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Chamber vs. SEC

Steven Pearlstein
Washington Post Columnist
Wednesday, March 30, 2005; 11:00 AM

Washington Post business columnist Steven Pearlstein was online to discuss his latest column, which looks at the legal initiatives launched by the U.S. Chamber of Commerce against the U.S. Securities and Exchange Commission.

He also explores "Conspiracy of Fools: A True Story," by Kurt Eichenwald, which chronicles Enron's collapse. It was reviewed in Sunday's Book World.

A transcript follows.

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.


Broomes Island, Md.: As a former utility employee, I am reading "A Conspiracy of Fools" with great interest, trying to compare where my company (Constellation Energy) was at the same time as Enron.

The 90s were a heady time for electric utilities, with the implementation of electric deregulation and the opening of the electric market. I worked in the marketing department at CEG when Enron was taking over the world, and I remember that our management was driving themselves crazy trying to figure out how Enron was doing it. If they only knew: OH! Enron was cooking the books! That explains it!

Enron changed our industry and our employees across the nation. I remember when Enron pulled out of the California retail energy market, that was a signal to us that retail energy residential sales wasn't something we should consider. And more personally, after the crash, a co-worker's parents, retired from Portland Electric, had to consider moving in with him.

I am reading the book now. It is a page turner! I was in work today and all I could think of was "How long till I get home to continue reading?"

Excellent, Excellent, Excellent! Congrats to the author!

Steven Pearlstein: For a business book, its a real page turner. And of course you know it pains me to give this book such a big plug, inasmuch as its author is a reporter for another newspaper that shall go unnamed but is in Manhattan and has a square named after it.


Atlanta: Good article. I worked in the energy trading business during Enron's rise and fall.

In any event, your article was right on - no one was willing to ask the right questions, the cash cow was coming too quickly to question some things that they were doing.

But one thing that truly is catching Enron where it shouldn't is the accusation that they were 'manipulating markets.' In reality, the markets were set up to be manipulated. When the markets were set up, the people setting it up told the regulators that that was the case, and they were shot down. So Enron saw an opportunity, and took advantage. For the most part, that is called good business. The contracts that were entered into with energy companies were probably, for the most part, on good faith with both companies - and should be honored, not ripped up because of fraud in other areas. The traders I knew would take advantage of any blips in the market and make money - that was their JOB. Not saying: oh, maybe people can't pay that and we should just lower the price - how ludicrous. A business is there to make money, not fraudulently, but that's what everyone was paid to do.

Steven Pearlstein: Boy, we're really getting people who know their stuff today. The question you raise is a really good one. Energy traders are indeed supposed to look for opportunities in the market to make money, arbitraging the price of this versus the price of that, which makes markets efficient. I agree with you there. And in a technical, narrow sense, none of the trades was illegal in and of itself. But there is a fairly well developed case law in market manipulation, particularly when it involves coordinating with other traders. And that kind of manipulation is illegal and is what caught up Enron and the others, as I understand it. Furthermore, to the extent that Enron and others were both trading and producing, and to the degree that they withheld power to the system as part of a broader market manipulation/trading strategy, that had other legal problems, particularly since power generation was still a somewhat regulated activity.


Arlington, Va.: I knew Andy Fastow of Enron fame when he was in high school and I found him a real charmer. Did you find that and why did he marry someone less attractive, because of her family connections in Houston? Thanks.

Steven Pearlstein: First off, let me say I don't want us getting into any discussion of why somewhat marries someone more or less attractive. These are very subjective judgments. It is true that he married into some money, as well as marrying someone who was very well educated and, if memory serves, in the same company at one point. He actually doesn't come off as very charming in Conspiracy of Fools. In fact, he's a rather nasty character, thuggish and petty and ruthless in terms of cutting off investment banks that didn't play along with some of his schemes or back stabbing other employees who questioned his activities. What high school did you guys attend and how did his charm manifest itself?


Mt. Lebanon, Pa.: After reading "Pipe Dreams - Greed, Ego, and the Death of ENRON" and now "Conspiracy of Fools", I'm wondering: has this institutionalized fraud spawned the ENRONization of the U.S. government and in particular, the Defense Department's "management" of the occupation in Iraq?

