the CAMP ENRON Report

... 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

Submit Feedback To:
RonKsFeedbag at aol

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

(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.


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

... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

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.
Wednesday, July 31, 2002

--- More Good Summer Reading: the FT Enemies List ---

Financial Times opens a major series titled "Barons of Bankruptcy" -- an investigation of executive compensation in the 25 largest US corporate bankruptcies since January 2001. First installment of the three-parter includes a roster of 25 exec's who banked ($3.3B)as their companies tanked ($211B).

Reassuring (I think) is the fact that 10 of the top 25 are Enron exec's. The remaining 15 are flashes in the telecom industry pan.

--- Beware the GigaNop, My Son ---

Today is the expected release date for FERC's "Giga-NOPR" [Or should that be "GIGO-NOPR"?] ... a Notice Of Proposed Rulemaking, several hundred pages in length, defining FERC's "Standard Market Design" for electric power across the USA, and opening it to a 75-day comment period before imposing it on regional markets from coast to coast.

FERC is still charging down the highway to deregulated energy markets, even as dereg's wiser champions survey the wreckage and ponder "lessons learned". Dereg is still a dubious vision, and an even more questionable reality given recent experience.

Expect passionate resistance especially from the Southeast (where legacy industry is comfortable in the old schemes) and Northwest (where "SMD" would abrogate a century's worth of grand-scale social compromises underlying hydropower, and where we're still staring in disbelief at bills resulting from the California experiment's bizarre side-effects).

The "gotchas" of dereg are nastier than anybody anticipated, the fundamental issues are unsolved (and arguably unsolvable), the gamesmanship cahllenges turn out to be major-league, and the stodgy old regulatory regimes don't look half bad now in retrospect.

FERC is on thin ice after a federal court found they exceeded legislative authority. They dodged a bullet earlier this year when the Cantwell Amendment came to a floor vote before the "Death Star" memo surfaced. Even this year's Lone Star dereg is unexpectedly problematic. (By quirks of history, geography and economy, Texas is self-sufficient and virtually isolated from national power grids.)

FERC is playing with fire. Expect feedback -- possibly at bureaucratically lethal levels.

UPDATE: The beast is released. FERC press materials describe it as a remedy for market defects. It does cap spot prices ... but at several times the price ceiling FERC applied in mid-2001 to short-circuit the California crisis gamesmanship. It's going to be one very hot summer.

--- Camp Enron Kicks Back While WaPo Dissects Enron ---

The lazy days of summer have gotten to us here at Camp Enron. Lots of chatter on the radar, lots of good material in the pipeline -- special segments on Crime and Punishment, and the whole stock options controversy -- but lots more to do outside.

For trail snax, check out the Washington Post's big five-part series on the fall of Enron. Peter Behr and April Witt dig deep and lay it all out. They've cultivated fertile relationships with insiders, pored over documents, connected the dots, and -- while Enron languishes in the shade of WorldCom and a rudderless stock market -- it's a big, big story ... prelude to a long-running courtroom drama series with wide-ranging collateral damage.

WaPo presents the whole tic-toc in giant fold-out graphics that make Playboy's "Women of Enron" look lame. (Yeah, OK, I gave it a look ... and it was lame.)

Day One subhead sums it up nicely: "Opaque Deals, Accounting Sleight of Hand Built an Energy Giant and Ensured Its Demise"

Day Two: "Dream Job Turns Into a Nightmare - Skilling's Success Came at High Price"

Day Three: "Concerns Grow Amid Conflicts - Officials Seek to Limit Probe, Fallout of Deals"

Day Four: "Losses, Conflicts Threaten Survival - CFO Fastow Ousted In Probe of Profits"

Day Five should be up late tonite.

Tuesday, July 23, 2002

--- O Brave NewWorldCom ---

As expected, WorldCom spun itself into the Mother of All Bankruptcy. Stated assets in excess of $100B won't cover liabilities of a little over $40B. True economic assets are estimated in the $15B ballpark ... but not all of those are separable and fungible, some may be radically overpriced, and there are not a lot of cash-rich potential buyers in the telecom game these days.

[As always, see Ben Silverman's excellent blog for all WorldCom's dirty details.]

Pre-filing, was a five-way Mexican stand-off ... everybody holding a gun to everybody else, everybody threatening to shoot the puppy and by extension, themselves. CITI, JPM and GE negotiated a desperately needed $2B infusion in return for debtor-in-possession status -- first-served in debt repayment, in the driver's seat for restructuring, and they get first pick of venue: New York City. By luck of the draw, Judge Gonzalez is handling both Enron and WorldCom bankruptcies.

WCOM equity is worthless, WCOM debt will probably settle for next to nothing. They probably can't divest many assets, and current opinion runs against their being acquired. The end-product of bankruptcy is the same company, with new owners, with debt-holders losing most all of what they're owed in exchange for shares in the new (relatively debt-free) company.

Biggest bag-holder is J P Morgan Trust, in for a whopping $17B ... but that doesn't tell the whole tale. The JPM unit merely holds WCOM debt instruments in trust for ... who? A lot of little people? A few big people and/or institutions?

Most telecom's, I'm guessing, will lose money directly in WCOM bankruptcy. Network enterprise -- telco, airlines, electric power -- is a funny business. Telecom's all owe each other money, all help collect each others' bills. They all subsidize each other massively, since anybody's network subset has fewer connectable points of presence and less statistical redundancy.

Meanwhile WorldCom switchboards keep on plugging, though customers may suffer marginally from cost-shaving strategies. The real nightmare is for competitors. The fiber-optic glut is still out there, commodity bandwidth prices are in the crapper, value-added services are dog-eat-dog, and the NewWorldCom dog emerges free of the debt load most other dogs are carrying.

Like dominoes, telecom after telecom could go bankrupt, emerging "born again" like NewWorldCom. Telecom suppliers -- the closest this sector gets to "smokestack industry" -- are hurting, masters of a vast universe of no-account customers. And after everybody goes bankrupt, they're still all behind the eight-ball. Prices are still lousy, marketing costs are still intense, and the fiber glut is still out there. It doesn't take much surplus in any commodity to send prices through the floor. A glut of No. 2 corn will go away eventually, courtesy of rats or rot or industrial conversion or livestock elasticities or actual human consumption. Fiber just sits there, while encoding and transponding technologies pack more and more messages into each strand.

So after everyone goes bankrupt, they've still got problems. The palette of solutions includes demand growth (where it's not clear the curves will cross in any foreseeable futures) or world war (destroying real physical capacity), or deliberate withholding by some sort of cartel. A global restructuring is in order but there's no model, nobody to carry it out, and no barrier to the same conditions creeping up again.

There'll be a developing shortage of qualified restructuring experts, managers, trustees, examiners, along with forensic accountants and investigators, and it'll get worse as CEO's face those August 14 sign-off decisions and as existing investigations mature.

Jack Grubman, of Salomon Smith Barney, of CitiGroup, is a marked man. No matter how much his picks reflected true-believer enthusiasm, he probably stretched the truth or wore conflicting hats enough to get nailed. Ebbers may be headed for personal bankruptcy, or worse. Sidgmore is under increasing scrutiny, and any number of corrosive disclosures could threaten the integrity of his shining armor.

Major financial institutions are on the hotseat. CitiGroup and J P Morgan Chase are in the Congressional crosshairs today, and getting pummeled on Wall Street. The mad science departments at many moneycenter banks were instrumental in engineering the structured financing vehicles through which borrowing was made to look like profit, and debt was made invisible. Prepays -- loans disguised as commodity swaps -- are a major issue. See this MSNBC/WSJ explanation (which unfortunately did not include the flowchart as in the print version).

