I will finish sending emails tomorrow. Part of the reason I didn't get done answering all emails is that I got sidetracked doing a little research. I found some old conspiracy theories about gold from 1970s (have been looking out for pre-1990 gold conspiracy theories for a while now out of curiosity). I still need to look them over before I know of what to make of them. Also found an interesting 1990 article from Heritage Foundation which I will blog about later: The Six Trillion Dollar Debt Iceberg; A Review of the Government's Risk Exposure.
Finally, I researched Enron from the perspective that regulators might not have missed the financial fraud but might have instead purposefully chosen to ignore it. The last article below "Open Secrets" was pretty much exactly what I expected to find: regulators knew there was trouble at Enron, and instead of ending the financial fraud, they let Enron slowly rot away until it collapsed an unsalvageable mess. (more on this later).
Interesting Bits of Info about Enron
(I will do an entry on Enron, hopefully later this week)
National Investor raises some interesting ideas about Enron.
(emphasis mine) [my comment]
"The cast of characters involved in Enron's off-balance-sheet activities is much bigger than previously thought," wrote Robert Hunter recently in a story at SmartMoney.com. "Limited partners included Chase Capital, G.E. Capital, J.P. Morgan Capital, Merrill Lynch, Dresdner Bank, AON, Credit Suisse First Boston, Morgan Stanley and First Union Investors, an all-star list of Wall Street insiders. Given the porous walls separating equity research from investment-banking operations, the suggestion that analysts at these firms knew nothing about the [Enron] partnerships before they blew up simply isn't credible...Enron's off-balance-sheet activities weren't the mystery they've been portrayed to be."
That's quite right, folks--Enron was the big vehicle whereby these Wall Street firms pumped, and pumped, and pumped--but couldn't dump. They were finally dumped on due to the sheer magnitude and unsustainability of the financial pyramid that Enron became. The important thing to understand, amidst all the hand-wringing, finger pointing and the rest in Washington is that this type of speculation--and subsequent debacle--is what a fractional reserve system creates.
ONE MORE THING
In his item, Hunter went on to say that, "What's striking is how long Enron was able to get away with these transgressions without someone blowing the whistle. People at Wall Street's biggest firms had intimate knowledge of these dealings, yet no one said a word. Wall Street can keep a secret far better than anyone could have imagined. How many other secrets is it keeping?"
On that note, I want to put before you a thesis I'm working on.
A few years ago, Long Term Capital Management became a pariah in the financial community. This hedge fund zigged when it should have zagged, and suddenly found itself insolvent when its bets evaporated.
This hedge fund had a reported $3.3 billion in assets; hardly the level of debacle that should have had bankers up in the middle of the night trying to figure out how to keep LTCM's collapse from bringing the whole world down with it. But that's exactly what happened. Led by Bill McDonough, President of the Federal Reserve Bank of New York, bankers and financiers had to scramble to find a way to keep LTCM's vaporization from having disastrous ripple effects.
There were two key reasons for this: First, LTCM was the owner/creator of over $1 TRILLION of derivative contracts. Other players were involved here, too, whose balance sheets were hammered by those contracts' going bust. So, much was involved beyond the level of investors' assets in LTCM, a hedge fund that could be called the Enron of its time.
The bigger issue, though, was that the LTCM implosion came as a complete surprise to regulators, the Treasury Department and the Fed, necessitating McDonough's 2 a.m. emergency meeting.
Now let's look at Enron. Its market capitalization was some $60 billion at its peak, dwarfing the assets of LTCM. Nobody has put their finger on the "notional" value of its derivative contracts, but I believe they are also many times greater than those of LTCM. In spite of all this, though, Enron's blow-up had virtually none of the deleterious effect on Wall Street as did LTCM. Sure, several companies even rumored to have exposure to Enron's woes saw their share prices beaten up to one degree or another. But--so far--not even a burp where the structural integrity of the financial markets is concerned. Why not?
