When Treasury Secretary Paulson announced work on a bailout plan, he made some comment about wanting to help responsible homeowners, implying that irresponsible homeowners were the ones to blame for this mess and needed no help. I felt like throwing something at the television when I heard him mouth such garbage.
Irresponsible homeowners — the ones who’d been pushed to become a part of the "ownership society" to help our floundering post-9/11 economy, the ones who suffered a catastrophic illness that health insurance didn’t cover, or lost their jobs due to market conditions over which they had no power.
It’s infuriating to hear such hints of blame from Paulson to this effect, knowing that the real problems — the really BIG problems — had far more to do with the irresponsible and completely amoral pirahna that populated firms like Enron.
Specifically Enron, but including their corporate brothers-in-arms.
Once upon a time, I worked for a Fortune 100 company, in a department with overlaps between legal and financial departments, and with regular exposure to executives and hedge fund traders. I remember about 10 years ago the first time the division for which I worked explored using "swaps", derivatives that would help businesses share risk as well as share profit. (You can read a nice explanation of derivatives by Hugh here in Oxdown.) The executives of the organization sweated for days and weeks over how this worked, what the real exposure would be, whether they knew enough about these kinds of instruments to use them.
And by executives, I mean the kind of guys that made $200K to $1M or more annually, who were graduates of business schools from around the world. They fretted over this stuff more than they did a number of mergers and acquisitions, even with the SEC or DOJ involved in oversight.
Ultimately, they implemented these "swaps" anyhow.
Not long after the first swap derivative, I had a chat with the firm’s top hedge fund traders. Again, brilliant guys with degrees from top notch schools, the kind of guys over which other Fortune 100 companies will fight. We got onto the topic of Enron, which was still in its fattest, headiest days as top dog of the market. I asked them what they thought of Enron, and if there was anything that Enron was doing that our firm should be doing.
They shook their heads and told me candidly that they had no idea how they were doing it, couldn’t explain how they were succeeding. If they couldn’t understand it, they couldn’t duplicate it, even though management wanted to get a cut of the same kind of action since they had exposure to energy markets.
Some of the smartest guys at a Fortune 100 company couldn’t understand this stuff and went ahead and did it anyhow; the executives duplicated with derivatives what Enron was doing to spread risk, stopping short only with moving these activities offshore and off-book because regulations and company charters kept them from doing so. Even though the guys who had to execute these transactions might be shaking their heads, the executives with big chunks of company stock and options and comfortable salaries went ahead and continued to do more of the same.
I can picture this happening at AIG at a much larger scale, and I’ll even bet that a few transactions from the same firm at which I once worked also involved AIG.
Smart guys, all caught up in trying to outsmart those so-called "smartest guys" at Enron, and continuing their efforts for years, long after Enron had gone down in flames.
Irresponsible homeowners? Pshaw. These guys made the puny little mortgagees look like teeny little pikers when it came to irresponsibility.
And yet we are going to have to bail them out. I sure hope they remember to call us and ask us to go for a ride on their yachts sometime, or invite us to go skiing in Gstaad.
(By the way: where did all the Enron employees go, anyhow? not the poor folks who were frontline energy business folks, but the ones who helped execute off-the-books financial maneuvers but weren’t prosecuted? Ever wonder where they got their next jobs after Enron imploded?)
12 Comments
Spotlight
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About The Seminal
Advanced search
I know of at least one Enron Exec who’s wife is my wife’s customer. He will be finishing his one year sentence in October.
Paulson, just another smart guy playing the game. It’s always the middle and underclasses at fault. Sells well to low information peeps.
Transactions so complex (and mass media so abysmal) that we’re all low info peeps now.
And for every one of these folks, there was somebody else in the corporate food chain who flipped and avoided the time.
There will be nobody held accountable for the aggressive tactics at AIG or other firms with similar investments in CDOs and CDSs since they toed the vaguely dotted line that made these vehicles legal.
I was an IT consultant at Enron for the last 18 months before the implosion. I often tell people I spent a lot of time there wondering how they were making money. About two years after the crash, I had lunch with my old boss, who had been an Enron employee. As we were talking, he said something simple, yet profound. He said, ‘You know, we’re smart guys. If we couldn’t figure out the company’s business model, we should’ve known something was wrong.’
