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Tuesday, May 24, 2022

Paying Attention to Failure’s Lessons

Paying Attention to Failure’s Lessons

By MICHAEL LEWIS

I’m not sure it matters anymore what anyone outside of a handful of regulators and prosecutors thinks about Enron Corp. The energy trader’s fantastic collapse has the dimensions of a natural disaster, and may wind up being viewed by investors as an unlikely-to-be-repeated act of God. Too bad about that, since there are a few good general lessons to be had from the case. To wit:

1) If the chief executive of a public company quits, he should be forced to explain why, even if it means maybe especially if it means professional humiliation.

Bells should have rung in stock portfolios across the land when Enron CEO Jeffrey Skilling said in August that “I am resigning for personal reasons. I want to thank (Enron Chairman) Kenneth Lay for his understanding of this purely personal decision.”

It’s a bad sign for any big company when its male executives all of a sudden begin to care about their personal lives. Having long since abandoned any chance of a rich inner life, having shunted aside wives and kids for the sake of commercial glory, they are unlikely to have any sort of inner awakening, unless they sense there is no more glory left to be had.

When a CEO cites “personal reasons” for quitting his job, what he usually means is that he is being fired for creating a mess.

When pressed by reporters, Skilling added, helpfully, “my reasons for leaving are personal ones and I’d rather keep that to myself.”

2) The most unsettling corruption is not in the souls of the people in charge of Enron but in the heart of the financial markets.

The original idea behind the modern Enron to make markets in newly deregulated power markets is a great one. But the financial markets wanted it to be even better than it was, and encouraged the company to grow into markets in which it had a lot less business being.

Why the markets pay rather than punish exciting new companies for expanding into markets in which they have no place is a mystery I’ll leave for others to explain.

3) Spectacular financial collapses come in many shapes and sizes.

Already the Enron collapse is being likened to the collapse in 1998 of hedge fund Long-Term Capital Management. Both companies were, to outsiders, opaque. In both cases their investors didn’t understand what their money was being used to do. Both made huge profits creating new markets, only to see their margins shrink as those markets became competitive.

But there was a big difference between the two cases. The people at LTCM believed in what they were doing. Right up until the end they acquired a bigger stake in their own business. When their business came a cropper, they lost most of their own money.

The Enron bosses unloaded hundreds of millions of dollars worth of shares in their company before it went bust, ensuring a lot of people, many of them defenseless, were left holding their bag of crap. In any comparison with LTCM, they are undeservedly flattered.

Michael Lewis is an author whose books include “Next: The Future Just Happened” and “Liar’s Poker.”

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