history repeats itself...

["Devine, James" <jdevine@xxxxxxx>]

http://www.latimes.com/news/printedition/la-000013610feb22.story

Enron a Rerun of History

Financial fiascoes and 'creative accounting' are nothing new to American
investors. Booms often can set the stage for scandals.

By PETER G. GOSSELIN
TIMES STAFF WRITER

February 22 2002/L.A. TIMES

WASHINGTON -- When former Enron Chairman Kenneth L. Lay invoked the 5th
Amendment against self-incrimination last week, he seemed to put the
finishing touch on the energy trader's transformation into the biggest,
baddest corporate scandal ever to befall the nation.

But America has a rich history of financial fiascoes that foreshadowed
Enron's, and could even have provided the firm its playbook. Most involved
extravagant claims of never-before-seen strategies. Many required "creative
accounting" to turn losses into gains. Some featured generous campaign
contributions. Virtually all came after long stock market run-ups.

More is at stake today: Three times as many Americans have money in stocks
now as did during the last truly big bust in the late 1960s and early 1970s.
But don't count on legions of bruised shareholders to push through reforms
that will put a stop to financial debacles. In the end, policymakers,
economists and historians suggest, debacles may be the largely unavoidable
price of America's anxious love affair with its wide-open financial markets
and their booms and busts. "Booms bring out situations that breed financial
scandal," said former Securities and Exchange Commission Chairman Arthur
Levitt Jr. "A culture of what-can-we-get-away-with takes hold."

When that happens, Levitt said, regulators come to be viewed as
"professional naysayers and doomsday predictors, and they lose credibility.

"That's unfortunate," he said. But, he added, "there is not much you can do
about it."

In its heyday, Enron went to considerable lengths to portray itself as
something unfathomably new and, at least implicitly, deserving of special
treatment. But its techniques came straight from the history books.

To help clear away what the company viewed as outmoded regulations that
blocked progress, executives flooded politicians with campaign
contributions, almost $2.5 million in 2000--most to now-President Bush--and
almost $6 million since 1990.

To drive home the notion of the company's uniqueness, executives adopted the
latest business lingo, a nearly impenetrable "new economy-speak."

Jeffrey K. Skilling, the Harvard Business School graduate and one-time
consultant who became the company's chief executive, regularly described
Enron as an "asset- light" market maker and risk manager able to trade
anything from energy to advertising.

In doing so, he glanced over the company's distinctly heavy investment in
such things as an Indian power plant, an English water business and a
Brazilian electricity distributor. For those who sought to square the
mismatch, he reserved a special kind of generational scorn.

His views were summed up in an explanation he offered for hiring the
unusually young Andrew S. Fastow as chief financial officer: "We didn't want
someone stuck in the past, since the industry of yesterday is no longer."

On such talk, Enron eventually ballooned from a mid-size regional company
into one of the largest corporations in America.

So did the highfliers of a previous era: the conglomerates of the 1960s.
Both the men and the methods behind Textron, ITT, Ling-Temco-Vought and
other hot stocks of the "Go-Go Years" bear a remarkable similarity to
Enron's.

In each instance, the players claimed they had hit on something entirely
new. In the conglomerates' case, it was the then-unheard-of idea of
plastering totally unrelated businesses together.

In each, executives offered elaborate rationales for what they were doing.
The conglomerators talked about "synergy" and claimed--wrongly--that their
companies were more stable than conventional ones.

The results ranged from disappointing to disastrous.

Yankee Royal Little took a placid New England thread-spinning company called
Textron and turned it into a corporate behemoth by snapping up producers of
zippers, pens, snowmobiles, eyeglass frames, silverware, golf carts,
metalwork machinery, helicopters, rocket engines, ball bearings and gas
meters.

The company survived, but only after spending the last two decades selling
off most of what Little had bought. Investors who purchased their shares at
the height of the conglomerate craze took a bath.

Harold S. Geneen at ITT carried the conglomerate approach so far that by
1972 Time magazine was noting that a consumer seeking to avoid the company
"could not rent an Avis car, buy a Levitt house, sleep in a Sheraton hotel,
. . . use Scotts fertilizer or seed, eat Wonder bread or Morton's frozen
foods."

Like Enron, ITT was a big campaign contributor. But Geneen's idea of how to
use political influence made Lay and associates look like choir boys. In
1970, the company offered Republicans $1 million and consulted heavily with
the Nixon White House and the CIA when Chile's new socialist president,
Salvador Allende, threatened to seize the ITT-owned Chilean Telephone Co.
Allende was overthrown with U.S. aid.

ITT started selling off parts of itself in the mid-1980s and split in three
in 1995.

Oklahoma electrician Jimmy Ling discovered the wonders of stock by selling
shares in his contracting business from a booth at the Texas State Fair in
the mid-1950s, and in just more than a decade turned Ling-Temco-Vought into
the 14th-largest industrial company in the nation with 120,000 employees.

Like Skilling, Ling insisted that only young, fresh minds could appreciate
his strategy. When a leading Wall Street analyst questioned his methods,
Ling demanded the man appear before him and, discovering he was middle-aged,
dismissed him with a contemptuous, "What could I expect from someone over
40?"