I contend that the answer is simple. Wall Street knew very well what it was doing with Enron every step of the way, in doing things that are an accepted part today of "wealth creation," arbitrage and all the rest. It also knew months ago that it might have gone too far. During that time, I believe that several key players--including some current and former Treasury officials, and perhaps even some people close to the president--tried to arrange things so as to keep any major, affected parties solvent when the reality of Enron finally hit the hardest. [interesting idea, no?]
The Golden Sextant reports about Enron.
MPEG COMMENTARY - Page 19
February 6, 2002. Olympic Special: Will the Enron Tar Baby Go for the Gold?
Barings and Long-Term Capital Management were brought down by unregulated and inadequately disclosed over-the-counter derivatives. Orange County, Procter & Gamble and Gibson Greetings suffered well-publicized losses on their derivatives bets. The role of these complex instruments in the Enron fiasco was elucidated at a hearing of the Senate Governmental Affairs Committee chaired by Senator Joseph I. Lieberman on January 24, 2002, in testimony by Frank Partnoy (www.senate.gov/~gov_affairs/012402partnoy.htm). Summarizing Enron's use of derivatives versus LTCM's, he declared: "In short, Enron makes Long-Term Capital Management look like a lemonade stand." [yet Enron's failure had no visible impact on financial system... You would think at least one of the big banks would at least need a bailout, no?]
By all accounts, last November former secretary Rubin, now a top official at Citigroup, telephoned Peter Fisher, the Treasury's current undersecretary for domestic finance, to suggest that he conside r trying to dissuade the rating agencies from an impending downgrade of Enron's credit. Mr. Fisher, who in his prior job at the Federal Reserve Bank of New York had served as point man for the rescue of LTCM, demurred. Mr. Rubin's position with Citigroup, a major creditor of Enron, raises legitimate questions about his motives. More importantly, however, his suggestion belies any strong underlying belief in either financial transparency or the protection of individual investors. On the contrary, it shows a mind committed to the proposition that government officials may invoke their personal notions of the public interest surreptitiously to manipulate markets notwithstanding injury to private investors and without public disclosure of the benefits thereby conferred on their political friends. [it also suggest that Peter Fisher and Robert Rubin had a very good reason something was wrong at Enron, yet they took no action...]
Upyourshawaii reports asks why hasn't former Treasury Secretary, Robert Rubin, been called to testify before congress?
Joe Lieberman's Cover-Up - Where Is Robert Rubin?
By Mark R Levin
The National Review
The news this morning for Citigroup, Inc., one of Enron's largest creditors, is bad.
The New York Times reports that "senior credit officers of Citigroup misrepresented the full nature of a 1999 transaction with Enron in the records of the deal so that Enron could ignore accounting requirements and hide its true financial condition, according to internal bank documents and government investigators." The Wall Street Journal reports that Enron "marketed similarly structured deals to a slew of other companies." And yesterday, the Washington Post reported that Citigroup, along with J. P. Morgan Chase & Co., "transferred billions of dollars to Enron ... in recent years in what amounted to loans that Houston energy trader concealed as it struggled to survive."
Given the central role played by Citigroup in concealing Enron's debt from investors, the general public, and government regulators, why, then, hasn't former Clinton treasury secretary, Robert Rubin, now the chairman of Citigroup's executive committee, been called to testify before Congress? In particular, why hasn't the chairman of the Senate Governmental Affairs Committee, Senator Joseph Lieberman, sought Rubin's testimony? After all, Lieberman is heading up the Senate's investigation into Enron's bankruptcy and fraudulent dealings.
And there's ample reason to hear from Rubin. In addition to this week's disclosures about Citigroup's assistance in cooking Enron's books, during Enron's final days Rubin played a direct role in attempting to conceal Enron's financial condition from credit-rating agencies. Specifically, on November 8, 2001, Rubin made a telephone call to Peter Fisher, the Treasury Department's undersecretary for domestic finance, seeking Fisher's intervention with Wall Street credit-rating agencies on behalf of Enron when those agencies were about to downgrade Enron's ratings.
