Pegasus

Yesterday I saw the movie "Enron : The Smartest Guy in the Room" and now when I think of it, I find how much we can learn about the nature of free markets and their effects from Enron.When we talk about free markets in India it is perversely treated as some sort of magic which if allowed to come out of the box , will change our life and make it better than we can imagine but when I look at the leader of Free Market, USA and what the unleashing of Free Market by Regan has done to her I an forced to think again if it is a really a system where sellers and buyers interact and market forces work out the best prices or a system which feeds to the basic cravings of men for risks, power and wealth and makes wealthy a few at the cost of others.

Enron is about how a group of Ivy League Graduates gambled away share holder's wealth and themselves made million in stocks and options.Enron is about pride, arrogance and greed.And Enron is about mankind and his vices. Enron Corporation is about how everyone, be it bankers, or lawyers, or auditors lose their moral compass when it comes to money and by act of commission or omission participate in mugging common people. Enron was one of the world's leading electricity, natural gas, communications and pulp and paper companies.While power generation and distribution is the general work of a similar company,Enron major power engine was trading these commodities on exchanges as derivatives.Enron devised new innovative accounting system where they could book profit they were expecting in the future ,that way they could make book look real good while no actual money flows in.So they started to show profits they never made and used those profits to krocket Enron's shares through the roof (why would not they,everyone in management had millions of stocks and options).When debt started to pile up because the profits never came in, Enron Corporation's CFO Andy Fastow started to fudge the account books so that debts wont look like debt and that way dupe investors and share holders.For this he created number of companies and in this process he skimmed off a lot of wealth for himself.When other sources of income stopped Enron created artificial shortage of electricity in California and traded on it and made billions of dollars at the cost of the citizens of California.

The Enron failure demonstrated a failure of corporate governance, in which internal control mechanisms were short-circuited by conflicts of interest that enriched certain managers at the expense of the shareholders.Managers who were given millions in options and stocks gambled at the exchanges as the system rewarded those who helped the Enron reach is financial goals even if it that entailed excessive risks which is essentially gambling and yanked those who put red flags and cautioned against the approaches.Managers who had stocks and options were interested in only one thing to keep stock prices up so that their own wealth don't depreciate.At the end,when ship was sinking those rogue managers sold their stocks making millions and left the company broke.

Now if you look at it and think that this will not happen again and at least not in India,then I must disagree .This will happen again because all the mechanism put in place to prevent these happening are controlled by people.So these institutes essentially have the same weakness as mankind.Pride and Greed,two most common vices of men, are equally effective in incapacitating these organization.So powerful these vices have proved themselves that they have overcome individual as well as group's wisdom. Before the bankruptcy, Enron had dealings with all the major banks in America,some them helped it proactively to cover the debts.These banks could have stopped Enron but immediate greed blindfolded them.Of the 17 analysts who rated Enron ,16 gave them good ratings.Lawyers and Councils,who were ethically bound to stop from stealing people,chose to look away because they were being paid millions per week.Story of its auditors Anderson is legendary which need not be told.And above all management of Enron which did everything it could in its power to steal away from investors .And finally the regulators and the government .The coziness of Bush and Kenneth Lay is well known.He donated millions in presidential campaign.Interesting Kenneth Lay was actually being considered for the post of Treasury Secretary. Regulators are appointed by the Washington and do their bidding only, so no wonders they looked away when there was power crisis in California or when Enron books were being cooked.

Talking about government and power,I could not help myself but to think about the frequent visits of Ambani Brothers to New Delhi.In such a mesh of greediness, wealth and power even if anyone tries to stand up-to his principles, the weight of the unscrupulous system is so enormous that it breaks his spine or squeezes him out. Enron executives pro actively ensured the credit ratings of its stocks remained good,so one of the analysts did not work with the wishes of Enron bosses he was shown the door.

Free Markets and less government intervention are wonderful place where productivity increases and creativity unleashes and entities which are baneful to the development are thrown out.These would have been true had they been operated by just men who were free of vices of common man and could think beyond money but it is not the case, so whenever we talk about free markets and economics, a little behavioral science would really help.

Regulators who are supposed to control the market will never be able put a leash the market because they are controlled by politicians and politicians are controlled by their love for power which has direct bearing on their morality as for power there is need of money for which we need those organizations whom regulators are supposed to control.A complete free market is a like a great illusion where everyone thinks that he has the liberty and power to make choices,but the real decisions are made in the boardroom.Parliaments become the facade to legitimize the greed of Capitalists and Democracy becomes autocracy re-invented.(Remember the Matrix)
Evolution suggest that fittest survives and weak gets eliminated,I hope here if capitalist are the fittest,weakest are not the common people.

P.S - Skilling was asked in Harvard MBA interview if he was smart to which he supposedly replied he was fucking smart !

Labels: Economics, Enrons, Free Market