Do you see parallels here? happy numbers; off-balance sheet maneuvers to deceive investors and regulators; conflict of interest to the financial harm of ENRON itself; silencing then moving internal opponents out of the way; vanity expensing; soliciting insiders and then outsiders to profit from the confused mess; unqualified schemers promoted to lofty positions of authority; intimidation of outside analysts; a board of directors led by "no one home"; irreparable harm to investors, suppliers, creditors, vendors, taxpayers.

In other words, did ENRON - a marriage of unbounded greed, political belly-crawling, contempt for law & proper conduct, reality denial, personal vendetta, and colossal stupidity - inform and inspire our present U.S. government and the pursuit of its own global empire?

The never-ending story seems oh, so familiar.

Thanks much. Vietnam Era Draftee/Veteran

Steven Pearlstein: It is interesting you make this observation because when I came into the office yesterday, that was precisely the column I intended to write. Then something in the paper about the Chamber caught my eye and I decided to go off in another direction. But yes, I think you are on to something: there is a kind of corporate management style at Enron that I think is reflected in the way the Bush administration is run. The basic model is to keep power and knowledge restricted to a tight circle of loyalists, ignore and starve institutional processes and checks and balances to the point that they atrophy, and manipulate and pla ate the outsiders (the shareholders, the voters, the press)as much as you have to without ever really leveling with them or thinking you might learn something from them. The purpose of the game is to win (power, money) and there is an end-justifies-the-mean quality to how you do it. And you see it everywhere, from the abrogation of civil rights down in Guantanamo to the non-punishment for those supervising prisoners who die to manipulation of the Social Security agency to further policy initiatives. I observe this is as much as Cheney attitude as a Bush one, by the way, and was evidenced in Cheney saying repeatedly that there was no market manipulation in the California energy crisis when, in fact, he really didn't know what he was talking about. It's all about helping our friends, screwing our enemies and circling the wagons in times of stress.


Fort Washington, Md.: What should CEOs and CFOs do to encourage transparency and getting instances of questionable accounting surfaced for discussion? Internal controls are useful, but can be too late (after the fact)in identifying problems. A culture of openness is needed to identify and to deal promptly with problems.

I have heard of one CEO and CFO who meet for one day each quarter with their divisional controllers to discuss issues with the draft quarterly financial statements. The controllers set the agenda and lead the discussions. That is real leadership by the CEO.

Steven Pearlstein: That's an interesting approach. Not sure a big company CEO needs to do that but certainly the CFO. And I think you can also use some tests that can indicate red flags. One simple one: if divisions or the entire company comes in close to expectations, that ought to trigger a more thorough review than if they come in significantly under or over.


MD 20615: I have to tell you this. Last night (THIS MORNING) at 12:30 am, I was standing in my bathroom with the door closed to keep from waking up the family and devouring Eichenwald's Conspiracy of Fools: A True Story. I heard about the book on the Diane Reim show last week and immediately purchased a copy. I can't put it down! I am at work now counting the hours when i can get back home to finish the thing! What a page turner!

Steven Pearlstein: That was me, too, only I went into the guest bedroom!!!


Washington, D.C.: I've worked across the table from Enron for 15 years, and most recently worked on the sale of one of Enron's last electric generators. Eichenwald's thesis is off the mark in several key respects.

First, Eichenwald completely ignores the role which the Federal Energy Regulatory Commission played in causing the scandal. Two of FERC's four sitting Commissioners were appointed by Enron, and the FERC's career staff is completely incompetent, to put it mildly.

Second, Eichenwald hasn't sufficiently pointed the finger at Enron's outside lawyers, who generally assigned junior lawyers to service Enron on day-to-day technical matters, and produced horrible work for which the entire energy sector will be paying for a long time to come.

Third, Eichenwald ignored the substantial role of the rating agencies in the misleading of investors. The truth is, Moody's and S&P have very few employees who are familiar with specialized industries. In energy, transportation, and communications, both Moody's and S&P employ legions of junior MBAs and former bankers, and nearly no one with actual experience in the industries they're rating. They typically use credit screen formulas which are nearly identical to those they use for other businesses. Fact: they don't work. An energy firm's Moody's or S&P rating bears absolutely no relationship whatsoever to the firm's actual creditworthiness or financial profile. The only "reform" since 2001 at the rating houses is that they've tightened coverage ratio requirements slightly. That's literally all, and the ratings they produce are still totally valueless.