We speculated back in January that events in the Greater Enron Standard Metropolitan Statistical Area could take down one or more landmark financial institutions (JPM a named case in point) through a double whammy of junk assets and legal jeopardy. We're not there yet ... but safety margins are eroding rapidly.

Monday, July 22, 2002

--- Delamination Sighting! ---

Thanks to Brad DeLong for this excellent Business Week Online riff on business lobbyists flummoxed at CEO refusals to get with the program.
When Coca-Cola CEO Douglas Daft announced on July 14 that his company would count stock options as an expense, one disbelieving business lobbyist privately told BusinessWeek that this was a "freewheeling" CEO and that Daft was, well, certainly "not well briefed." ... When business lobbyists start arguing that CEOs are talking out of school, we are in a Lewis Carroll world.
Speaking of the program, listen for charges that legislation would "criminalize risktaking" (heard from several mouths within hours Friday), and the amusing assertion that markets are crashing because investors think Congress is going to Do Something.

"Delamination"? Among earlier pieces, see our July 8 take, Business Takes the Lead, Uneasily, and to their Eventual Regret: "Temporarily, in a parody of the principle-agent problem, the engines of business advocacy are straining at cross-purposes against the firms that pay their rent." Adhesion fails, layers separate, unimaginable abrupt "restructurings" become possible. (see also closing paragraphs of the longwinded piece below).

Sunday, July 21, 2002

--- More to Fear than Fear Itself ---

Markets closed ugly Friday afternoon. Hard to say what Monday will bring ... insiders make a good case for a triple-digit bounce ... good case for stampede to the exits ... maybe a bottom and slow recovery ... or a flattish sideways muddle. Robust fundamental indicators can be read to say the market is deeply undervalued, or massively overvalued, or just about right.

In any case, real people are getting real hurt lately, and some are getting real scared.

It can get worse. Buyers are reluctant, but holders have barely begun to sell out. Passive investors are still bleeding money into the decline.

In another troubled time, FDR said "We have nothing to fear but fear itself". This Sunday there is more to fear than fear itself. There's anger, for instance. Impulsiveness. Disorganization. Unpreparedness. Prostitution (of the institutional variety). Polarization. Backlash. Mischief. Naivete. Simplism. Opportunism. Mutiny. Cascade. Chaos. Insurrection. (No, not by Monday close.)

In the real economy, a brick is still a brick. All the bricks are still there, and each brick bears the same weight it always did, no matter the rent on a brick house or how the markets capitalize this stream of returns.

The brick-and-mortar economy is just fine. So is the bits-and-modems economy, after some adjustments for irrational expectations.

The Boom was real, and not necessarily over. Real output grew. Real productivity grew. Private sector workforce participation set records, as did individual investment in education. The feedstocks of intellectual capital increased markedly. Not bad at all.

Discoveries boomed, as did the means of sharing and exploiting them. The supporting branches of mathematics are in full blossom.
It's as if railroads, electricity, autos, the printing press, celestial navigation, organic chemistry and the germ theory of disease were invented all at once.

The globe is in better shape than ever. Literacy is up, democracy is ascendant. Life expectancy is up, yet population is stabilizing. Communication and connectivity is up. Productivity is up. Why should we not look forward to an age of unprecedented prosperity?

Oh, the markets. The securities markets. The markets for expectations of discounted valuations of future returns on shares of financial assets. The paper economy. Yes, the paper economy sucks. Do you have a problem with that?

Well, yes, you might. You have a problem if you hitched you wagon to those paper horses. It looks like your horses are running away, redistributed your purchasing power, and you might never get them back. You have a problem if the turbulent ebbtide capsizes you boat, or runs it aground. You also have a problem if a century's worth of settled social and political compacts come unstrung, and you get caught in a crossfire.

The real economy thus far has not joined in the paper economy's malaise, and eventual linkage is not inevitable. The collapse is confined to the token economy of financial assets and who owns which, and this collapse was inevitable.

Financial markets grew addicted to the idea that shares appreciate faster than economies. This untenable conceit seized control of most private assets, and made inroads into public finance as well. In the long run, economies grow maybe 2% real per annum compounded. Share prices grew 7% or more for decades on end. Law of history? No, quirk of history.

By the Law of Pies, no slice can grow faster than the pie forever. The value of shares rests on the stream of real corporate profits -- a fraction of total real output. This fraction can change, but profits can never exceed total output of the surrounding economy ... though the market-mania "Law of History" requires exactly that.

On the way up, share inflation redistributed a massive amount of wealth. So did very real efficiencies of the corporate form of organization, and so did the positional advantage of dominant firms in ever less competitive markets. But these are necessarily self-limiting trends.

The paper boom had to go bust. So did the concomitant upward redistribution of wealth. It's not clear whether the current shock signals "game over", but if so, well and good ... even for those who got caught with their chips stacked on an unlucky number. Distorted markets mis-allocate resources, damping output ... and distorted wealth intensifies the potential for destructive social backlash.

Again, the boom in shares has little necessary connection with the boom in goods and services, fixtures and ideas ... in theory we can still have all the good stuff, and there should be enough to go around. In practice its more difficult.

Of course fraud and corruption throws the sand of information asymmetry into the gears of efficient markets, and it goes round and round for years even after the perps are found out and tossed out.

Shocks in the token economy can bleed over into the real economy. Asset dislocation can gum up the works where resources are spun into goods and services. Hesitation, role confusion, risk aversion can jam the wheels of commerce. As Greenspan reminds us, sound investments go unmade unless somebody somewhere is placing a losing bet. The Great Depression bears witness to the possibility of sustained disorganization, even where all the factors of production and elements of demand are present in good measure.

The Age of Innovation has an unmentioned downside -- accelerated depreciation. Every idea, every machine, every skill, every logo has a shorter commercial life ... fewer months in which to wring out its weight in returns on capital before something goes it one better.

And every obvious invention creates an instant virtual shortage of non-obvious collateral innovations -- transaction frameworks, public infrastructure, "common knowledge". Imagine the effect if everybody had a car, but nobody had the collateral technologies: hardtop roads, traffic signals, freeways, garages, parking lots, drivers licenses, drivers ed, highway patrol, tow trucks, gas stations ... birth control pills. Now there's a huge backlog of digital inventions we don't know how to merchandise and collect on.

Another drag is that consumer-oriented businesses are fixated on the idea they can make most of their money by linking and leveraging customer relationships -- by exposing their customers to other purveyors of equally poor service. Put that on the creative destruction list.

There is also the small matter of $2T in real capital -- real R&D hours, real silicon -- pissed away in the stream of tech bubbles. Apparent small potatoes next to $7T in shredded paper assets, but of greater ultimate consequence.

THE OTHER BAD NEWSThere is a growing inventory of background complications, mostly under topic headings of "class war" and "global turmoil".

One-sided class warfare ran rampant after the working classes capitulated c. 1980, and Communism surrendered c. 1990. "Comparative advantage" capitalism gave way to "because I say so ... because I can" capitalism. Despite the talk of "competitiveness", competition is for losers, efficiency is for chumps ... positional advantage is the name of the game.

Malefactors of great wealth grew fat by weaseling in to suck the yolk out of average folks' nest-eggs. Now they can't skinny back out without attracting notice, but they won't give up without a fight. Several individuals enjoy personal incomes larger than the SEC budget. Wealth has learned to move like quicksilver, adept at avoiding burden sharing.

Market malaise and corporate show trials will raise questions that lead to more questions, leading the one-fifth of households who think they're in the top 1% to realize they've been had, and some of them will set out to radicalize the other four-fifths. The casino economy was bad enough when we thought the wheels were on the level. Left and Right know equally well that where wealth is perceived as illegitimate, social norms are subject to change without notice.