This crap is exactly the same thing. I think there will be prosecutions, especially at AIG. The guys who pull this stuff think they are bullet-proof. They’ll be surprised that the FBI has guys who can follow these transactions.
Yes, WO, that’s exactly the reaction I had from the hedge fund guys I spoke with; we were talking about Enron’s business model because we were looking at risk management vehicles and couldn’t figure out how they made it work, because everything we knew said it couldn’t.
We were right — it couldn’t work, not if you did it legally.
And the risk management model doesn’t work if the underlying risks are not known or deliberately obscured.
For some reason we thought we weren’t smart enough, when in reality we weren’t criminal or irresponsible enough.
I think we’d already be seeing prosecutions if Elliot Spitzer hadn’t been politically assassinated. I’m not so sure now, since the bodies are being buried very rapidly. Shredders and wipers must be working overtime.
The movie that shares the title of your post should be required viewing of every one here.
I work in financial services and still found it breathtaking how easily the energy traders for Enron gamed the system to jack up prices in California while laughing about “Grandma being stuck in an elevator” during their self serving rolling blackouts.
Its the same principle with the short selling the hedge funds are doing now.
Anytime these a-holes get together in Davos, Jackson Hole, The Greenbriar, etc. with some butt kissing CNBC anchor sitting outside breathlessly awaiting an interview, hold on to your wallet and 401(k) because rest assured they aren’t inside talking about ways to better the human condition.
No, they’re in there cooking up the next way to make obscene amounts of money exploiting some new found (or lobbied for) regulatory loophole.
Great post, except I don’t think it’s the last gasp. These people are like cockroaches and will mutate to survive the latest concoction of Raid.
I have long thought of our guiding “governing” principle as that of Enron. “Keep buying the bullshit, America!” while the top dogs sell off and make a mint. I would not put it past Ken Lay to have procured a corpse from the local med school or undertaker to take his place in the crematorium. That’s how big his moral void is.
Smartest Guys in the Room is a great book as is Conspiracy of Fools. Read and learn, America. The short sellers are the only people to call BS on these corporate pirates. That’s why Ken Lay blamed them for Enron’s demise and not the fancy shell games Andy Fastow dreamed up. They were not true believers, nor are they now.
Henry Paulson is Jeff Skilling to play to Bush’s Ken Lay.
OK me again. I am not a financial wizard but certain terms have a way of burning into my brain like subprime lending. One of those is mark to market. I noticed this in Forbes magazine about the workout a/k/a bailout:
Mark to market was discussed at length in the Enron books mentioned above. Here’s a little tidbit from wiki and any of you financial types can chime in:
That’s a humdinger of an idea, eh, to investigate mark to market accounting practices?
Final Throes?
STTP (6) — yes, you are correct; when they get together over martinis at the country club in a private room to discuss the latest business initiative, they do not have your best interests or mine in mind. They are thinking about their own shares and stock options. Don’t bend over.
dosido (7) — I think it’s the last gasp of this generation, the Ken Lay generation, the kinds of guys who were cut from the same cloth as Dick “I had other priorities” Cheney. But that’s not to say that the next generation isn’t cutting their teeth as I type this; I’ll bet they emerge from another sector of the world, too.
And yes, mark-to-market has been a real racket. But here’s where we need to collar another group of people and smack them hard: where were the auditors, internal and external? How many auditors aided and abetted this with a flourish of their pen by not demanding more data on collateralization and issuing more cautions about leverage? Enron’s auditor Anderson wasn’t the only firm that should bear blame
Tortoise (9) — if you will. (God, I hate it when that cold, heartless, smarmy, smug bastard modifies comments with that crap “if you will.”)
Or if the model is inaccurate or ill-devised.
We live in a world of illusions, and we’ve created some dangerous financial Frankensteins base on bad models.
I long ago concluded that economics was far more psych than it was ’science’, and this post is more confirmation of my bias. Smart guys and gals can be a lot of fun, but when they screw up, they REALLY screw up Big Time.
Yeah, spectacular screwing up when left to their own devices, unwatched.
The entire purpose of CDOs and CDSs were to smooth out risk, at least that’s what the smartest guys told us they were aiming for.
Real smoooooth.