Steven Pearlstein: I certainly agree with you about the lawyers and the rating agencies. I thought Eichenwald was too easy on Vinson and Elkins. One thing you have to remember is that when you take on a law firm, their costs of brining a libel suit is significantly less than your cost of defending it. And I'd bet he got absolutely no help at all from any of the lawyers there, as attested to by the fact that none of the scenes is set inside the firm. As to FERC, I'm not sure I agree that the commissioners were appointed by FERC or that they have been Enron toadies. I don't think the evidence supports that.


Anonymous: I'm in the middle of Eichenwald's book, and I have to say I agree with you that his portraits of Skilling and Lay seem implausible. One could, maybe, argue that Skilling was fundamentally a weak man in the wrong job. But Lay had a meteoric rise-- up from nowhere, through a series of executive positions with increasing responsibility, all leading up to his job at Enron. Did he suddenly turn into a sleepwalker? Hard to believe.

Steven Pearlstein: Well, I actually disagree with you on both men. I think Lay was smart and focused on some things while ignoring a lot of other things. He learned his management while running what was essentially a regulated utility that was a pretty simple machine in which he could rely on operational experts -- and did. Running what became a very fast growing, unregulated, financial firm with an international power generation subsidiary and all sorts of off-balance sheet entities -- he was way over his head. The economics degree not only does nothing to help you with that -- it probably sets up habits of mind that are all wrong, in fact.

As for Skilling, he obviously is guilty of lousy management if nothing else -- failure to oversee, failure to pick good and trustworthy people. Again, his training was as a strategy consultant and, in fact, strategy was what he focused on. That said, I think he had a wink and nod relationship with Fastow and the finance staff that was the source of all the problems, and willfully ignored warnings he was getting from others about that. He knew something was rotten down there, even if he didn't know exactly what. I don't know if the term criminal negligence has any legal meaning in terms of securities fraud, but that's what I suspect we're dealing with.


Laurel, Md.: I've read four books on Enron, though not Eichenwald's. If I understand correctly, Enronomics was a house of cards built on the company's stock price. Thinking back to the period they were designed (the late 90s), it was common to think "this time it's different" and that stock prices were reaching for a new, permanently high plateau.

Obviously, subsequent events have pointed out the folly of this thinking. But I'm not entirely convinced that if Enron's gamble had paid off, that anyone with money at stake would think the company had done anything wrong.

Steven Pearlstein: You got that right!


Fairfax, Va.: I am a big fan. But on what basis can you possibly conclude that Lay was "largely clueless" about the financial games going on at the company? Please enlighten us with the evidence.

Steven Pearlstein: Well, the evidence is really the lack of evidence. Eichenwald is the latest person to do a pretty thorough job of talking to everyone who had traffic with Lay in the company who was willing to talk (and that is quite a few people). And if memory serves, nobody has come up with a smoking gun yet -- evidence that he ordered people to do bad things or even evidence that he knew of or was warned of bad things. As Eichenwald tells it, in fact, when Sherron Watkins finally wrote him her anonymous letter, he took it seriously enough to have others look into it. And the process of having the lawyers and others look into it, in Eichenwald's telling, actually did help set in motion a series of events that led to the rather quick unravelling of things (along with the declining stock price, a short-sellers attack on the company and a couple of critical articles in Fortune and the Wall Street Journal). The stuff about him making a killing by selling his stock is just a crock: he was selling his stock so he could make margin calls on the rest of his stock.


Houston: Doesn't it concern anyone who has read the book that the author's research assistant was 17 years old when hired and no experts on accounting and/or structured finance are listed in the acknowledgements? Many of the transactions that have entered the Enron mythology as corrupt, such as the prepays, were legitimate, as Justice Cooke in the UK recently ruled. Time for someone to approach Enron critically, and with some expertise?

Steven Pearlstein: I suspect the Securities and Exchange Commission qualifies.


Mt. Lebanon, Pa.: ENRON was about booking earnings without net positive cash flow - aside from all of the scumbaggery, that is.

What other present Wall Street darlings fit this pattern? Doing the balance sheet and income statement tango, not the fraud.

Thanks much. HLB

Steven Pearlstein: Wish I knew. But as Fastow proved, you can use off-balance sheet entities (non-reporting) to finagle cash flow statements, too.


Arlington,Tex.: Is Donahue the anti-christ?