Yet, Lieberman knew that Rubin, on behalf of Citigroup - which had an approximate $1 billion investment in Enron and the potential of large merger and other fees in pending deals - on at least two occasions, sought personally to protect Enron's credit rating. Still, as best as I can tell, Lieberman has never asked Rubin to testimony before his committee. Furthermore, Carl Levin, chairman of the Senate Governmental Affairs Committee's Permanent Subcommittee on Investigations, which is holding a hearing today on "The Role of the Financial Institutions In Enron's Collapse," has, to the best of my knowledge, not sought Rubin's testimony. (An inquiry I made to Levin's subcommittee asking whether Rubin would be a witness at today's hearing went unanswered.)
Mail-archive reports that Enron, Bush Officials Face Serious Legal Questions.
Enron, Bush Officials Face Serious Legal Questions
by William Rivers Pitt
t r u t h o u t 01.15.02
In an attempt to save his failing company, Lay contacted Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans last fall in search of some sort of governmental assistance. According to O'Neill and Evans, these requests were rebuffed. The fact that Lay even made the calls, however, is prima facie evidence that Lay was fully aware that the emails he sent to his employee/stockholders were based upon incorrect assumptions regarding the strength of Enron and the viability of its stock. In exhorting them to buy into the employee stock option program, he was effectively defrauding them under Rule 10b-5.
Defenders of the Bush administration point to the fact that Lay's pleas for assistance drew no response from O'Neill, or from Bush, who was likewise informed of Enron's impending collapse last fall. These defenders claim that their inaction is proof of their purity; they let the chips fall where they may, and let the "genius of capitalism," in O'Neill's words, determine the fate of Enron.
O'Neill's inaction, however, could prove to have been a serious violation of the duties of his position as Treasury Secretary. According to the Duties and Functions of the Treasury Office, O'Neill is responsible for "enforcing Federal finance and tax laws." Within the bailiwick of this lies the responsibility for the "development of policies and guidance in the areas of financial institutions, Federal debt finance, financial regulation and capital markets."
Treasury Secretary O'Neill was aware of Enron's impending collapse and did nothing to warn or protect the stockholders. A man so intimate with Wall Street, and with Kenneth Lay, could not have missed the disparity between Enron's stock value and the dire financial news he was getting from Enron's chairman. Rather than perform the duties of his office and step in to protect the thousands of Americans who would lose their life savings within the capital market that deserved and expected his guidance, O'Neill chose only to inform Mr. Bush and then remain silent. This was a dire breach of the clearly stated requirements of his position, one that cost a lot of people a lot of money.
Given the conversations between Treasury Secretary O'Neill and Enron chairman Kenneth Lay, questions about the possibility of insider trading violations come to the forefront. A significant number of Bush administration officials had a great deal of money invested in Enron stock. One such official is Mark Weinberger, Assistant Secretary of Tax Policy in the Treasury Department. Mr. Weinberger was in an excellent position to learn of Enron's approaching doom, and may have used this information to get out while the getting was good.
Considering the number of Enron investors within the administration, it is not so farfetched to ask the questions: Did O'Neill truly keep silent about what he knew? If not, did Weinberger become aware of Enron's situation? Did he use this information to dump his Enron stock before the hammer came down? Did he warn other administ ration officials to do the same? Given the clear timeline of events, the SEC should have no trouble running down these possibilities.
Gladwell reports that Enron's Open Secrets.
January 8, 2007
Dept. of Public Policy
Enron, intelligence, and the perils of too much information.
If you sat through the trial of Jeffrey Skilling, you'd think that the Enron scandal was a puzzle. The company, the prosecution said, conducted shady side deals that no one quite understood. Senior executives withheld critical information from investors. Skilling, the architect of the firm's strategy, was a liar, a thief, and a drunk. We were not told enough—the classic puzzle premise—was the central assumption of the Enron prosecution.
But the prosecutor was wrong. Enron wasn't really a puzzle. It was a mystery.
