Hold Your Horses
Winners and Losers

January 15, 2002 3:05 p.m.

t is held, and I too hold to it, that as long as we know what financial/political money exchanges amount to, we can make the relevant judgments. If you have the means of establishing that Congressman Quick received $25,000 last year from the Demolition Firearms Company, you can put the kind of pressure on him, when time comes to vote on the new gun-control law, that will keep him honest. This link is so widely advertised as to generate the wisecrack that any politician who is truly anxious to help somebody or something is wise to ask the intended benefactor kindly not to send him a campaign contribution.

These conceptual generalities fall, often, to the ground. It's like the problem we have with local government: The rule is, keep the exercise of power to the lowest possible echelon in the line of command, because that way you can keep a keener eye on people who make the laws. Your problem becomes a problem between you and an official you can lay your eyes on, not a remote senator or a Supreme Court Justice who doesn't know your name, whose own name you wish you had never heard of. All of which is absolutely true, but every day, you run into this pothole in your life that you can't get your local alderman to do anything about.

In Enron, the chief executives who sold their stock did so publicly, that being the law. What that law says is that executive officers of a company have to record any sale in the stock of their company within ten days of the end of the month. Consider, then, the case of Kenneth Lay, who was chairman and CEO of Enron. In a little over two years, he sold stock 350 times. That means that on an average day, he sold stock, sometimes a lot of stock, sometimes not so much, but anybody who looked around would have been justified in thinking him a kind of Enron-stock-dispensing machine.

Surely his name affixed to statements of stock sales month after month over two years would have aroused interest in professional stock evaluators, who would have passed the word down to their clients ("The big man is selling. He must know something we don't know. Let's move to another investment.") But that isn't the way the world works; ask Bill Gates. Nobody is prouder or more optimistic about Microsoft than its founder/boss, but he has sold stock worth billions. People do that, and professionals don't interpret this as anything more than the exercise of routine prudence, not to be interpreted automatically as a rejection of the company whose shares you're selling. When Enron nose-dived, the good Mr. Lay was still holding millions of shares of his company, worth about $7.70. Either he didn't sell more than he did because he was stupid (a possible explanation); or because he was afraid of calling greater attention to the trickle that was seeping out of the sinking ship (a possible explanation); or because he harbored the hope that Enron's problems would turn the corner and that some day his millions of shares would be worth $700 million (which is about what they were worth when Enron was trading high).

The question everybody has is: Did Lay himself have information that governed his conduct, information that he withheld from the shareholders? Perhaps. On the other hand, the day the accountants changed their opinion on how to classify $586 million of alleged 5-year profit wasn't until November 2001, a mere month before Enron went for bankruptcy. The primal scream we hear comes, quite reasonably, from people who lost money on Enron, most poignantly, employees whose savings and retirement money were forfeit. But an entire tier of money-men are hopeful that the forthcoming investigation will establish that buying Enron, during those giddy days, was an apparently smart thing to do. If it was a dumb thing to do, those who were induced to buy will have a brief against their advisers. It pays to remind ourselves that every share sold meant one share bought.

Now if it transpires that the whole thing was a Ponzi scheme, then the public fastens its eyes not so much on the venality of Mr. Lay and his associates (if it proves that they were fraudulently deceptive) as on the accountants. The whole idea of accounting is to o'er-leap management and report to shareholders what actually is going on. If the accountants misread what was going on on so grand a scale, then they were blind or wicked, and attention reasonably turns to how to devise accountant codes that even blind accountants can follow.

Meanwhile, it is wise to brace oneself to hear all the clichés that are trotted out at every opportunity to attempt to discredit the theory of capitalism, whose unhappy side is that just as there are winners, there are also losers.