I’ve been sick the past couple of days and have been watching movies to pass the time mindlessly. I signed up for Netflix at a handy time, and was able to watch via Watch Instantly. I watched some entertaining movies, but I also watched a couple of documentaries. Netflix has a nice collection of documentaries available via Watch Instantly.
One that I watched was Enron: The Smartest Guys in the Room. One idea that the movie put forth was that Enron’s partners were complicit in Enron’s fraud. The mark-to-market accounting was key to how long Enron was able to keep its house of cards up, but they needed to keep getting new infusions of cash to keep things going. The companies that bought into Enron’s continued existence certainly didn’t look very deeply at Enron’s ability to keep on paying. One, Merrill Lynch, even temporarily took some barges off of Enron’s hands to pull them off of Enron’s books. A bunch of banks bought into Enron’s LJM2 company which was used to pull more debt off of Enron’s balance sheet.
Arguably, Enron was a complex business and it was hard to understand all of the workings of the company. But, if you’re a bank that is considering investing, isn’t that a red flag? Complexity certainly doesn’t seem like a feature to me. The banks could have been taking it on faith and Andersen’s good name that Enron was turning out fantastic performance, but a writer for Fortune magazine managed to sniff out the trouble. You’d think the people forking over billions in investments could too.
I also watched a bit of Maxed Out. The movie talks about big banks’ predatory lending practices and how targeting people who will have trouble paying is good business for them. These are many of the same banks that invested in Enron.
Those are also many of the same banks that got bitten earlier this year when those bad mortgages they’ve been taking on (and CDOs they’ve been invested in) finally came back to bite them for real.
The phrase “too big to fail” has been bandied about, with respect to some of these companies. It occurred to me that maybe the converse is true. These companies are too big to not fail. They have so many executives and independent businesses that are out to produce outsized returns and win big bonuses that some of them are likely to take irrational risks and lose giant sums of money. With enough leverage, the amount of money lost could be enough to sink the parent company.
So, if these companies are going to run themselves in such a way as to allow these kinds of losses, they should also be allowed to fail. Or they shouldn’t be allowed to get “too big to fail”.
I do also think that a focus on quarterly profits and day-to-day stock prices, rather than the long term health of a business, is another thing that leads to problems like Enron and bad mortgages.
By the way, I know that all documentaries come with biases. I am sure there are other sides to these stories. However, there are plenty of indisputable facts out there. It’s grating that we, as citizens who are footing the bill for these mistakes and as shareholders in these companies, are not being looked after by Congress and Boards of Directors.