In late July of 2000, Jonathan Weil, a reporter at the Dallas bureau of the Wall Street Journal, got a call from someone he knew in the investment-management business. Weil wrote the stock column, called "Heard in Texas," for the paper's regional edition, and he had been closely following the big energy firms based in Houston—Dynegy, El Paso, and Enron. His caller had a suggestion. "He said, 'You really ought to check out Enron and Dynegy and see where their earnings come from,' " Weil recalled. "So I did."
Weil was interested in Enron's use of what is called mark-to-market accounting, which is a technique used by companies that engage in complicated financial trading. Suppose, for instance, that you are an energy company and you enter into a hundred-million-dollar contract with the state of California to deliver a billion kilowatt hours of electricity in 2016. How much is that contract worth? You aren't going to get paid for another ten years, and you aren't going to know until then whether you'll show a profit on the deal or a loss. Nonetheless, that hundred-million-dollar promise clearly matters to your bottom line. If electricity steadily drops in price over the next several years, the contract is going to become a hugely valuable asset. But if electricity starts to get more expensive as 2016 approaches, you could be out tens of millions of dollars. With mark-to-market accounting, you estimate how much revenue the deal is going to bring in and put that number in your books at the moment you sign the contract. If, down the line, the estimate changes, you adjust the balance sheet accordingly.
When a company using mark-to-market accounting says it has made a profit of ten million dollars on revenues of a hundred million, then, it could mean one of two things. The company may actually have a hundred million dollars in its bank accounts, of which ten million will remain after it has paid its bills. Or it may be guessing that it will make ten million dollars on a deal where money may not actually change hands for years. Weil's source wanted him to see how much of the money Enron said it was making was "real."
Weil got copies of the firm's annual reports and quarterly filings and began comparing the income statements and the cash-flow statements. "It took me a while to figure out everything I needed to," Weil said. "It probably took a good month or so. There was a lot of noise in the financial statements, and to zero in on this particular issue you needed to cut through a lot of that." Weil spoke to Thomas Linsmeier, then an accounting professor at Michigan State, and they talked about how some finance companies in the nineteen-nineties had used mark-to-market accounting on subprime loans—that is, loans made to higher-credit-risk consumers—and when the economy declined and consumers defaulted or paid off their loans more quickly than expected, the lenders suddenly realized that their estimates of how much money they were going to make were far too generous. Weil spoke to someone at the Financial Accounting Standards Board, to an analyst at the Moody's investment-rating agency, and to a dozen or so others. Then he went back to Enron's financial statements. His conclusions were sobering. In the second quarter of 2000, $747 million of the money Enron said it had made was "unrealized"—that is, it was money that executives thought they were going to make at some point in the future. If you took that imaginary money away, Enron had shown a significant loss in the second quarter. This was one of the most admired companies in the United States, a firm that was then valued by the stock market as the seventh-largest corporation in the country, and there was practically no cash coming into its coffers.
Weil's story ran in the Journal on September 20, 2000. A few days later, it was read by a Wall Street financier named James Chanos. Chanos is a short-seller—an investor who tries to make money by betting that a company's stock will fall. "It pricked up my ears," Chanos said. "I read the 10-K and the 10-Q that first weekend," he went on, referring to the financial statements that public companies are required to file with federal regulators. "I went through it pretty quickly. I flagged right away the stuff that was questionable. I circled it. That was the first run-through. Then I flagged the pages and read the stuff I didn't understand, and reread it two or three times. I remember I spent a couple hours on it." Enron's profit margins and its return on equity were plunging, Chanos saw. Cash flow—the life blood of any business—had slowed to a trickle, and the company's rate of return was less than its cost of capital: it was as if you had borrowed money from the bank at nine-per-cent interest and invested it in a savings bond that paid you seven-per-cent interest. "They were basically liquidating themselves," Chanos said.
