An homage to one of the best pieces of financial journalism of the last decade, Bethany Maclean's Enron blockbuster titled with childlike simplicity "Is Enron Overpriced?".
Originally posted November 14, 2007
Wall Street Learned the Lessons of Enron (Unfortunately)
By now, Climateer Investing's loyal and long-suffering readers know of my morbid fascination with stock frauds in general, and Enron in particular. One of the earliest* looks at this perversion of capitalism and markets was:
Is Enron Overpriced?
It's in a bunch of complex businesses.
Its financial statements are nearly impenetrable.
So why is Enron trading at such a huge multiple?
By Bethany McLean
March 5, 2001
NEW YORK (FORTUNE) -- In Hollywood parlance, the "It Girl" is someone who commands the spotlight at any given moment -- you know, like Jennifer Lopez or Kate Hudson. Wall Street is a far less glitzy place, but there's still such a thing as an "It Stock." Right now, that title belongs to Enron, the Houston energy giant. While tech stocks were bombing at the box office last year, fans couldn't get enough of Enron, whose shares returned 89%. By almost every measure, the company turned in a virtuoso performance: Earnings increased 25%, and revenues more than doubled, to over $100 billion. Not surprisingly, the critics are gushing. "Enron has built unique and, in our view, extraordinary franchises in several business units in very large markets," says Goldman Sachs analyst David Fleischer....MORENow Bethany is back with
Uh-oh. It's Enron all over again
(Fortune
Magazine) -- Start with the headlines about off-balance-sheet entities
known as structured investment vehicles, or SIVs (or sieves, as some
wags are calling them). As Gertrude Stein never said, an
off-balance-sheet vehicle is an off-balance-sheet vehicle is an
off-balance-sheet vehicle.
Just
as Enron's off-balance-sheet vehicles were propping up its stock price
by camouflaging the company's real financial results, so SIVs were
inflating the credit market by providing demand for the complex
securities created out of mortgages and loans used to finance
buyouts....Here's a nice characterization
But no one wants to remember two simple rules -- some things are too good to be true, and be wary of Wall Streeters bearing gifts -- when everyone seems to be making so much money. And the collateral damage always hits the true innocents, such as gas pipeline workers and homeowners....MORE*For the record, Fortune gave Enron its "America's Most Innovative Company" Award for six straight years, 1996-2001 and and as of August 14, 2001 was tipping ENE as one of the "Ten Growth Stocks to Last the Decade". Enron filed its bankruptcy petition December 2, 2001.
economicprincipals.com has some of the history of the journalists who worked the story:
...Three
books dealing with the story of Enron Corp. have
now appeared; a fourth may be in the works. That is a sufficient
number to permit an impressionistic boxing of the
compass of news, for the books in print were
written by journalists who covered the story for
The New York Times, The Wall Street Journal and
Fortune magazine.
And while abstracting out the three key institutional
players obscures the vital role played by the other organizations
that committed extensive resources to the chase
-- The Washington Post and The Financial Times in
particular; the Chicago Tribune (in connection
with the ill-fated Chicago-based accounting firm
of Arthur Andersen) and The Houston Chronicle
(eventually) -- it renders visible some of key mechanisms
by which news is covered and uncovered in the present day.
Enron is an especially interesting case for many reasons,
not least because the press was so deeply complicit in its
rise to prominence as "America's seventh-biggest
company." Early in its fifteen-year history,
Enron recognized that glowing press clips, as
much as analysts' recommendations and business
school cases, were the royal road to success.
No news organization was more embarrassed in the process
than Business Week magazine, which triumphantly splashed
Enron's Jeff Skilling on its cover just as the company
began its dizzying descent. (It was no more than a
superficial cut, since BW does an excellent job
from week to week.). But almost everyone who was
anyone got taken in at some point. Winners of the
$50,000 "Enron Prize for Distinguished Public
Service" included Nelson Mandela, Colin Powell,
Mikhail Gorbachev -- and Alan Greenspan. (Surely they were
happy to cash the check!)
The story as it frequently is told is that it was a Fortune
magazine writer who raised the first alarm. And it is true
that Bethany McLean, a former Goldman Sachs
analyst-turned journalist wrote a savvy (if
somewhat cautious) article in March 2001 titled
"Is Enron Overpriced?"