Globally, we have too many "away games" on the schedule. A boundless War on Terrorism, a cascade of trade disputes, a broad slate of affronts to nascent designs of international law, rejection of hard-won environmental burden-sharing compacts. Africa is in deep trouble, Latin America is losing its provisional faith in markets and democracy, the former Soviets haven't found their stride, South Asia is trouble from stem to stern, Antarctica is melting. That mostly leaves China, Japan and Europe, and for whatever reason we go out of our way to advertise contempt for them.

We reach out to dissident factions who might otherwise take out their grievances on local targets of opportunity, and nominate ourselves as global enemy #1. We propose and promote alliances between otherwise disinterested adversaries. Economic chaos has a way of feeding geopolitical chaos. Terrorists come and go ... what if the next wave are Irish? Or Mexican? Or pan-African? or Kentuckian?

As luck would have it, our President is among the least equipped in history. His policy calculus started out several trillion fries short of a happy meal back during the 2000 campaign -- before the troubles -- and nobody called him on it then. His inner circle is studded with thinktank wizards, where the prevailing winds of laissez faire drive a whirlwind of "neat ideas", circling ever higher without mainstream review or practical test. The circle is further constrained by a culture of intense reciprocal loyalty, and an experiential history of narrow victories in winner-take-all confrontations.

Both parties in Congress have been walking on eggshells, afraid to upset close balances in either houses. Both are out of touch with rank-and-file sympathizers, in touch with free-spending high-intensity advocacy groups. Institutional cohesion and cooperation between parties has been eroding for years.

The People are no prize either, and neither are the media. In times of plenty, most of us could get by just going along, and so we did. I'm not sure there's been a time of greater apathy and ignorance, despite our Information Age amenities.

As scandal-tarred footprints are traced to the back doors of Wall Street and White House, sphincters slam shut on the Right and fantasies take wing on the Left. Neither side is prepared for the new realities.

Paralysis rooted in laissez faire may prevail in early years (as in the Great Depression and the Potato Famines). Traditional parties may polarize competing theories to the point of widespread blacklisting and mob action. The madding crowd may recognize its next hero in the Rorschach blather of some charismatic nutcase. Or all three may happen, or something worse yet.

Will wobbles in the token economy wreak havoc in the real economy? They very well might. Will wobbles in the real economy wreak havoc in civil society? They obviously could. We are at end of a chapter in social consensus, turning a blind corner. Take the corner too fast, with too high a center of gravity, and we'll spin out, roll over, tumble down the embankment, crash and burn.

Note how abruptly the wings came off those aerial tankers fighting Western wildfires ... how quickly a gleaming silver bird becomes a splash of twisted char on the slopes. We live in a world of dry tinder, and the volunteer fire department is out of condition.

A Day of Reckoning is inevitable. Reckoning is not a bad thing when errors have crept into the accounts. What's uncertain -- what still hangs in the balance -- is whether we'll see bloodbath, or bilebath, or some other bathetic substitute to the bubblebath we've enjoyed these last few years. There is great need -- and still time -- for Third Ways we have not yet unimagined.

Monday, July 15, 2002

--- FLASH: Bush Resigns; Coca Cola Tabbed 44th US President ---

Earlier today, in a rapid-fire succession of unprecedented constitutional maneuvers, Coca Cola Co. (NYSE symbol KO) replaced George W. Bush as President of the United States.

Bush had failed disastrously in a series of confidence-building efforts. "When G. W. Bush talks, people listen ... and sell, sell, sell" remarked one veteran money manager. A grassroots campaign had begun gathering steam, with anguished investors Fed-Ex'ing rolls of duct tape to 1600 Pennsylvania Avenue.

At the same time, Coca "Coke" Cola -- now 44th President in US history -- seized the mantle of market leadership and moral authority with the announcement it would voluntarily expense stock options on the income statement.

The confluence of events left Bush politically bankrupt, with no viable options. Vice President Dick Cheney accepted a "golden parachute" buyout (said to include indemnity against certain contingent liabilities arising in conjunction with previous service as CEO of Halliburton Corporation) and was air-dropped into an undisclosed location. Coke was appointed VP as Cheney's replacement, and became President on receipt of Bush's letter of resignation.

Bush, announcing his resignation, said "I remember telling a reporter in Chicago how many times in the wee hours of the morning I looked myself in the mirror and thought 'the Coke Party is the way to go'." A chorus of Wall Street regulars murmured assent.

The firm's eligibility to hold office derives from the long-standing principle that a corporation enjoys all the 14th Amendment protections of a person under the law, and Coke's claim to origination as a "natural born" US enterprise over 35 years of age.

Any remaining objections to the "corporate presidency" were mooted when the Supreme Court, acting on its own motion, endorsed the arrangement by a 5 to 4 margin. Insiders indicate the die was cast following a frantic telephone conference between Justice Kennedy and his broker.

In its inaugural press release, Coke promised to reflate the bubble economy, promote recycling, and generally "make things go better".

Coke also began positioning itself for reelection, casting rival Pepsi/Britney ticket as the vanguard of moral depravity while chiding Phil "Pepsi Generation" Dusenberry's "Campaign for Freedom" public service announcements for their Big Brother overtones.

Treasury Secretary-designate (and Coke board member) Warren Buffett proclaimed "I'd like to buy the world a Coke, but gee, the budget's tight ... here, pass around a handful of these discount coupons". Buffett -- instrumental in Coke's "Real Thing" accounting initiative -- took the job after negotiating compensation in the form of convertible debentures which will pay handsome dividends, and could -- if the marked swings decisively in his direction -- leave Buffett with controlling interest in the United States of America, its Territories, and Possessions.

Boeing Co.(NYSE symbol BA) -- which has always expensed options on its income statements -- heralded today's developments, looking forward to appointment and confirmation as Secretary of Defense.

"Coke is it!" exclaimed enthusiastic partisans, "Always Coca Cola!".

At this writing, the position of Vice President stands vacant. Mountain Dew had been champing at the bit, but the Court determined the "as if" provisions of US law extend only to corporations -- not to brands.

Sunday, July 14, 2002

--- That Was The Week That Was ... ---

... like a week of Christmas in July. An intelligent week! A remarkable week! A week you could send to the poulterer's to fetch that prize turkey hanging in the window, and deliver it to the Cratchet's. What a delightful week!

As a tidal wave of realizations obliterated all settled political landmarks, opinion leaders jumped and spun to reposition and reinvent themselves. Cirque du Soleil hs nothing on this crowd.

A Bridge Too Far? Once it gained airspeed, the Senate acted with near-unanimity, tacking Leahy's sentencing provisions onto Sabanes' regulatory scaffolding, adding friendly amendments of all stripes, dodging McConnell's poison pills. The only notable balk was at McCain's effort to mandate expensing of stock options. (McCain is right on principle, off-center and off-timing on approach. Expect Sarbanes and McCain to converge on a more methodical Levin proposal next week.) Schumer added a powerful prohibition against preferential loans to executives ... and it passed unopposed on a voice vote! (With deeper implications than most adherents realize -- expect some backing and filling in conference.)

Everybody Wants in on the Act. By week's end, Sarbanes' nemeses all wanted to be his friends. House Speaker Hastert ... Ways & Means Chmn. Thomas [who got in front of the curve with his own measure to hobble Bermuda corporate tax runaways] ... Treasury Sec. O'Neill ... numerous business advocates ... SEC Chmn. Pitt. Huh? Yes, Pitt is heartily commending and agreeing in principle, where the same provisions a week ago posed threats to civilization as we know it. Press reports exaggerate the degree of agreement, but nobody wants to get caught on the wrong side of an accelerating pendulum.

