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Enron and Greenspan´s Bubble / interess. Artikel (engl.)

verfasst von JÃœKÃœ, 02.03.2002, 14:18

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http://www.mises.org/fullstory.asp?control=902
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Enron and
Greenspan's Bubble
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by James M. Sheehan

[Posted March 1, 2002]

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During the 1990s, at the height of the Greenspan bubble,
investors demonstrated most convincingly that they were not interested in
well-managed companies. They were not concerned about profits, as evidenced by
the fact that they bought Internet firms that had hardly any customers.

Even profitable companies issued pro forma financial
results, meaning that they departed from normal accounting conventions in order
to boost reported earnings. Numerous"restatements" of earnings were
also reported, in which companies admitted to having provided misleading numbers.
Investors swallowed these fake numbers willingly, speculating that easy money
from the Fed would cause stock prices to inflate further still.

 [image] In
contrast, the SEC failed to act for years, even though it had the exact same
information as Mr. Chanos, if not more. The agency failed to review Enron's
public filings for four years, complaining that they were too complicated to
understand. Under the Public Utility Holding Company Act, Enron was required to
provide the SEC details of its various investments, holding companies, and
off-balance sheet financing transactions. This law was mysteriously waived by
the SEC in 1994, one of the many government mishaps that prevented discovery of
Enron's fraudulent practices.

Those who desired information about Enron's regulatory
disclosures would also find themselves stymied by the SEC's bizarre
administrative procedures. The agency has voluminous files containing
correspondence between companies and SEC accountants. This paperwork may contain
material information concerning questions the SEC had about the aggressiveness
of corporate accounting representations.

Yet investors do not have ready access to this data. In order
to see it, they have to file cumbersome Freedom of Information Act requests.
Then, they must wait patiently for months on end as the bureaucracy processes
paperwork.

Much of the regulatory apparatus apparently broke down because
lawmakers in Congress, who had received generous campaign contributions from
Enron, pressured the agencies to be lenient. This is an inherent flaw in any
political approach to regulation. No amount of political graft could convince
James Chanos to go easy. The market eventually rewarded him nicely for revealing
the truth after years of government lies about Enron.

Like the baseless arguments put forward for more accounting
regulation, proponents of big government want more controls over 401(k)
retirement plans--never mind the abject failure of Social Security.

The Feds now are angling to meddle further in a process whose
flaws they created. For example, the law encourages companies to compensate
employees using stock options without counting them as expenses on the balance
sheet. For years, Washington did everything it could to"stimulate"
private retirement savings. As a result, some Enron employees made bad decisions
to take full advantage of these rules, and they overloaded on company stock.
Companies could not hire investment advisers to recommend against overloading on
one asset because of a flawed legal system that would hold the companies liable
for the investment advice.

Fearing debilitating lawsuits, companies simply can't provide
any investment advice to their employees. Post-Enron, Congress wants to restrict
investment choices and put onerous requirements on the structure of company
pension plans. The net affect of these changes will be to discourage companies
>from offering generous retirement matching programs at all.

The role played by maestro Greenspan and the Federal Reserve
has been almost completely obscured during Enron's congressional investigations.
After all, it was the Fed-inspired boom that turbo-charged questionable
companies like Enron. With shaky companies sporting lofty valuations, healthy
companies felt pressure to manage earnings rather than their businesses. They
did so through various legal and illegal accounting tricks involving aggressive
recognition of revenues. Profits were overstated, and earnings quality was
abysmal. The Fed had debased all normal financial standards and benchmarks
relied upon by investors.

Fed maestro Greenspan fully encouraged this process, not only
through inflationary monetary policy but also through his widely publicized
speeches and congressional testimony. He claimed that the bull market was due to
a"productivity miracle" that he himself created.

Pronouncements of this nature fueled the mania and discouraged
a close scrutiny of company fundamentals. Investment capital was misallocated
toward companies with no visible earnings or real prospects. Speculators pursued
Internet start-ups as well as the seemingly innovative but highly leveraged
Enron. 

Since the collapse of the Greenspan bubble, investors have
placed a new premium on earnings quality and transparent accounting. The market
is already acting without the passage of new laws by the grandstanders in
Congress. Companies that were too aggressive in their financial reporting are
being punished in the stock market. Since Enron, many other firms--notably Tyco,
IBM, and GE--have had their accounting scrutinized. Even companies that merely
pushed the envelope of legitimate accounting practices are being shunned.

Accountants and auditors are responding to consumer demands by
getting tough on their corporate clients. Likewise, they are discontinuing
technology and tax consulting work to settle conflict of interest concerns. The
market is not even waiting for Congress to wrap up its Enron hearings--an
embarrassing display of politicians' ignorance about business matters.

Opponents of the market say we have to stop another Enron from
happening again. Yet all the government's watchdog agencies completely missed
Enron. The system of cronyism in Washington, D.C., made the debacle possible and
made it harder for the public to find out what was going on. Existing laws will
put Enron executives behind bars, but they won't touch any of Enron's
accomplices in Washington. They are too busy devising additional laws that
pretend to protect us from fraud, while obscuring the biggest fraud of all.


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James Sheehan is a financial professional in New York. He is the author of Global
Greens (Capital Research Center, 1998), a book that documents
government funding of environmental extremist groups. Send him MAIL,
and see his Mises.org Articles
Archive.



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Enron and Greenspan´s Bubble / interess. Artikel (engl.) - JÃœKÃœ, 02.03.2002, 14:18