Steven Pearlstein: Of course not. He's a controversialist whose big aim in life is to slay two dragons: the unions and the plaintiffs bar. And he follows those aims wherever they lead, even if it means taking a centrist, Main Street organization like the Chamber and using it to defend indefensible Wall Street practices and excessive corporate salaries. He's a good Irishman, and I learned in Boston (meaning Irish) politics that Rule No. 1 is that the enemy of my enemy is my friend. Donohue follows that Rule.


Anchorage, Alaska: I was in the electric power industry in the 70's and 80's. I am a multi-degreed electrical engineer with all of the licenses. But by 1990, the industry had gone the way of lawyers, accountants, and media whizzers throwing the rest of us technical types out of work because: We just don't get it.

After all, who needs the highly skilled and experienced engineers who designed, built, put into place, and operated the American infrastructure when it's just about amassing tons of boodle and passing the debt onto the shoulders of a greater fool.

So, who's sorry now?

Kind regards..

Steven Pearlstein: A well-made point also made by others this morning. By the way, why Anchorage?


Arlington, Tex.: The Chamber's filing of a brief on behalf of the investment bankers defense in the Enron case, is it an attempt to bully the justice system so that other egregious assaults on the market can continue to be attempted with little, or no, consequence?

washingtonpost.com: Chamber Files Brief On Enron Losses (March 29, 2005)

Steven Pearlstein: The reason the Chamber filed the suit is because they see it as a case that is a first cousin to a civil case now before the Supreme Court in which they have also filed a brief. That case, a shareholder suit, has to do with calculating the losses to shareholders from bad management. The Chamber believes there should be no shareholder lawsuits at all, although they deny that but that's essentially what they would like. And anything that limits the amount of damages is also good, in their view. Again, anything that is bad for the plaintiff's bar, which they think is ruining American business, is a good thing.


Minneapolis: What do you think about the role of business school education in all the business scandals we've been seeing? I have to believe that the people running those schools are taking a hard look at what they are and are not conveying to their students about acting ethically. Their hardline responses to the recent hacking scandal at some schools (where students were able to access their admissions files sometimes weeks early to see if they had been accepted) would seem to reflect a need for "teaching lessons/making examples."

Steven Pearlstein: Not sure this is really a business school issue, other than to teach an important lesson to top managers about the importance of a company's culture and how to shape it. It isn't shaped by forcing every employee to take a computer course on ethics. It is shaped in all sorts of indirect ways by what top executives say and do, the tradeoffs they are perceived in making, etc. If top executives display a ruthlessness in meeting Wall Street expectations, then you can be sure the rest of the organization will get that message and make similar small decisions in their own realm.


Enron toadies: Pat Wood (FERC). Harvey Pitt (SEC). Dick Cheney (White House).

Should I go on?

"Good words to you."

Steven Pearlstein: Not sure I would question the integrity or Pat Wood and Harvey Pitt that way. Frankly, I think Pitt would have dealt very harshly with Enron. And Wood, while industry friendly, understands that his job is to protect the public interest. Cheney isn't so much a toadie as a fellow traveler.


Washington, D.C.: Let's get back to the Chamber story. Aren't these just further examples of how the Chamber is - simply pursuing outcomes that are good for the senior executives of its member companies, regardless of how horrific the effects are on the rest of our country and its citizens?

Steven Pearlstein: Absolutely. And frankly, if I were running a toy store in Toledo or a small employment agency in Bakersfield or a metal shop in Dayton, I think I wouldn't want my dues used for things like speeches defending CEO pay or legal briefs on behalf of Merrill Lynch executives who can afford the best lawyers in the country or threats made to the SEC that they will be sued if they make it easier for disenchanted shareholders to nominate a few directors to run against the nominees of the current board. The Chamber has strayed very far from its Main Street roots in an effort to raise money and raise its visibility in Washington. It has also become a very partisan (Republican) organization, contrary to its previous efforts to be a bipartisan as possible, given the obvious Republican leanings of its members when it comes to voting.


Columbia, Md.: While I haven't read "Conspiracy" (it's in my to read pile) I've read other Enron books. One thing mentioned in them is the role that the performance based employee pay plan contributed to the culture that allowed Enron to get away with their crimes. Yet the same sort of performance pay plans are beginning to appear everywhere from the Defense Department to Constellation Energy (for real laughs look at how many former Enron'ers now live in Baltimore).