Market Blows and Bush Blunders. GWB took a business-as-usual approach to business as usual, and did a high-visibility face-plant on Wall Street. Insiders say he expected to talk tough and take credit for the ensuing market rally. Bad plan, bad execution. Left it to staffers, vacationed in an old money playground, breezed back into town the day before, undercut his own limelight by holding a clumsy afternoon presser, chose Wall Street rather than Main Street as the backdrop, delivered a perfunctory performance devoid of McCain's passion or Mark Gerson's poetry, and said nothing that would make any CEO uncomfortable. Favorable reviews were nonexistent (apart from party flaks and CEO/CFO/option lobbies), and the market tanked. Other initiatives gathered steam, leaving Bush in the dust.

It doesn't stop there. Bush is prepped to go back at it Monday, jawboning the markets with "accentuate the positve" themes. The Prez is ill-advised, notably by Commerce Sec. Evans (who was all over the Sunday talk shows), still living in the bad-apple era. What's the problem? "Our customers hate us." Good bidn'ssmen don't cover that with catchy jingles. Stop theme-ing. Start leading.

More spiders and snakes. As the week wore on, scalier and slimier details emerged on WorldCom. And ImClone. And Enron. And Qwest. And Bristol-Myers Squibb. And KPMG. And Deloitte Touche. And Harken Energy. And Halliburton. And Providian.

Reform begins at home. The new Corporate Fraud Task Force is a fraud -- window-dressing with no task and no force. Administration officials say it will prosecute wrongdoers ... and say it will do nothing of the kind ... and recommend legislation ... and do nothing of the kind. All members already have day jobs, and there's no staff. Task Force Chairman (Larry Thompson) previously chaired Providian's audit committee while Providian racked up $300M in gov't penalties, $105M in customer settlements, $38M in shareholder suits, with other actions still pending. White House still resists full disclosure on Energy Task Force and Harken matters. Army Sec. Thomas White goes to Capitol Hill soon, where he's damned if he does (take the Fifth) and damned if he doesn't (either take responsibility for Enron's trading shenanigans, or confess cluelessness re everything under his command). Halliburton has Cheney in real jeopardy. Pitt comes off recusal status soon, which comforts nobody. KPMG tax shelters may collapse under IRS fire, trapping big name bushbackers inside.

Where do we go from here? Andersen's Melvin Dick testified, in effect, "all I know is what I read in the papers" ... and KPMG's chief MIke Rake emphasizes "the auditor is a watchdog, not a bloodhound". NYT's Floyd Norris says "Congress should establish a new accounting regulator controlled by people representing investors, not accountants". I say the whole global auditing industry lives on borrowed time, and I don't know what comes next.

Europe concerned. EC calls an emergency meeting of finance ministers and regulators, worried about contagion. Paris moves to raise standards ... some CAC-40 companies don't even have audit committees. Major digital carrier KPNQwest is cratering. WorldCom has trouble paying it's bills to other carriers, and they have trouble extending credit.. Telecom is thick with reciprocal patronage and reciprocal payment obligations, everyone is stressed, and outages could multiply. A good test of robust Internet connectivity.

Don't Ask, Don't Tell. Tim Russert: Would SEC Chmn. Pitt release Bush's Harken files? "I would if he asked." Sam Donaldson: Will Bush urge Harken to release their documents? Commerce Sec. Evans "He has fully cooperatied" Sam: "But will he urge Harken to release the documents?" Evans: "He has fully cooperated" Tony Snow: "Clean bill of health -- yes or no?" Breeden (SEC Chmn. at time of the Harken matter): "Um, ***cough***, just in terms of enforcement action, the staff, er, ... ..." Evans, re black and white: "we need to simplify the standards".

Unintentional Irony Award: Russert: How can the public trust [SEC action on Halliburton]? Pitt: "I am a person of integrity, and it won't be my decision".

Saturday, July 13, 2002

--- Harken, Darken, Spoil and Starken ---

Fully vetted? Arf! Arf! The Harken Energy plot thickens. Not the way a DNC plot doctor would write it. More the way Shakespeare would have done.
This is the news: he fishes, drinks, and wastes
The lamps of night in revel; ...
Vouchsafed to think he had partners: you shall find there
A man who is the abstract of all faults ...

His faults in him seem ... hereditary,
Rather than purchased; what he cannot change,
Than what he chooses.

(Anthony and Cleopatra)
Considering the incidence of Bad Apple encounters here in the Haunted Forest, scandal-hounds should be suspicious of low-hanging fruit. If it looks too good to be true, maybe it is. Scandal ordinaire is political chumpbait no matter how it plays out ... focus on tectonic shift, not partisan cheapshots. Yes, revenge is sweet ... and sweet is fattening. Stay in shape for the triathalon.

Harken offers a near-perfect object lesson in Kinsley's Law: the real scandal is what's legal. The story combines a remarkable array of corrupt and abusive practices in one neat package. Assets and authorities tendered for one purpose were persistently diverted to other agendas, in both commercial and political spheres. Harken shouts a potent counterpoint to the administration line that what's needed is tougher enforcement of existing laws ... and it's not about to pipe down.

If I read the earmarks right, GWB may have been no more than a pawn is a game that was in turn a pawn in another game. Either way it's a great case study in School for Scandal.

Note well: the late-filed after-sale report looks innocent and inconsequential. It may be anything but.

And who's that shadowy figure lurking in the weeds? Could it be that black sheep of the Bass family, Big Mouth Billy Bass? Stay tuned ... the opera ain't over 'til the bass baby sings.

Wednesday, July 10, 2002

--- Bush's Corp Crime Speech: Hood Ornament or Bid for Suite Cred? ---

Wall Street's using the P-word openly now. How much credit for today's rout goes to GWB's tepidly inspirational speech Tuesday on Wall Street? How much goes to the embarrassingly unembarrassed testimony of Andersen's former WorldCom engagement partner Monday on Capitol Hill? And how much goes to the what Paul O'Neill describes as the "organic quality" of market dynamics?

You can make a case for "organic". This market stinks.

Treasury Sec. O'Neill and Commerce Sec. Don Evans took questions at a CNBC "Town Hall" telecast today. The Bush team is bullish on outrage. Evans: "I'm outraged." O'Neill: "People are legitimately outraged."

They're even more bullish on buck-passing. How can we restore investor confidence? Evans: "tell them they can have faith in the system" to weed out the few bad apples. O'Neill, by the way, still thinks they know how to privatize Social Security (even though the privatization task force crapped out even before the numbers went bad).

Andersen's guard dog fielded question after question almost disinterestedly, untroubled by his firm's failure to look for trouble -- even in retrospect -- on the WorldCom account. He refused to acknowledge any responsibility. He failed to concede they might have found the problem if they'd done this or that differently ... acted as if he didn't even think it an interesting question. I know he's been coached to avoid potentially damaging admissions, but this sends a damaging message to the whole market.

Some obsevers hail the new Corporate Fraud Task Force as the most significant announcement in GWB's program. Will Larry Thompson's duties as head of the DOJCFTF interfere with his duties as head of DOJ's Enron Task Force?

The Force gets no new $$$, no new staffing, no new authority. Members include DOJ's Thompson and Chertoff, Treasury's O'Neill, SEC's Pitt, FBI's Mueller, as well as the heads of FERC and CFTC. Upshot: they'll never get a meeting together, or all the meeting will be done by designees.

On the plus side, the task force "sends a powerful signal". NYT's Floyd Norris notes the SEC has historically had trouble getting DOJ to move on criminal referrals, and fraud is notoriously difficult to prosecute, even harder to convict.

Later on CNBC's Kudlow and Cramer, NY AG Eliot Spitzer TEES OFF MIGHTILY on Harvey Pitt: "every time I turn around he's up on Capitol HIll trying to cut my jurisdiction" ... SEC's revised rules on security analyst / banker independence are "Swiss cheese". Spitzer's a good lawyer, and used language I don't think a good lawyer uses against somebody who's cooperation will be needed again and again.