In November of that year, Chanos began shorting Enron stock. Over the next few months, he spread the word that he thought the company was in trouble. He tipped off a reporter for Fortune, Bethany McLean. She read the same reports that Chanos and Weil had, and came to the same conclusion. Her story, under the headline "IS ENRON OVERPRICED?," ran in March of 2001. More and more journalists and analysts began taking a closer look at Enron, and the stock began to fall. In August, Skilling resigned. Enron's credit rating was downgraded. Banks became reluctant to lend Enron the money it needed to make its trades. By December, the company had filed for bankruptcy.
Enron's downfall has been documented so extensively that it is easy to overlook how peculiar it was. Compare Enron, for instance, with Watergate, the prototypical scandal of the nineteen-seventies. To expose the White House coverup, Bob Woodward and Carl Bernstein used a source—Deep Throat—who had access to many secrets, and whose identity had to be concealed. He warned Woodward and Bernstein that their phones might be tapped. When Woodward wanted to meet with Deep Throat, he would move a flower pot with a red flag in it to the back of his apartment balcony. That evening, he would leave by the back stairs, take multiple taxis to make sure he wasn't being followed, and meet his source in an underground parking garage at 2 A.M. Here, from "All the President's Men," is Woodward's climactic encounter with Deep Throat:
"Okay," he said softly. "This is very serious. You can safely say that fifty people worked for the White House and CRP to play games and spy and sabotage and gather intelligence. Some of it is beyond belief, kicking at the opposition in every imaginable way."
Deep Throat nodded confirmation as Woodward ran down items on a list of tactics that he and Bernstein had heard were used against the political opposition: bugging, following people, false press leaks, fake letters, cancelling campaign rallies, investigating campaign workers' private lives, planting spies, stealing documents, planting provocateurs in political demonstrations.
"It's all in the files," Deep Throat said. "Justice and the Bureau know about it, even though it wasn't followed up."
Woodward was stunned. Fifty people directed by the White House and CRP to destroy the opposition, no holds barred?
Deep Throat nodded.
The White House had been willing to subvert—was that the right word?—the whole electoral process? Had actually gone ahead and tried to do it?
Another nod. Deep Throat looked queasy.
And hired fifty agents to do it?
"You can safely say more than fifty," Deep Throat said. Then he turned, walked up the ramp and out. It was nearly 6:00 a.m.
Watergate was a classic puzzle: Woodward and Bernstein were searching for a buried secret, and Deep Throat was their guide.
Did Jonathan Weil have a Deep Throat? Not really. He had a friend in the investment-management business with some suspicions about energy-trading companies like Enron, but the friend wasn't an insider. Nor did Weil's source direct him to files detailing the clandestine activities of the company. He just told Weil to read a series of public documents that had been prepared and distributed by Enron itself. Woodward met with his secret source in an underground parking garage in the hours before dawn. Weil called up an accounting expert at Michigan State.
When Weil had finished his reporting, he called Enron for comment. "They had their chief accounting officer and six or seven people fly up to Dallas," Weil says. They met in a conference room at the Journal's offices. The Enron officials acknowledged that the money they said they earned was virtually all money that they hoped to earn. Weil and the Enron officials then had a long conversation about how certain Enron was about its estimates of future earnings. "They were telling me how brilliant the people who put together their mathematical models were," Weil says. "These were M.I.T. Ph.D.s. I said, 'Were your mathematical models last year telling you that the California electricity markets would be going berserk this year? No? Why not?' They said, 'Well, this is one of those crazy events.' It was late September, 2000, so I said, 'Who do you think is going to win? Bush or Gore?' They said, 'We don't know.' I said, 'Don't you think it will make a difference to the market whether you have an environmentalist Democrat in the White House or a Texas oil man?" It was all very civil. "There was no dispute about the numbers," Weil went on. "There was only a difference in how you should interpret them."
Of all the moments in the Enron unravelling, this meeting is surely the strangest. The prosecutor in the Enron case told the jury to send Jeffrey Skilling to prison because Enron had hidden the truth: You're "entitled to be told what the financial condition of the company is," the prosecutor had said. But what truth was Enron hiding here? Everything Weil learned for his Enron exposé came from Enron, and when he wanted to confirm his numbers the company's executives got on a plane and sat down with him in a conference room in Dallas. [Now this again is interesting no? To me, everything suggest that Washington/Wall Street unofficially knew all about Enron, but ignored the problem. More on this later]
Nixon never went to see Woodward and Bernstein at the Washington Post. He hid in the White House.
