We'll get fooled again
By Daniel M. Ryan
The latest phase of the seemingly interminable Conrad Black case took place last week, when Conrad's legal team filed for two appeals: one to the same Seventh Circuit Appeals Court that had shot down his initial appeal, and one to the Supreme Court. The odds suggest that both are long shots, and that it's effectively over for Lord Black. There seems to be some recognition of these odds on the part of Lord Black himself, as this story hints at: his team's also seeking out a possible transfer to a U.K jail. He could be paroled after about three years' worth of sentence if that transfer is effected, and if the last of his appeals fail.
Some supporters of Lord Black might very well cling to the opinion that Conrad was the victim of mob justice. If so, then this episode says a lot about American mob movements. I suspect that other supporters of Lord Black are those who merely blinked at, or were unaware of, the case that started it all: Enron.
I recently read a book on the Enron debacle that, at least, qualifies for the most apt title of its year: Conspiracy of Fools by Kurt Eichenwald. The details of Enron being secretly hollowed out while posting better and growing earnings are well-known now. What Mr. Eichenwald specifically brought to his book, though, was an at-times eerie description of – well, fools rushing in where more conventional-minded sorts warned against treading.
The Enron case itself makes for a real touchstone. Where you stand on Enron largely depends upon where you sit, in a classroom. The front-of-the-class type – the ones who dutifully do their homework, absorb their lessons, earn straight As and get earmarked for the college and post-college fast track – are the one most likely to see Enron as a house of monsters that deserved to be extirpated. The back-of-the-class type – the ones who, for whatever reason, treat the school system and the lessons therein with either skepticism or cynicism – would be more inclined to minimize the significance of Enron, with jokes about investors in it being willfully blind when their eyes glided over the sentences "Investigate before you invest" and "Don't invest what you can't afford to lose."
Regardless of who thought what, Enron's implosion led to swift passage of the Sarbanes-Oxley Act. That's real evidence of a prior sea change. Believe it or not, Wall Street (as well as Bay Street) was the traditional haven of the well-heeled back-of-the-class type. Hence, the jokes about old Wall Street that featured stockbrokers as both crooked and dumb.
The new Wall Street (as well as the new Bay Street) is, of course, profoundly different from the old. If Mensa were ever able to shake off its reverse prestige, an entire chapter could be opened up at Wall & Broad. (Another could be opened up at King & Bay in Toronto.) The new Wall Streeter is smart, well-educated very hard-working…and much more dependent upon numbers and disclosed facts than the old boys were. If Conrad Black was taken down by mob justice, then the kernel of the mob in question was the upper-middle-class professional. It was the Revolt of the Bookworm.
Seemingly, that mob movement – or that campaign to excise a malignant cancer from the body pecuniary – ended with the trial of Lord Black and his three co-defendants. Myself, I wouldn't count on it. I base this caution upon a seemingly insignificant fact in Mr. Eichenwald's book. It's not quite as briefly mentioned as the fact that one of Conrad's fellow life peers, fellow Conservative Lord Wakeham, was himself a director of Enron. Mr. Eichenwald goes into the former point in some detail. It occupies six pages in his book, pp. 55-60 in the hardcover.
The main tool that Enron used to keep its earnings fluffed up was its use of "mark-to-market" accounting, in a way that was considered irregular even at the time when it was proposed. More straitlaced accountants in Enron's auditor, Arthur Anderson, had objected that the use of mark-to-market would sever revenue recognition from the time of delivery of the corresponding product. Nevertheless, Enron's top management decided to ask the SEC to grant permission for that method to be used.
At the time that Enron made the application presentation – September 17, 1991 – the SEC was already pushing the banks to go to mark-to-market. The SEC officer responsible for financial institutions was so used to them resisting it, that he was surprised when he realized that Enron was actually asking to switch to it. Approval for the change came swiftly.
It's easy to guess why. To use prosecutorial parlance, Enron "rolled" for the benefit of the SEC. By asking to use the mark-to-market method, Enron offered itself up as a precedent that the SEC could take to the resistant banks.
We know that this change marked the start of Enron's slow disappearance into the accounting subcapitol of Fantasyland. It doesn't take much reading between the lines to discern that a large part of the reason why they thought they could get away with almost any accounting-related finagle, provided that the forms looked correctly filled out, was because they had been the SEC's fair-haired boy on an important accounting-change issue.
This kind of arrogance, I need hardly spell out, isn't confined to Enron. Look at the history of the recently-decimated Fannie Mae, as of 2004, and the also-recently-devastated Freddie Mac, as of 2003. Both of these earnings scandals were Enron-sized. In terms of prosecutorial discretion, at the criminal level, both GSEs got completely let off the hook.
Look at what happened subsequently to the prices of both of their stocks.
It's hard to avoid the conclusion that a corporation being sheltered by the government kindles arrogance, and even foolhardiness, in the top-management level of said corporation. Hence, I suggest that the fair-haired boys of the Sarbanes-Oxley era rate a hard, skeptical look. It's true that they wore hats made of Washington white in the post-Enron era…
…but so did Enron itself in 1991. Look at what happened to that company subsequently.
Get weekly updates about new issues of ESR!