Senate Assistant Minority Leader Don Nickles (R-OK) gave the GOP counterpoint. The important thing now is to "avoid overregulation" ... a couple of bad apples "bent the rules" ... bringing up the Sarbanes bill (which Gramm thought he had blocked) is "political" ... calls for Pitt's head are "political". PREDICTION UPDATE: Lott will not repeat as Minority Leader, and Nickles will not be his replacement.

Standard & Poor's kicked seven non-US firms out of the S&P 500, making it an all-US Big Cap index (and incidentally weighting it more heavily to financials, less heavily to commodities). "All US" is an odd concept in a world of increasingly global big cap's. [Note to self: find out if this includes US firms with make-believe Bermuda addresses.]

Across the pond, Alcatel is now officially junk. Irish pharma Elan is junk, with accounting "troubles". Out of our regular orbit, if you hadn't noticed, Latin America is going in the crapper. (Brazil's industrial output fell 5% in a month.) What if all these little troubles glom together? Could it be ... Big Trouble?

Tuesday, July 09, 2002

--- Things I Wish I'd Said ---

In an obscure corner of's Fray discussion board, poster "mungleford" capsules GWB's corporate ethics initiative: "The pot calls the kettle grey".

--- Bush Hedges His Bets in Volatile Outrage Futures Market ---

In the main, GWB's corporate crimebuster proposals are nothing to write home about. Still, we owe the homefolk a letter from camp so ...

Bush43 plunged into the Bad Apple market on Wall Street this morning. CNN's Pre-game capsule summary:
Aaron Brown: "What does the business community want to hear this morning?
Lou Dobbs: "As little as possible."
There's a routine checklist of responses to misbehaviors that become overly present in the public eye.
Tougher sentencing? Check.

Increase enforcement budgets? Check. (Bush proposals underwhelm the competition.)

Take back ill-gotten gains? Check. (The Devil's in the legal details.)

Task force? Check. (Might do some good. Who's involved? What does it do, and how does it resolve interagency divergences in information privacy/disclosure standards? Or is it just another nameplate on another door at DOJ?)

Lifetime bans? Check.

"Challenge" leaders to set higher standards? Check.

Denounce moral relativism? Uh, check.
Other remedies were fait accompli, mostly as prospective stock exchange mandates, before Bush swung into action.
Restrictions on corporate loans to executives. (May take some working out, since these are often the means to the means to the ends of "interest alignment" via other compensation elements.)

Director independence.

Shareholder approval of option plans.
Harvey Pitt lives, and his statutory recusal period expires in a month.

Bush ventured an unfortunate weasel-worded slap at the Democratic-led Senate: "the House has passed these measures" [referring to the weaker Oxley bill] "I urge the Senate to do the same" [where the more serious Sarbanes bill is being hammered out.

In the House, which passed Oxley's "reform lite" early in the game, some are having second thoughts. The Senate Sarbanes work-in-process is the brand leader at this point. Sarbanes v. Oxley in conference committee looks like the hot ticket in town. (I make it a lightheavyweight mismatch ... see you at the fights.)

No "tough new laws" that I can see ... just tweaking the payoff matrix and pounding the bully pulpit. It's a start.

Is non-criminality the sine qua non of corporate ethics? If not, what is? White House focus is still on outright criminality ... not on the increasingly bizarre value propositions we see blowing around the corporate stratosphere. Crime is the tip of the iceberg ... and the iceberg is the canary in the coal mine (the penguin in the ice mine?) of global financial climate change.

Flash reaction? Too little, too late, but it's still early.

How does all this affect the forward curve for outrage futures? Do we detect an inflection point, or just normal backwardation? In any event, "Enron rage" is now a listed commodity, and differences of opinion are what make speculative markets.

Monday, July 08, 2002

--- Business Takes the Lead, Uneasily, and to their Eventual Regret ---

Enronitis progresses from an initial phase of anemic public response to an irony-rich phase in which financial interests drive the reaction, and business advocacy organizations fall visibly out of synch with their clientele. (An earlier (pre-WorldCom) post addressed the tepid public response and the developing investor-class reaction).

Even before the WorldCom disclosures, Enron-consciousness was thriving amid the scarps and gullies of the world's financial watersheds, where an unabated flood of economic crosscurrents undercut the footings of once-secure corporate aeries. The investment community is most reluctant to acknowledge systemic vice, but paradoxically it has the most at stake. Dollars were getting up and walking out of the market.

A day before WorldCom, the GOP parroted talking point dictation direct from the Chamber of Commerce (among other organized advocacies), and CofC functionaries reflexively moved to block any move that would expand regulation or subject any member (or traditional ally) to an extra flyspeck of potential liability.

In time, with or without WorldCom, business interests wake up and remember their fundamental interests. Shields and cloaks reduce trust, trust lubricates exchange, and exchange creates value. A new conventional wisdom is starting to jell. In a healthy market, nothing gets socialized faster than the cost of fraud. Everybody pays, and the (shared) costs invariably exceed the (individual) ill-gotten gains.
Was Enron an isolated occurrence? No. Will natural market dynamics flush Enron toxins out of the system? No. Are we losing comparative advantage? Yes. Are we losing the initiative? Yes. Can we afford to go on like this? No.
The memo took a long time reaching K Street. (History leads us to believe it will never reach the WSJ editorial board room.) Temporarily, in a parody of the principle-agent problem, the engines of business advocacy are straining at cross-purposes against the firms that pay their rent. So now the plot thickens.

Ownership elites are miniscule in numbers, but massive in influence. Likewise management elites. The two elites overlap, their interests converge, but do not coincide. Enron exposes snags where related interests are in opposition. The business lobby is a powerful engine of influence, and it is built to serve both masters. In time they'll tease out right from wrong, profitable from profligate investment, and defensible from indefensible positions.

The time has come for capital to recognize and abandon a number of obviously indefensible positions. Once movement occurs, it gains momentum. The perception of motion creates an atmosphere conducive to motion. Then there's a spate of turnover in leadership as pragmatists gain stature and influence at the expense of diehards.

Now business rides to the rescue! An alarmed consensus is forming -- Something is wrong! Something must be done! Even among the hold-outs, an equally compelling consensus is forming -- The water's rising too fast! The dikes won't hold! Somebody has to take the fall!
Int'l Paper CEO John Dillon spoke for the Business Roundtable on ABC's This Week: "we can support the Sarbanes bill" ... (though he clearly hopes for a conference committee blend of that and Oxley's milder House bill.) "100% for disclosure". Roundtable's John Castellani likes everything in general and nothing in particular. "We support proposals for reform put forward by The President, Members of Congress and the leading stock exchanges" (per full-page ads in major papers). They do support shareholder approval of all option grants.

CNN's Lou Dobbs now explicitly rejects his earlier "few bad apples" thesis ... and seems to have jumped from the "few bad apples at Andersen" diagnosis to the sweeping corruption analysis "it was all of the Big FiveFour, not just Andersen".

Last I heard, NYSE chief Dick Grasso was holding to the premise of between 1 and 15 bad apples, but this assessment may be out of date.

AICPA applauds all reform efforts ... even though reform efforts contradict each other, even though AICPA went on record early against most of them, even though current proposed reforms still "may have gone too far". AICPA is afraid of losing turf ... as they should be ... as they should. They're part of the problem, not part of the solution. They never discipline anybody, they've lead the de-professionalization of their own profession ... but they are eager to "work with" whoever is fixing things. In K-Street-ese, "work with" means "be in the room to throw monkey wrenches".

