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.
Monday, June 24, 2002

 
--- Can't See the Haunted Forest for the Bad Apples? ---

We've reached a collective turning point on the path to Zenron, but we have a long way to go. The "train wreck" theory -- Enron as anomaly -- has given way to the "bad apples" theory of market malaise. [The race is remarkably tight -- Google gave 778 cites for Enron and "train wreck", 777 for Enron and "bad apple(s)" -- but momentum favors Bad Apples down the stretch.]

The Bad Apple is a favorite of regulatory minimalists, championed by Paul O'Neill at Treasury, and now voiced prominently by President Bush.
"Ninety-five percent, or some percentage, huge percentage of the business community are honest ... But there are some bad apples."
A bad apple here, another over there, just random points of rot ... no call for a systemic "Axis of Apples" analysis. (Ironically, the old saw is "one bad apple ruins the barrel". Either rottenness spreads like wildfire, or the evident rottenness in one apple alerts us to the incipient rottenness of its companions.)

But in other circles of elders who live to distinguish between gain and loss in worldly matters, there's a sense the gyros have gone wobbly somewhere in the Great Machine, and old hands are having a second look at the schematics.
"here we find ourselves, a ragged band of Capitalist tools ... 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 ... fishing for the keys ..." (CampEnron, 2002-01-24)
Does it matter? Preliminary diagnosis skews the course of follow-up tests, shades our diet, exercise regimen and travel plans, suggests what horrors might lie ahead, and steers us toward one or another mode of therapy. If the problem is a few bad apples, pluck them out. If apples are going bad out of moral failing, of their own perverse volition, take a few to the cider press as a deterrent example to others.

On the other hand, if the problem is a full-fledged infestation of apple maggots, we may have to burn whole orchards to cinders, replant with wider separations, inspect for pests more diligently, create favorable habitat for antagonistic predators, or experiment with companion plantings. We may even have to compromise our marketarian ideals of organic farming, and resort to noxious sprays and powders ... or mark up the price of apples and plan on less applesauce in our diet.

In today's excursion, we lay Train Wreck Theory to rest, and nip Bad Apple Theory in the bud. In a later piece we'll present a loose taxonomy and evolutionary reprise of Enronitis theories, and probe the roots of the current methodological tension ... basically a classic left-right fistfight over the merits of retributive justice vs social engineering. (We may return at some later date to recount the hysterical pageant of history ... suffice it to say that as the world of Enron evolved, many great dynasties rose and fell on that river in Egypt.)

In the beginning ... well, there is no proper beginning, so let's just start here:
"We’re bringing a lot of attention to the accounting profession that really isn’t justified based on the examples that are given. We’re worrying about a train wreck, and the first bolt hasn’t flown out of the train to begin with. … In any situation, there are a couple of bad actors and the bad actors usually drive what we do ... ." (Sen. Enzi (R-WY), in re SEC audit rules, 2000-09-28 (thx Charlie Cray)
And so it came to pass that nobody tightened any bolts, lubed any switches or double-checked any signals, and the Enron Express -- the great engine of e-everything growth, the Bullet Train of deregulation, pride of the New Economy line -- cannonballed disastrously into the abyss.

Train Wreck Theory ruled the roost in its time. Things happen, without much rhyme or reason, they don't happen often, and watching a train wreck is no reason you shouldn't get on the next train and ride.

Some even sensed opportunity in the ensuing skittishness. See, for instance, a 2002-04-09 Morningstar piece
"Managers Find Opportunity in Enron's Demise ... investors have the nasty habit of painting every scandal (or in most cases, the mere accusation of scandal) with the same brush."
... going on to describe how savvy money managers were taking advantage of bargains on TYCO (down 56% since 4/9), El Paso (off 54%), Dynegy (74%), Qwest (35%), Verizon (6%), SBC (10%), WorldCom (77%), TECO (13%).

If Enron were a train wreck, this approach should have made money. Even if the problem were a few bad apples, this approach should still have made money ... but a balanced portfolio of the eight recommended "opportunity" stocks would have reaped a 60% loss in the 11 weeks post publication. That's some basket of bad apples.

Is the shortage of Good Apples episodic, or systemic? By our reckoning, the Bad Apple model isn't even in the running as a defensible explanation. Is it as bad as it looks? No, no, it's worse.

Reacting to a decade-long trend toward shameless accountancy, Standard & Poor's revised its standard definition of core operating profits, to take some of the outright goofiness out of last year's model. With respect to the new definitions, aggregate year 2001 operating earnings for the entire S&P 500 were overstated by about 35% across the board. That's not one bad apple, or a few. That's apple blight. And for a number of reasons, even that paints an overly rosy picture of the financial orchard.
Contrary to widespread belief, the S&P 500 is not just a list of 500 top market caps. The list is screened for merit -- quality of earnings and stability of enterprise. Some of the wormier big-name apples don't even make the list.

2001's "500" was already culled by departure of high-flying, hard-crashing dotcom, fiber and energy firms.

By definition, operating earnings excludes nonrecurring losses -- such as goodwill writedowns -- reported elsewhere. And neither category includes real losses yet to be recognized on the books. The boom that went "BOOM!" left us with huge unrecognized capital losses in several important categories, in market-leading sectors.

Reported non-operating earnings still include fiction such as nominal pension fund earnings (despite actual investment losses in the actual funds).

All of the above takes financial statements at face value, and makes no provision whatsoever for over-aggressive accounting, e.g., "mark to market" ... or for outright fraud, e.g., roundtripping.
All told, perhaps 50% of all corporate earnings reported in recent years were fictional. The froth settles, and the glass is less than half full.

But it's worse than that. We cranked exaggerated earnings data into growth rate calculationss, where the resulting errors are magnified. Every "miracle of compound interest" scenario, every benchmark rate-of-return model, every retirement plan is out of whack. The apparent downturn is not a wiggly deviation from trendline, to which we'll necessarily return. It's the evaporation of a mirage. LIke Wile E Coyote, we're off the cliff, holding the anvil, spinning our wheels in thin air, and just starting to look down.

How d'ya like them apples? As Martha Stewart might say, "When life hands you Bad Apples ... make Bad Apple-rosemary-caramel shortcakes"!