Ex-Enron bosses' scenario a sham
By BRUCE MEYERSON
By BRUCE MEYERSON
NEW YORK — The Enron corporate murder mystery is solved. The investors did it.
That is essentially who Kenneth Lay and Jeffrey Skilling have blamed by describing the energy trading company's collapse as a "classic run on the bank" during testimony at their fraud trial in Houston.
Had investors and creditors not run scared as the scandal unfolded in 2001, dumping their Enron shares and refusing to lend more money, the company and its purportedly healthy business wouldn't have been forced into bankruptcy, the former top two officers of Enron argued.
There's a term for this type of reasoning. It's called blaming the victim.
From this vantage point, Enron would have weathered the storm if institutional and individual investors, despite their staggering losses on the stock, had bravely clung to their shares, dismissing all the spooky news reports — another sinister culprit, along with short sellers, in the conspiracy theory being spun from the witness stand. The same would have held if all the lenders had seen through the panic rather than choking off Enron's liquidity.
An underlying presumption required for this scenario to be true is that nearly all investors erred in assessing the company and the financial improprieties that Lay and Skilling have downplayed as the deeds, limited in scope, of an unethical few.
Irrational market hysteria is a basic characteristic of a "classic" bank run, where word spreads that a financial institution is short of cash and panicked depositors rush to their branch to withdraw their savings before the money is all gone.
Occasionally, the crush of withdrawals can be ruinous for a bank, forcing it to quickly liquidate investments at fire sale prices until the institution is left with insufficient assets to repay all its deposits.
But the reality is that most banks survive a run on deposits, and any resulting failure is the reflection of a pre-existing financial ailment exposed by a run. Research shows this was true even before the arrival of federal savings insurance to reassure depositors, according to George Kaufman, an economist at Loyola University Chicago who focuses on banks and financial markets.
"The fable is that a run can bring down a solvent bank. What a run does is: It causes an insolvent bank to be recognized as insolvent," Kaufman said.
A run needn't be fatal because an otherwise healthy institution has the wherewithal to raise sufficient cash or borrow it from other lenders that wouldn't risk their money on a bank whose ability to repay was suspect, he added.
That's where the proposed analogy between a bank run and Enron's collapse fails.
If Enron's business was truly sound — its assets truly of greater value than represented by its plunging share price — then some savvy company or investor would have swooped in for the apparent bargain, dismissing the market scare as nonsense.
That almost happened in late 2001, when smaller rival Dynegy Inc. initially agreed to bail out Enron with a deal to acquire it for $8.4 billion. But Dynegy soon bailed on that would-be bargain after briefly trying to negotiate a lower price. That decision came as debt rating agencies downgraded Enron's credit worthiness to junk status, showing that they, too, had little faith in what Lay and Skilling insist was still a sound business.
By that reckoning, the list of wrong-headed players who contributed to the Enron bank run grows quite long. Not only did Dynegy and the credit rating agencies get it wrong under Lay's postulate, but so did Citigroup Inc. and JPMorgan Chase & Co., both of which lent hundreds of millions to Enron before turning off the spigot. Likewise, the California Public Employees' Retirement System apparently erred in deciding it needn't risk any more pension money trying to prop up its increasingly worthless Enron shares, once worth nearly $200 million.
"You have to believe, in order for that to be true, that everyone in the market thought wrong," said Kaufman, co-chair of the Shadow Financial Regulatory Committee. "If this was a difference in agreement that some investors thought Enron was in trouble and others thought they weren't," then Enron's shares wouldn't have slid to fire sale prices. "But if everyone was on the selling side, that would tell you the market thought Enron was in big difficulties — and probably right."
It's fine for Lay and Skilling to insist they were oblivious to the fraudulent accounting and financial schemes transpiring on their watch. They can also insist they weren't selling their own stock in anticipation of the coming bank run, and thus not guilty of insider trading. The jury will decide on all that.
No doubt the two disgraced executives don't mean to be so literal by invoking the bank run theme. Instead, they probably just hope it sounds catchy enough to resonate with ordinary people like the jurors.
Still, it's somewhat insulting for them to point an accusing finger at investors, effectively second-guessing everyone else's right to cut bait and preserve whatever paltry sum remained of an investment in Enron.