The Conference Board has a Blue-Ribbon Commission on Public Trust and Private Enterprise, fronted by Pete Peterson, w/ Andy Grove, Levitt, Rudman, Volcker.

Anti-plaintiff "tort reform" shill Philip Howard of Common Good demands "accountability" ... but not regulation. How do we usually enforce accountability? Mostly, we take people to court.

In a surprise press briefing today President Bush promised "tough new laws". That's a long Texas mile from the "no new laws" he endorsed earlier in the drama. In earlier Enron commentary, Treasury Sec. Paul O'Neill didn't "see the need for lots of new laws" ... but did see the need for a new framework for regulating the audit function. Now Bush wants to be in the room ... he wants to "work with" Sarbanes.

US Chamber of Commerce's Thomas Donohue lays it on the line, bringing their considerable forces out from behind the usual stonewall for a battle they never thought they'd have to fight. He vows to "hit the airwaves" ... that's K-Street-ese for "our vital interests are threatened, and we're going to war". He "deplores the episodes", says we "need an honest discussion" but must "resist the temptation" to cripple the world's best economy by overreacting since "capable infrastructure ... is already in place". [Earth to Major Tom -- the temptations that are crippling capital flows have nothing to do with the temptation to make law.] He'll support innocuous measures like an SEC budget boost and a bar against executive stock sales during 401k lockdowns, would approve yanking derelict exec's/directors (providing they have their day in court). He also would support (rather frisky by CofC standards) requiring a majority of independent directors, and an all-indy audit committee. He likes Pitt's oversight board, hates Sarbanes' board (concerned its transparency will favor trial lawyers). Again, the "day in court" is vital for corporate defendants (but apparently not for shareholder plaintiffs). Major concern: information unearthed by oversight boards will find its way into court, inviting the class action trial lawyers / plaintiff's bar to subject American industry to "summary execution". [If the Sarbanes bill becomes law, the terrorists will have won.] CofC will challenge foreign critics (Osama?), sponsor extended dialog on long-term issues (talk it to death and hope it blows over). Short selling is a major target (CofC goes on record against efficient markets!). He specifically opposes expensing stock options, suggesting we've had "one or two" cases of abuse, and it's no longer a problem. lawmaking is a bad thing, rulemaking is a good thing ("we want to be in the middle of that"). Of course they do.
Donohue is a relentless lobbybot, responding as programmed. He may receive more awkward mid-course corrections from the folks who recharge his batteries, as layers of the upper crust delaminate. Serious money is getting down off its high horse, getting its hands dirty, shedding baggage, trying to rock the juggernaut of American capitalism out of the righthand gutter.

Once the bandwagon gets rolling, though, more bystanders of all stations will want to push, and take credit, and steer. Interests vital to economic elites will come unexpectedly within the scope of discourse, and negotiation, and the alignment of interests between elites and masses will be re-examined. There will be a movement, and none may govern it, and it may rumble on unpredictably until it finds the lefthand gutter.

Patience. However this season's schedule plays out, it's a rebuilding year for the reform team. Legislation may pass. It won't go to the heart of the matter -- whatever that is. It won't be polished and precision-tuned. It will be a hastily-concocted compromise of competing half-measures, and hindsight will probably show most of those to be misguided. But an epoch of change is underway.

Sunday, July 07, 2002

--- Junior Woodchuck Jamboree ---

I see a few new campers have signed up ... a little late but never too late -- we're in for a busy week. You'll learn, and you'll sweat ... gathering firewood ... clearing trails ... basic orienteering. We'll do basic first aid ... [True fact: banana-slug slime takes the sting out of stinging nettles!] ... learn to recognize noxious species ... but fercripesakes leave the mushrooms alone ... kids a couple years back started babbling about "new paradigms" and all that.

Remember, you Junior Woodchucks are babes in the woods. About the wood-craftiest thing we'll do this session is toast marshmallows ... maybe a snipe hunt if you're good. But we're laying a foundation here. Keep coming back year after year, and 10-15 years out some of you will be full-fledged snake-eaters ... drop you off in a forest of footnotes with nothing more than a pocketknife and a laptop, and you'll be able to clear ground and find your way out. Of course some of you will end up snake-chow instead.

Regulars know we don't care much for political scandal in the usual sense ... but Camp Enron does have its moments. Who's up for a game of follow-the-leader?

Today the Senate (Governmental Affairs Committee's Permanent Subcommittee on Investigations) released a 60-page report (pdf) scathing Enron's Board of Directors. (See this Houston Chronicle story.) The report makes several specific recommendations for directors -- block high-risk transactions, ban conflicts-of-interest (like Enron's Raptors), prohibit off-book cosmetic devices, shun compensation schemes that move exec's to gimmick the stock price, restrict certain consulting engagements with the outside auditors, insist on true independence for outside directors. Enron attorney William Bennett calls the report "unfair". The Chron also offers an AP rundown of Enron "outside" directors and their conflicts.

Today also, WaPo ran a devastating rip on Congressman Jim Moran (D-VA), who accepted BIG loans, on favorable terms, from big lenders with big agendas in Congress. Don't wait for the election ... GET THE HOOK! Moran's credit-card addiction stems from a deeper problem ... stock-market addiction. He managed to trade himself into dire financial straits even in the prime of the 90's market boom. This can be done! Trading securities without understanding -- trading just for the action -- is gambling. It can be addictive, it tends to snowball, and problem gamblers can run themselves to ruin at any table. The same speculative dynamic -- get lucky, win a little, think you're good, lose a little, double up to catch up, lose a little more, start fooling yourself, start fooling others -- may have driven Enron's boom and crash.

Monday is WorldCom Day on Capitol Hill. Ebbers, Sidgmore, Grubman, et al. Some good TV drama, some lame theatrics, some interminable bombast, some of that ho-hum "plead the 5th" routine at the end of a dozen opening statements.

Tuesday, Bush gives us his new take on corporate wrongdoing. The second coming of Teddy Roosevelt? No. GWB lived through the Sixties without its zeitgeist crossing his path, he'll make it through the Oughts without breaking the code. Expect tough talk on Good and Evil, Crime and Punishment, but expect the unexpected. Bush needs more than outrage. Keynote, an "Axis of Detail"? Pursue the wrongdoers through their gated communities, past their traps and bunkers, and smoke 'em out of their Par 4's? Will he call tax refugees back from Bermuda on a patriotic mission? 18 months, and Bush hasn't fired anybody.
This should be good, as his Harken Energy paper trail is swirling in the whirlwind again. [Major newsmedia this morning persistently described Bush -- incorrectly -- as "cleared of wrongdoing". Is the rally-round-the-flag rule still effect? "Fully vetted"? Nuh-uh. SEC exercised descretion in declining to prosecute, but clearly explained its action was not an exoneration.] In an undisclosed location, Cheney must be sweating bullets over Halliburton. Sec. Army Thomas White, nee VP White of the Enron Virtual Market Rangers is still an attractive sacrificial goat.
Wednesday thru Friday in Milan, the International Corporate Governance Network has its annual conference. Should be an uncommonly lively session, with more than usual media visibility.

Thursday looks like a slack day, but one never knows, does one?

Friday Shields and Brooks and Kudlow and Cramer and Gibbs and Colvin will put it all in context.

On a parallel timeline, Harvey Pitt is rolling his own reform plan. He opposes basically all the initiatives moving in Congress, but believes he can -- on his own say-so -- criminalize false and misleading filings, send key executives to purgatory, create an oversight board in the private sector but with broad powers of taxation, regulation and adjudication. Harvey's as smart a securities lawyer as any, but he seems to have hand-waved over some basic constitutional issues ... and people are paying attention. Other issues: Pitt's proposed executive attestation "to the best of my knowledge" is a weak link, and mossback ideals seem to have flipped from "rule of law good, faceless bureaucratic regulation bad" to "hairy faceless bureaucratic regulation good, legislation bad".

