the CAMP ENRON Report


CAMP ENRON:
... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.


For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003

NOTE to READERS:
(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


OUR DEPARTMENTS:

the COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.


For brief orientation, see this
Welcome to CP


CAMP ENRON:
... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

OTHER GOOD STUFF:
Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Thursday, January 24, 2002

 
--- Jenkins: What's Right, Who's Wrong, What's Up, What's Goin' Down ---

[Previously unpublished correspondence, in re QuasiPundit exchanges here, here, and here, pursuant to Holman Jenkins' column "Enron for Beginners" in 2002-01-23 WSJ (not available online).]

Will is right. "Enron is us." We begged for unbelievable numbers, and we got them. Our mythos insists we can win big by compounding passive investments -- by picking and swapping horses, whether or not we know horseflesh. We're a nation of "system players", who think we're losers unless we beat par. If winning was so damn easy, the jockeys would get minimum wage. If the touts were so damn smart, they wouldn't need our money.

Will is right, Tony is wrong, something is very wrong with pay disparity. A least that's the "90% consensus", including a fair share of gazillionaires. And Will is right, any CEO worth his salt is backed by CEO-calibre staff ... but the excesses keep compounding. And don't get me started on shortstops. (The drivers are very similar.)

Tony says "utter non-sense", but Will (and Jenkins) are right in that stock schemes are intended to correct risk-averse management bias. Decades of management science literature suggests the rational manager avoids risk the rational enterprise would undertake.

But do CEO's sandbag? Do they deliver less than their best work for $1M cash, but work smarter for $2M cash or $20M in stock options? Seems far-fetched.

Split-incentive risk bias theory focuses on middle-management -- where venturing and winning means an agreeable bonus, but losing means career death. Do options work? They do favor a shared culture of hard work, but may have opposite the intended effect on risk preference. A branch manager can't make or break the firm, can't move the stock more than a tick, but any visible failure is now subject to reprisal by "injured" peers. Anecdotally, I have noticed strong conformist "go with the flow" pressures in option-heavy firms.

Re top hat compensation, Tony's right, "these packages tempt some people to fool around with the books". More often, they tempt exec's to take irrational risks short of outright fraud, since they're in on the upside and not the downside of risktaking. [2002-03-07 UPDATE: Warren Buffett makes this asymmetris incentive the centerpiece of his critique of the options game.]

Right on, Brother Will, on short-term focus, options, broader ownership, shills on CNBC, investment as spectator sport. The Street is an out-of-control sports bar, and woe to the team that wins but fails to cover the point spread. Good firms with option-rich compensation schemes (executive suite or rank-and-file) can find themselves lethally destabilized by minor stock wobbles. On the flip side, option-rich harebrained schemes ran fundamentally sound option-poor tortoises off the track in the late great dotcom recruiting derby.

"if Jeffrey Skilling had stuck to things Enron knew ... Enron might still be a darling." Disagree here, Will. The "ethos" -- them's us -- rips assets out of the hands of prudent stewards, and consolidates them in the hands of hustlers.


The Jenkins piece itself offers a remarkable mix of insight and obtuseness -- "Enron for Ostriches".

Among the obtuse: "how do you let the air out of your own stock? Our legal system and the ethos of shareholder capitalism make it very hard".
The ethos, maybe. Our legal system, no, just the opposite. Securities law mandates popping one's own bubble.

"Enron's problem was bad assets" ... "Enron wouldn't have failed if investors had not rewarded it with an excessively optimistic stock price" ... [Cendant, Sunbeam, others] "had nothing to do with deregulation or campaign finance yet they are of a single species" ... "In accounting logic, though, a theory can trump a fact" ... "Harrumphing in Washington won't stop the occasional Enron".
Jenkins is afraid Washington will find a useful role. In his account, auxiliary arguments pop up like Cayman Islands subsidiaries.

"If these were crooks, they were dumb crooks"
"But Papa, how can all the Jews be bankers ... and communists?" "Ah, that just shows you how clever they are". (Having it both ways: either they're not crooks at all, or they're too dumb to succeed, thus there are no crooks in the universe smart enough to warrant institutional oversight.)

Among the useful:
"the public's appetite for risk has been growing stronger. We push companies to live dangerously" and "The sad truth is that Enron's business was maturing."


So here we find ourselves, a ragged band of Capitalist tools -- Jenkins, Krugman, Tony, Will (Vehrs), Will (George), RonK, and more -- puzzling over the bones of a fallen giant, trying to discern what it portends for the rest of us ... saying things out loud to see if they sound right, haphazardly agreeing and disagreeing, not yet divided into factions, striking this or that pose of confidence or concern, fishing for the keys by which we can attach meaning to this event without tearing up too much of the chain of meanings we learned and used in the world before Enron.

Our faith enjoins us to place Capital in the hands of those most capable and inclined to use it best, to create more Capital. Something has gone amiss, something we can't comfortably dismiss as an isolated instance, something we can't readily trace to a single defective component. This may take a while.

P.S. "Prediction: McCain-Feingold by St Val's Day", 2002-01-10, running a day late, as I pegged the Discharge Petition to hit 218 by the 23rd.