The second, and perhaps more consequential, problem with Enron's accounting was its heavy reliance on what are called special-purpose entities, or S.P.E.s.
Enron's S.P.E.s were, by any measure, evidence of extraordinary recklessness and incompetence. But you can't blame Enron for covering up the existence of its side deals. It didn't; it disclosed them.
Victor Fleischer, who teaches at the University of Colorado Law School, points out that one of the critical clues about Enron's condition lay in the fact that it paid no income tax in four of its last five years. Enron's use of mark-to-market accounting and S.P.E.s was an accounting game that made the company look as though it were earning far more money than it was. But the I.R.S. doesn't accept mark-to-market accounting; you pay tax on income when you actually receive that income. And, from the I.R.S.'s perspective, all of Enron's fantastically complex maneuvering around its S.P.E.s was, as Fleischer puts it, "a non-event": until the partnership actually sells the asset—and makes either a profit or a loss—an S.P.E. is just an accounting fiction. Enron wasn't paying any taxes because, in the eyes of the I.R.S., Enron wasn't making any money. [This further suggest the treasury knew their was a horrible problem]
If you looked at Enron from the perspective of the tax code, that is, you would have seen a very different picture of the company than if you had looked through the more traditional lens of the accounting profession. But in order to do that you would have to be trained in the tax code and be familiar with its particular conventions and intricacies, and know what questions to ask. "The fact of the gap between [Enron's] accounting income and taxable income was easily observed," Fleischer notes ...
"There have been scandals in corporate history where people are really making stuff up, but this wasn't a criminal enterprise of that kind," Macey says. "Enron was vanishingly close, in my view, to having complied with the accounting rules. They were going over the edge, just a little bit. And this kind of financial fraud—where people are simply stretching the truth—falls into the area that analysts and short-sellers are supposed to ferret out. The truth wasn't hidden. But you'd have to look at their financial statements, and you would have to say to yourself, What's that about? It's almost as if they were saying, 'We're doing some really sleazy stuff in footnote 42, and if you want to know more about it ask us.' And that's the thing. Nobody did."
In the spring of 1998, Macey notes, a group of six students at Cornell University's business school decided to do their term project on Enron. "It was for an advanced financial-statement-analysis class taught by a guy at Cornell called Charles Lee, w ho is pretty famous in financial circles," one member of the group, Jay Krueger, recalls. In the first part of the semester, Lee had led his students through a series of intensive case studies, teaching them techniques and sophisticated tools to make sense of the vast amounts of information that companies disclose in their annual reports and S.E.C. filings. Then the students picked a company and went off on their own. "One of the second-years had a summer-internship interview with Enron, and he was very interested in the energy sector," Krueger went on. "So he said, 'Let's do them.' It was about a six-week project, half a semester. Lots of group meetings. It was a ratio analysis, which is pretty standard business-school fare. You know, take fifty different financial ratios, then lay that on top of every piece of information you could find out about the company, the businesses, how their performance compared to other competitors."
The people in the group reviewed Enron's accounting practices as best they could. They analyzed each of Enron's businesses, in succession. They used statistical tools, designed to find telltale patterns in the company's fi-nancial performance—the Beneish model, the Lev and Thiagarajan indicators, the Edwards-Bell-Ohlsen analysis—and made their way through pages and pages of footnotes. "We really had a lot of questions about what was going on with their business model," Krueger said. The students' conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that "Enron may be manipulating its earnings." The stock was then at forty-eight —at its peak, two years later, it was almost double that—but the students found it over-valued. The report was posted on the Web site of the Cornell University business school, where it has been, ever since, for anyone who cared to read twenty-three pages of analysis. The students' recommendation was on the first page, in boldfaced type: "Sell."