Losers: Phil Gramm, who figured he could stop the world, and figured wrong. Sen. Evan Bayh (D-IN), who slipped too far into the "lets not be hasty" camp, may have missed the bus. Connecticut Democrat Senators Lieberman and Dodd, who have shilled too far for accounting industry interests. Will the Democratic Caucus have the nerve to pull key committee assignments out from under Lieberman, a potential 2004 standard-bearer?

Timely disclosure: Reliant fesses up to $7.8B inflated revenues (round-trip trades), which gets lost under this week's radar.

Intriguing side-effect: Vladmir Putin observes Bush's predicament, develops more nuanced understanding of market systems, hazards of libertarian claptrap, mafia capitalism.

This week's action -- or this year's action -- is only setting the stage. The real problems are deeper than anything we'll hear discussed this week, but there's a common thread linking fictitious filings, outlandish compensation packages, inefficient markets, wealth disparities and make-believe economics. Down the road and down the calendar, we may see major party realignment, major wealth realignment, even fundamental system change.

For now, a question or three: Are outright fraud and outright theft the only things worth getting worked up about? Are they even the biggest things on corporate governance radar? Is punishment the best prevention?

PREDICTION: Regardless of November election outcomes, Trent Lott will not repeat as his party's leader in the Senate.

PREDICTION: The "personal accountability" movement will spur creation of the Chief Accountability Officer, i.e., the designated corporate Fall Guy.

PREDICTION: The existing independent audit system WILL COLLAPSE ... perhaps soon, perhaps not, but rather abruptly when it does. What's our Plan B?

Thursday, July 04, 2002

--- Camp Enron Never Sleeps ---

Not with the skitterings we hear outside the platform tents at night ... not with the beady red eyes we see glowing when the lights go out ... not with the sounds of vampire capitalism heard muffled through the dark wood ... not after somebody spotted our former handyman Old Hook -- or his ghost -- rowing through the fog down at Fire Lake.

WorldCom's internal whistleblower, auditor Cynthia Cooper, is cooperating with investigators ... and the scuttlebutt is she's not telling the same backstory the exec's are telling.

Harvey Pitt is blaming the previous administration. WorldCom CEO John Sidgmore is blaming the previous administration ... and I'll bet Pitt doesn't let Sidgmore get away with it.

Former SEC Chair Richard Breeden has been appointed as corporate monitor in the civil fraud case against WorldCom. "I'm not there to replace company management," said Breeden. "I'm there to be the eyes and ears of the court." (AP)

WSJ busts Andersen consulting spin-off Accenture and PricewaterhouseCoopers consulting spin-off "Monday:" (motto "we dare you to use our name in a sentence"), for re-incorporating in Bermuda to enjoy relief from US taxes.

Deposed WorldCom CFO Scott Sullivan sold $30M in WorldCom shares since 1997. Former CEO Ebbers, $77M. Others too ... and it looks like the firm itself tapped a line of credit which may not have been available under conditions as then known to the firm (but unknown to the lender or the public).

WSJ's Shawn Young tries to triangulate WorldCom's actual asset position -- maybe a few billion, versus $104B book value. [UPDATE: See this WSJ pre-game rundown of assets, liabilities and feeding frenzy game plans.]

Across the pond, KPNQWest's Ebone went dark for good, leaving teeming masses yearning to log on all over Europe. Small-to-medium enterprises are hurt worst, since most alrge users have contingency plans. Determined sysop's have been keeping the network up, working with little expectation of pay, but it's game over. "All that remains is to sell the equipment, and that will be worthless in a market awash with surplus equipment" says one senior Ebone tech in coverage. A macroproblem in microcosm.

GOP House committee chairs Tauzin and Greenwood put Harvey Pitt on the spot, inquiring whether SEC ever scrutinized accounting at Tyco, WorldCom, Global XXing, Qwest or Xerox. Did the SEC fail to look? Or look and not see? Or see and not do anything? Tauzin can be counted on to ream exec's out in public after things go bad, without doing much about root causes. Greenwood looks serious about cleaning up the Wild West.

Sidgmore to take his ball and go home? The CEO emphasizes the current hostilities and WorldCom's indispensible role as a DOD communications vendor. Message: "Bail us out ... or the terrorists will have won."

NYT's Seth Schiesel unwinds a convoluted arrangement by which Liberty Media's John Malone ended up owning 19% of Sprint PCS (worth $825M at Tuesday's close), with a guarantee those shares would worth at least $5B (more than Sprint PCS's total market cap). How would Sprint possibly satisfy such a guarantee? Good question. One possibility is that Malone flies the plane into the ground, and ends up owning the airline.

The SEC is drastically impaired by vacancies and recusals. A powderkeg case against Big Four survivor Ernst & Young was tossed out this week because it was authorized by a 1-0 vote. Two of 5 Commission seats are vacant ... one is held by a former EY'er ... and the last seat belongs to Chairman Harvey Pitt, who used to lawyer for EY (and everybody else for that matter). Per the Judge's order, it takes at least two Commissioners to conduct a binding vote. Details in this WaPo account.

The cost of being right in a world gone wrong ... see Fort Worth Weekly for the sad story of last year's man -- a straight-arrow accountant in WorldCom crooked-arrow culture. WorldCom accounting -- and their response to imminent exposure -- is looking more and more foul by the hour. Anybody surprised?

Celebrating Independence Day -- a more reflective 4th than usual -- we've found it's still possible to rustle up a mighty fine apple pie despite all the bad apples. We can tuned in Kevin Phillips and Ken Burns on the wireless. Geared up for fireworks tonite ... maybe they'll put a scare into the ghouls of greed ... and I have an inkling that folks to the left of me and folks to the right of me are shocking their own systems by thinking deeply about how all of this is really supposed to work. Maybe tomorrow we'll put some of that famous can-do American ingenuity to work, and start hammering out some workable checks and balances.

OK, all you Geniuses of Capitalism ... what would MacGyver do in a case like this?

Tuesday, July 02, 2002

--- WorldCom Damage Control: Report! ---

Try as I do to avoid forming any opinion of the market's one day performance -- yesterday, today, or tomorrow -- I confess surprise that WorldCom's $4B "kerplunk!" made so little splash last week.

There are several parts to last week's story. WorldCom was already beaten down (from $180B to yesterday's $180M in market cap). The sharpest jolt was to the credit markets, not equities. Many of the consequences were indirect. And, in my opinion, much of the financial community was still running on laughing gas. Not so this week.

The good news is that WorldCom debt -- around $30B -- is broadly syndicated. Nobody holds as much as $1B worth. Few creditors hold more than $100M. (California -- wouldn't you know it -- looks to win top honors, with over $800B combined debt and equity exposure.)

The bad news is that WorldCom debt -- around $30B -- is broadly syndicated. If it all goes gunnybag, hundreds of creditors -- banks, pensions, insurance companies, funds -- would take individual losses of $10M and up. Some of those stakeholders turned bagholders may also suffer additional losses via the "stupidity tax" of civil litigation from their stakeholders.

Banks could call the loans and take down WorldCom in a heartbeat ... but CEO John Sidgmore doesn't think they will, and neither do I. All they'd get by pulling the plug is a heap of worthless paper, plus domino effects on the rest of the market including other bank customers, which might make more paper worthless in the funny way these things circle a few times before they come home to roost.

Bankers will calculate what they can salvage, and -- if it works out -- persuade bigger fools to cart away the remaining ten-billion pound steaming pile in a billion five-pound bags. In any case, the outcomes from here on out are in the province of game theory, not factor economics.

