[A-List] Is Enron the New Drexel?

[Mark Jones <mark.jones@xxxxxxxxxxxxx>]

Commentary. Michael Lewis, the author of ``Liar's Poker'' and ``The New New
Thing,'' is a columnist for Bloomberg News. The opinions expressed are his
own.
By Michael Lewis
Berkeley, California, Dec. 20 (Bloomberg) -- Enron Corp. is rapidly
expanding the American business journalists' notion of what is possible: No
story can ever again be said to be too outrageous to be true.
The boss, Kenneth Lay, was a friend of the current president of these
United States, an adviser to his administration and one of his biggest
financial backers. The company itself was rated ``strong buy'' by analysts
at almost every Wall Street firm, considered a shining example of modern
accounting by reputable accounting firms, and plugged endlessly by the
business press. Six years running as Fortune's most innovative company! And
all the while this same operation was, at the very top, a lie.
Understandably, people long for some analogy to help them grasp this
situation, but really there isn't a good one.
Other than failed hedge fund Long-Term Capital Management, Michael Milken's
junk bond department at Drexel Burnham Lambert offers the closest parallels
on Wall Street, and several people have written to me over the past week to
suggest it. But it really is unfair to Milken to compare him to Lay.
Alumni Will Flourish
True, in both cases profitable trading businesses collapsed because their
creditors came to distrust the people who ran them. And in both cases the
core business -- Drexel's junk bonds and Enron's energy trading -- remain
viable in the hands of other companies that banks trust.
Just as the Drexel junk bond traders who didn't go to jail went to other
Wall Street firms and created replicas of their former business, former
Enron traders will soon be making lots of money for one-time rivals such as
Dynegy Inc. and Duke Energy Corp. Well before Kenneth Lay emerges from his
legal hell, the energy trading business will return to normal.
But the morality of the cases are entirely different. Whatever you think of
Milken's junk bond department -- and I think its sins were minor beside its
achievements -- you must admit the people in it exhibited a certain honor
among thieves.
There was never a moment when Milken betrayed the broad interests of his
traders for his own narrow ones. He paid himself huge sums of money, but he
also made huge sums for his firm. He was careful to watch out for the
little people who worked for him, and they loved him for it. The Enron
bosses, by contrast, pillaged their firm and left the little people who
worked for them holding the bag.
Different Motivations
Enron created the illusion that it was much more profitable than it
actually was. Milken created an operation which was, if anything, much more
profitable than it looked. What Milken hid was the thuggish manner in which
he made his profits. What Enron hid was the sneaky way it made its losses.
(This is something I still don't understand, and would love for some
enterprising reporter to explain, as Enron seems intent on explaining
nothing. The off-the-books partnerships that brought Enron down appear to
have been a mechanism for hiding bad investments in hard assets -- Turkish
gas pipelines, Indian power plants and the like. Why did Enron, which made
its money as an intermediary, invest in this stuff in the first place?)
The speed with which the markets have punished Enron reflects the
differences between it and Drexel. In Drexel's case, it took a multiyear
investigation by the U.S. government, together with a smear campaign in the
press, to bring down the business. In Enron's case, all it took was a
couple of articles in the Wall Street Journal pointing out, among other
things, that senior executives were profiting at the company's expense.
In Drexel's case, the demise of the firm and the jailing of Milken was
pretty much the end of the story. In Enron's, the fate of the company and
its leaders may open up a much bigger scandal that reaches right up to the
top. Anything is possible.