Isn't there a huge risk that the sort of "don't rock the boat" mentality (and it's deleterious effects) could spread to other parts of society?

Steven Pearlstein: Yes, that's a very good point, although I'm not sure I agree with your conclusion. The book does emphasize the use of the bonus pay plan by Skilling and Fastow to reward those who went along with their thinking and schemes and punish rivals and critics. That's a bad compensation system. But it doesn't mean that the better solution is to go back to a pay scheme that is based solely on hours worked and seniority. That's bad for other reasons. You need to have checks and balances on the discretion, with objective criteria that go along with the subjective criteria. But getting rid of subjective judgment shouldn't be the goal of any system. You need to incent the people making the subjective judgment to have the best interests of the organization in mind when they do so. And that's a tricky bit of business.


Conspiracy of Fools: If this book was entered as evidence at the trials of Lay and Skilling..

Lay.. not guilty due to traipsing around the world in the latest of corporate jets bellying up to political power.

Skilling.. not guilty because he was lazy, weak, didn't do his job, and like Sgt. Schultz: "I know nothing. I see nothing. I hear nothing. Please don't tell me anything!"

Guilty of stupidity and ignorance but is that a crime in modern corporate America?

Seems like the qualifications to advancement.


Steven Pearlstein: Thanks.


Janesville, Wis.: Was the Enron collapse really the result of being too dependent upon one source of funds, the excessive profits to be made from manipulation in California, which allowed them to spend, ie waste, billions on other things they couldn't really execute, like broadband, until regulators finally stepped in and cut off the excess electricity profits, at which point they crumbled? Wasn't it really that they weren't competent in many areas to do what they tried?

Steven Pearlstein: No, I hope I didn't give the impression that the California stuff as a big reason for the collapse. Actually, it wasn't at all. In fact, financially it might have been the source of strength.


So are we done with..: .. mark to market accounting?

And when is Congress going to be indicted for their role in the ENRON scandals? If a foreign power had done to our standards, regulations, and business structures what Congress has done in the last 20 years, we'd declare war! And rightly so.

So when does Phil Gramm and Co. get their day in court?


Steven Pearlstein: I suspect Mrs. Gramm, an Enron director, will get her day in court before long.


Arlington, Tex.: I'm more astounded by the politics behind corporate corruption than the actual acts. Has Wendy Gramm,a Distinguished Senior Fellow and Director of the Regulatory Studies Program of the Mercatus Center at George Mason University in Virginia, a former chairman of the U.S. Commodity Futures Trading Commission from 1988-1993, administrator for Information and Regulatory Affairs at the Office of Management and Budget from 1985-1988, the Executive Director of the Presidential Task Force on Regulatory Relief and Director of the Federal Trade Commission's Bureau of Economics and a director in charge of the auditing committees for both Enron and Invesco getting a bye because she is the wife of former Texas Sen. Phil Gramm?

Steven Pearlstein: I'm not gonna get into that exactly. She is a deregulatory ideologue, or was before the Enron debacle. It would be interesting to hear her on the subject now.


Washington, D.C.: Would it be incorrect to say that the USCC's position is pro-fraud? Perhaps some of the nation's executives want the freedom to pilfer shareholder money and pump up stocks with lies, to get wealthier themselves?

I think that in the "ownership society", as in all others, there are the haves and the have-nots; the managerial control allows the insiders to transfer money from the small-time shareholders. The mystery to me is why institutional investors like pension funds are willing to go along with a culture that fleeces their members.

Steven Pearlstein: The Chamber's position is anti-fraud, but anti having the government really having the tools to root it out and prosecute it. They are for voluntary codes and letting the market fix all problems, basically. Certainly they are against lawsuits and plaintiffs lawyers trying to fix any problems.


Anchorage, Alaska: Why Anchorage. Because that's where I'm from courtesy of my Dad's Air Force career in the 60's plus my own induction into the service during Vietnam (though I let the Navy take me instead and went right into their nuclear power program).

Alaska's own energy programs were derailed by Republican legislatures and governors in the late 80s and 90s - typical myopics who can't see past their quarterly dividends and incestuous consultancies.

Reason preserve us!

Good session today.

Steven Pearlstein: Thanks.


Steven Pearlstein: That's all for today folks. Good discussion. See you next week.


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