By 1969, LTV was selling $1 billion of meat, $1 billion of steel and $700
million of planes and aerospace hardware. It had become the world's largest
manufacturer of sports equipment. It made chemicals, cable, drugs and
stereos. Its stock reached $136 a share.

Today, all that's left is a bankrupt steel producer.

Few things about Enron have attracted as much attention as the company's
extraordinary talent for painting whatever financial picture it wanted by
hiding debt, converting losses to gains and making whole operations vanish
at will.

Unluckily for ordinary investors, the company's off-the-books partnerships,
stock-backed deals and less-than-arm's-length transactions were not unique
to it. A substantial number of companies use similar practices, despite the
fact that some contributed to many of the greatest corporate crackups of the
last century.

Perhaps the clearest link to past debacles involves Samuel L. Insull, the
British-born onetime private secretary to inventor Thomas Edison.

Insull is widely credited with figuring out how to make money from the new
electrical technology of the early 20th century, and with assembling one of
the largest regional power distribution systems in the country during the
1910s and 1920s.

Lay, Skilling and Enron could rightfully claim to be Insull's historical
heirs. They, more than anyone, pressed for taking the next logical step from
where Insull left off, linking the country's disparate regional distribution
systems into a single national power grid. Their proposal, for which they
lobbied heavily with the Bush administration, lies buried in the fine print
of the president's yet-to-be-acted-upon energy plan.

But Enron executives were much more interested in following Insull's lead in
another area, creative accounting, and the result was a tottering financial
structure that ultimately collapsed.

Details of the two groups' methods differed. But their aims were the same:
to ensure that insiders maintained control over their respective empires, to
ensure that they did so with other people's money, and to attract as little
unwanted public or government notice as possible. Their fates were also the
same.

Insull's debt-laden empire crumbled in September 1931 in what newspapers at
the time said was "the biggest business failure in the history of the
world." The collapse took 600,000 shareholders and 500,000 bondholders down
with it.

"People felt so swindled they never went near the market again. There was a
lost generation of investors," business historian Ron Chernow said.

More than Enron's political clout or its dubious accounting practices, what
most outrages the public about the company's collapse is the idea that top
executives could walk away with millions of dollars while ordinary employees
lost their jobs and retirement savings.

"Americans have always been deeply ambivalent about capitalism," Columbia
University historian Alan Brinkley said. "Most people see it as fine as long
as it is working for everyone. But they get very distraught if it is not
working well or seems to be serving only the top few."

That distress was fed mightily by news that Lay, Enron's former chairman,
sold $100 million of company stock last year even as he was trying to
persuade company employees to hold on to their shares. That was
substantially more than previously reported.

But even with the latest report, the executive who ultimately could come in
for the nastiest criticism may not be Lay or Skilling, but former finance
chief Fastow.

That's because in addition to designing many of the off-the-books
partnerships that fooled the public about Enron's true financial condition,
Fastow and an associate are accused by their own board of tweaking the
arrangements to draw tens of millions of dollars out of the company for
themselves.

In authorizing Fastow to set up key partnerships, the Enron board appears to
have allowed him to treat them almost as personal property, even letting him
name them after his wife and children.

If board members had looked at similar deals from the past, they might have
seen what was coming.

During the 1920s, Albert H. Wiggin, the head of New York's giant Chase
National Bank, created a series of private companies, including two named
for his daughters, to speculate in Chase stock.

When the 1929 crash occurred, Wiggin was put in charge of propping up the
bank's share price. But he used his private firms to take out loans from the
bank with which to bet against the stock. During the darkest period of the
crash, September through November, he made more than $4 million.

Analysts agree that stopping the likes of Wiggin in advance may be nearly
impossible, but some argue that the addition of new laws and regulations
over the years has helped discourage fraud by raising the cost of getting
caught.

"I doubt any of the principals of Enron or the partnerships are going to
look back on this and say, 'Boy was that a wild ride, but was it worth it,'
" UC Berkeley economic historian [and pen-l alumnus] Brad DeLong said.

It remains to be seen whether anyone forfeits his fortune. Ex-junk bond king
Michael Milken, who spent almost two years in federal prison for securities
fraud and paid more than $1 billion in fines and penalties, was recently
estimated to be worth $800 million.

Officially, the Enron hearings underway on Capitol Hill are to help members
of Congress decide whether new laws are needed to prevent such a collapse
from happening again. But as almost everyone involved understands, they are
really morality plays intended to reward good and punish evil.

Most of the executives who have been paraded before the committees and the
cameras, including Lay and Fastow, have taken the Fifth and endured hours of
insult. Skilling took a different tack and denied knowing of any improper
activities or even financial problems, and was ridiculed for his claims.

Lawmakers and historians say that such public pillorying helps build
momentum for political change. In Enron's case, the company is quickly
emerging as a symbol of business excess that's already helping to prod
passage of campaign finance reform, and probably will result in new controls
on corporations, pensions and accounting.

But some of the regulators who have won broad new powers through the hearing
process argue that, in the final analysis, it is not the extra laws or
regulations that are most important, but the public glare on the rich and
powerful.

"Whatever rules we pass will not assure us that we will not have another
cycle" of Enron-like scandals, Levitt, the former SEC chairman, said last
week. "In America, humiliation and embarrassment tend to change behavior
faster."

-- Jim D.