stock just before a significant price decline. (It happened
last week at Dynacq International.) Other companies' employees have lost
millions when their pension funds were locked into declining company
stock. (See Dow Chemical.) Companies with more employees have
declared bankruptcy. Adjusted for the relative levels of the overall stock
market, Enron is not the largest bankruptcy in US history. (Adjusted,
Texaco was larger.) And Enron is certainly not the first company to devote
significant resources to courting public officials.
So why all the attention? Why are various Congressmen holding press
conferences pledging to investigate? If Congress is going to get into the
corporate malfeasance investigation business, they will have little time for
anything else. Why is Enron different?
Because Enron executives pushed, pulled and cajoled so many people in their
efforts to get special treatment, it has now come back to haunt them. The
people whose arms they twisted or whose opponents' campaigns they financed or
whose own campaigns they financed, but at lower investment levels, these people
smell blood. And they are going after it. In fact, because Enron did
enjoy such a cozy relationship with regulators and politicians is probably the
reason these officials now must be so energetic in their investigations.
Enron and its top managers donated hundreds of thousands, if not millions, of
dollars into political elections. CEO, Ken Lay, began donating to George
Bush when Bush was running for governor. But Lay also funded Bush's
opponent, Ann Richards. The wife of a powerful US senator (Wendy Gramm,
Texas senator Phil's wife) sat on Enron's board. In 1997, Enron was granted a
specific special exemption from certain provisions of the Investment Company Act
of 1940. A year earlier, certain disclosure requirements of the Public
Utility Holding Company Act of 1935 were waived ' for Enron.
The company also
received Labor Department exemption from certain regulations governing pension
and ESOP plans. A significant portion of the Enron business strategy
involved working to get special treatment ' and that sword cuts both ways.
Willi Schlamm, a former communist, once said that the 'problem with
capitalism is capitalists; the problem with socialism is socialism.' My
initial reaction is that no new agencies are needed as a result of the Enron
failure. There will always be crooks and incompetents. No system can prevent
that. The market will deal with Andersen; who can ever confidently review
financial statements they prepare again? If you are honest and want to
fairly present your financial statements, do you want Andersen as your
While we don't really need all of the congressional investigations, we are
going to get them. We will get more laws, more regulations and more
agencies. The problem is that criminals break laws ' no law will change
that. If Enron and Andersen executives broke existing laws, just enforce
the ones we already have. Send the guilty to jail and see what impact that
has on future 'creative capitalists.'
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).