Who else gets hurt? Vendors -- of hardware, software, ordinary goods and services (notably EDS today, stuck with the problem of valuing an 11-year IT outsourcing contract). Employees, and contractors, and temps. Customers, who may see customer service go from bad to worse, and legitimate claims harder to settle (though major customers may negotiate rich concessions from the desperate vendor). Other carriers, who are at once vendors and customers and swapmates and financiers. Unrelated legitimate new ventures, who'll see capital markets go from rotten to stinking rotten. And charities. And "multiplier effect" successors in concentric rings around all of the above.

Will it all come out in the wash? The optimistic case (championed by CNBC's Larry Kudlow) is that after ALL the telecoms go bankrupt. We'll be left with all of the same companies, services, customers, and a mountain of costly facilities, minus the mountain of debt. But the other half of the problem is that same mountain of facilities ... dark fiber, excess bandwidth, the legacy of "get big fast" and winner-take-all franchise economics. It's not going away, and while it exists the competitive market value of any strand of lit fiber is approximately zero.

When your basic stock-in-trade is essentially free, it gets hard to fund network operations, marketing, customer service, legal, government relations, R&D, and still have something left over for risk-adjusted return on capital. It's like going to the beach and selling sand by the spoonful. Sure, the cost of goods sold is favorable, but SG&A will kill you. You need to set up a booth, and hoist a banner, and hire some college kids to man the booth ... and you need cups and spoons, and price sheets, and you still need to get the crowd to buy sand from you and not from the booth next door. Too much silicon dioxide in supply, not enough carbon-based demand units. Yeah, yeah, I know, in Marketarian Utopia there's no such thing as a surplus ... fine, let 'em eat sand!

Capital markets are having a hard time with this one. The Guardian says US scandals shake the Square Mile. On CBNC, David Faber reports illiquidity verging on panic, especially in the high-yield debt and credit hedge markets. ("High yield" == "high risk", which is what a lot more debt became this week). The spread between bid and ask prices widens. Buyers and sellers lose confidence, both fearful the other guy knows something they don't. Risk-takers arbitrageurs have no place to lock in wins by selling back risk.
For broader perspective, New campers are encouraged to read our Camp Enron Economic Impact Statement. [I haven't reviewed it since January myself ... I'm saving that for a special occasion.] Direct damage aside, global capital markets will be less efficient until we get over this. It may take us decades to get over it. And this is only the tip of one rather large iceberg ... around the next bend we may see a whole ice shelf breaking up.
We live in an age of innovation. Truly revolutionary technologies are rolling off the drawing board and piling up in the limbo between the research and commercialization. We'll need new societal, institutional and transactional frameworks in order to exploit this backlog. Information technology is chock-full of economic potential, but the more obvious inventions need a host of new, non-obvious inventions to make them practicable ... and those inventions need mad money to make them happen. Lose our nerve now, and we lose a lot, for a long time.

--- Short Takes for 2002-07-02 ---

Over on, corporate conscience Nell Minow (The Corporate Library) and corporate apologist Holman Jenkins, Jr. (WSJ) are slugging it out over corporate ethics. Don't miss it!

Per yesterday's WSJ, total assets in pension and personal retirement accounts fell $500B in calendar 2001, even as $140B in cash flowed into the funds. Whaddya say, gang, can we beat that record in 2002? We're off to a good start.

A group of big pension funds is preparing to sue a group of big banks for failures of due diligence in underwriting an $11B WorldCom bond issue. Meanwhile a group of big banks is gearing up to sue a group of big insurance companies in the Enron affair.

Signs of the Times: NYT Sunday Style Section has a full-page rundown on the etiquette of socializing with celebrity indictees. On NYT front, Kurt Eichenwald muses "Can Capitalists Actually Bring Down Capitalism?" (he thinks not). The Seattle Times has a quick Q&A re WorldCom's impact on small fish in local waters. And Financial Times reports from outside a NY courtroom, where Tyco's embattled Dennis Kozlowski muttered something about "Brazil winning the game". The reporter shook her head in confusion, then explained she had asked about WorldCom, not the World Cup.

Google gives 3,530 citations for "martha stewart" and "toast". ("martha" and "bad apples" hasn't cracked 1,000 yet.)

Per, Martha Stewart ran an article in the November 2001 issue of Martha Stewart Living titled, "Enjoying Hedge Apples." What's a hedge apple? I dunno, but if I was running a bad-apple hedge fund I'd sure wanna read up.

WaPo's Steven Pearlstein had a good scandal retrospective a few days back.
"... there was nobody in the business community who is not implicated in this in some way," said Jeffrey Garten, dean of Yale University's School of Management. ... "Even those of us at business schools ... were cheerleaders, too." ...

"The incentive to scam was enormous," said Kevin A. Hassett ... author of a new book, "Bubbleology."

Six months ago ... Harvard Business School professor Jay Lorsch was among those who believed that corporate wrongdoing was the work of a "few rotten apples." Now he's not so sure. ...

In 1913, a reform-minded accountant named Arthur Andersen started his firm on the promise of offering investors an alternative to the lax accounting standards then prevailing. ...

In the theory of "efficient markets" ... stock price came to be viewed as better than even financial statements in determining a company's worth and prospects.
Strange Boardfellows Department: Martha Stewart and NY State Controller H. Carl McCall rub elbows in NYSE's boardroom. McCall is ex-officio trustee of what may be the world champion bag-holder in recent financial scandals, and is in the running for Governor of NY.

Strange Boardfellows, cont'd: Clifford Alexander, Jr, Chairman of Moody's, sat on WorldCom's Board until January. (thx Ben at "As the WorldCom Turns") Strange Boardfellows are encouraged to read the aforementioned NYT "scandal etiquette" advisory.

Vivendi joined the scandal club today, by the way, and EDS is bidding for consideration.

--- Harvey Pitt Digs Himself a Hole ---

Harvey Pitt has gone and dug himself a deeper hole. Stirring Python-like into action (nobody ever expects the Securities Commission!), he's on-air everywhere at once ... blaming the current sad state of affairs on his predecessors. Refusing to name Arthur Leavitt by name -- but leaving no margin for misinterpretation -- Pitt scourges his predecessor. The SEC was in terrible shape. The 90's were a decade of moral depravity. Clinton let things go to hell. Corruption was rampant. Democrats blocked accounting reforms.

What's wrong with this counterattack? As a minor point, much of it's not true. Clinton vetoed legislation that discouraged shareholder litigation (and suffered the indignity of a veto override). Leavitt, crusading for audit reforms, nearly had his head taken off by industry attack dogs like ... Harvey Pitt! GWB's most decisive campaign promise (in the fundraising arena, where the nomination was won) was his pledge to get SEC bureaucrats off the backs of corporate America, by giving the reins to somebody like ... Harvey Pitt! Fictive accounting accelerated through the closing years of the decade, but it appears [subject to detailed retrospective analysis] this trend shifted into high gear in December 2000, directly (even if coincidentally) on the heels of W's Florida overtime success.

As a major point, going partisan and sniping at scapegoats will piss some people off ... people whose support Pitt may need if he's to live long and prosper as SEC Chair. All the Democrats in Congress for one thing ... even those who really did cave in to AICPA pressure when Leavitt most needed their support. (Say, aren't they having Harvey for lunch up on the Hill next week?) Most of the SEC career staff for another. A fair share of Republican money managers who want answers, not whiny excuses. Otherwise unaligned admirers of Leavitt. Maybe even old friends who still want Pitt to keep the old implicit campaign promises.

In my opinion, Pitt is now earnestly efforting a personal and institutional transformation ... within the confines of his limited perspective. But much as he tries, he's late to the party, he's not right for the part, he's on the wrong track, he can't be taken seriously now even when he's right. Put him back on the other side of the table, and let him eat crow with the rest of the old boys.