If thereÃ¢â‚¬â„¢s one word that explains why Enron Corp. failed and why former executives Ken Lay and Jeff Skilling, convicted in Houston last month, are facing long stints in prison jumpsuits, itÃ¢â‚¬â„¢s this: hubris. Enron failed because Lay (who faces up to 165 years in prison) and Skilling (185 years) didnÃ¢â‚¬â„¢t understand basic business management. They believed that Enron was so good and its business model so impressive that they didnÃ¢â‚¬â„¢t have to work at making real cash profits. It almost sounds too obvious to say it, but Enron failed because it ran out of cash. And the failure to manage the companyÃ¢â‚¬â„¢s cash is directly attributable to purposeful mismanagement by Lay and Skilling. Lay was a Ph.D. economist (albeit from the University of Houston) who couldnÃ¢â‚¬â„¢t read a cash-flow statement. Skilling was a Harvard M.B.A. who once told another Enron employee that cash Ã¢â‚¬Å“didnÃ¢â‚¬â„¢t matter.Ã¢â‚¬Â
At trial, their arrogance was on full display. The lawyers for Lay and Skilling tried to convince that Enron had done everything legally. The two executives had no choice but to take the witness stand, where the prosecutors ripped their stories apart. On the stand, Lay and Skilling had only two choices: admit that they were stupid, or admit that they were crooks. The latter choice being unappealing, both men took the former, and throughout their trial insisted that theyÃ¢â‚¬â„¢d been duped by their subordinates. Fortunately, the jurors didnÃ¢â‚¬â„¢t buy that bullshit. Lay was convicted on numerous charges, including conspiracy, bank fraud, securities fraud, mail fraud, and (in a separate bench trial held immediately after the jury trial) making false statements to banks. Skilling was convicted of securities fraud, insider trading and conspiracy.
And while itÃ¢â‚¬â„¢s satisfying to see Lay and Skilling convicted, the trial left several important questions unanswered. For instance:
What did Ken Lay do with that $70 million? During the trial, prosecutors hammered Lay for his sales of Enron stock in the year before the bankruptcy Ã¢â‚¬â€œ sales that Lay insisted he made because he was repaying some $70 million in cash that heÃ¢â‚¬â„¢d borrowed from Enron. Now remember, that in addition to millions of dollars in salary and bonuses he got from the company, Lay sold a total of $184.5 million worth of company stock in the three years before EnronÃ¢â‚¬â„¢s bankruptcy. And yes, Lay led a lavish lifestyle Ã¢â‚¬â€œ one that included a $200,000 birthday party for himself in February 2001 Ã¢â‚¬â€œ and numerous vacation homes. But $70 million? A former Enron employee who worked directly for Lay attributed his profligate spending habits to his wife, Linda Ã¢â‚¬â€œwho, you may recall, went on TV in early 2002 to declare that she and Ken had Ã¢â‚¬Å“nothing leftÃ¢â‚¬Â and were Ã¢â‚¬Å“fighting for liquidity.Ã¢â‚¬Â (Poor people go broke. Rich people fight for liquidity.) Ã¢â‚¬Å“Linda spent money like Ken was printing it in the penthouse,Ã¢â‚¬Â the former Enron employee told me. And like other former employees, she carefully watched LindaÃ¢â‚¬â„¢s wardrobe during the trial Ã¢â‚¬â€œ and those outfits apparently included many brand new ensembles straight from high-end stores like Nieman Marcus. While on the witness stand, Lay acknowledged that he and his wife led a lavish lifestyle that was Ã¢â‚¬Å“difficult to turn on and off like a spigot.Ã¢â‚¬Â Statements like that, combined with LayÃ¢â‚¬â„¢s overt arrogance, helped convict him. As Houston lawyer David Berg said, Lay is going to jail Ã¢â‚¬Å“because he was so obnoxious on the stand.Ã¢â‚¬Â
Why arenÃ¢â‚¬â„¢t we seeing more criminal prosecutions of the bankers who helped hide EnronÃ¢â‚¬â„¢s debt? In 2003, the Securities and Exchange Commission extracted $135 million from J.P. Morgan Chase & Co. for its part in a series of deals that allowed Enron to hide $2.6 billion in debt between 1997 and 2001. The SEC said the megabank had Ã¢â‚¬Å“aided and abetted EnronÃ¢â‚¬â„¢s manipulation of its reported financial results.Ã¢â‚¬Â Other big banks and securities firms have also paid fines. But when it comes to criminal prosecutions, only three executives from Merrill Lynch have been indicted by the Justice Department for their roles in the Enron meltdown. The lack of zealous criminal prosecutions against the other crooks who actively Ã¢â‚¬Å“aided and abettedÃ¢â‚¬Â the Enron fraud proves that there is one set of laws for small time thieves and a whole other set of rules for white collar criminals. Indeed, the only real prosecution of the banks has been left to the tort lawyers Ã¢â‚¬â€œ the same tort lawyers that George W. Bush has been campaigning against for years. In October, the biggest civil case against the banks will go to trial in Houston. ItÃ¢â‚¬â„¢s being headed by the securities lawyers at Lerach Coughlin Stoia Geller Rudman & Robbins LLP.
Where are Phil and Wendy Gramm? While itÃ¢â‚¬â„¢s true that Enron was George W. BushÃ¢â‚¬â„¢s biggest career patron until 2004 and that the Bush Administration went far out of its way to help Enron whenever it could, the Gramms performed the most egregious political whoring on behalf of Enron. In 2000, Phil Gramm pushed a bill through the U.S. Senate that exempted EnronÃ¢â‚¬â„¢s trading business from federal oversight Ã¢â‚¬â€œ even though Wendy was serving on EnronÃ¢â‚¬â„¢s board. For her part, Wendy got her job on the Enron board just days after leaving her post at the federal agency that was supposed to be regulating Enron. In 1993, she had pushed a measure through the Commodity Futures Trading Commission that freed EnronÃ¢â‚¬â„¢s energy derivatives business from federal regulations.
Is George W. Bush actually Ken Lay? For watchers of the Bush administration, much of the hubris at Enron should prove disgustingly recognizable. Listen to these concepts and see if they sound familiar: Enron insisted the old rules didnÃ¢â‚¬â„¢t apply to them; it was going to remake the world in its image; anyone who disagreed with its vision was viciously maligned; and as it descended into bankruptcy, it kept cooking its books in order to make it appear healthier than it was.
Now that Ã¢â‚¬Å“Kenny BoyÃ¢â‚¬Â Lay appears headed for jail, letÃ¢â‚¬â„¢s hope a similar fate awaits other Bush cronies. Scooter? Karl? Or even better, Dick?