The Real Reason Enron Failed
This paper explains that Enron was not built on fraud, but it was built on trust like a bank or an insurance company. When Enron lost the trust of their customers their revenues when from $100 billion a year to nearly zero in few months. But that is not the story that politicians want to tell.
Concerning the reason for Enron's fail, they pushed accounting into an area where the SEC could no longer stomach the conclusions by management and unqualified opinions by the auditors. The real reason for the failure was management's decisions...nothing more.
If you read the paper the author shows that multiple companies at the same time made similar size and egregious accounting errors (lies), but they did not fail.
Rand didn't really go into such cronyism in finance, or at least not in any great depth. The enemies of Midas Mulligan were communists, not international crony bankers. I'd say we have two types of enemies of freedom.
I am of the opinion however that a good case could also be made by downplaying the importance of trust in the collapse. When the accounting tricks became known, investors, customers, etc noted the links of dubious accounting measures to executive bonuses.
In business, distrust matters more than trust. Good warning flags are rocketing profits and bonuses but no product or service provided, just skimming of commissions.
A big bonus should generate distrust. Who is the father-in-law? How are those measures defined and calculated? How come this year it is gross sales but last year it was net? Who designs the measures and who supervises the production of the stats? I remember reading the 56(?) page Enron code of conduct. More pages -> more distrust.
The more telegenic the personality the more the public gives trust. This applies everywhere it is others people's money being spent.
My second thought was that the author's premise is faulty. Enron was an outsider infringing on the illegal profitable schemes of Wall Street and therefore Enron had to go. If Lay had been an insider from Harvard or Yale, the company would have been bailed out and a scapegoat would have been found for a couple years in club fed.
This also misses the fact that they filed fraudulent SEC public company statements (which are required and led to changes in the law requiring corporate officer signatures and personal liability). They knowingly just made the stuff up to match the per-share profit numbers expected by Wall Street. Because they were hiding all of the debt off the books, and the revenue from their market trading system was "what it was" the only way to make the numbers look right was to phony up the reports... which kept the stock price up, so they could keep selling stock and burning shareholder equity and lying about the next report.
Either way, if the feds hadn't brought them down, they were facing dozens of criminal charges in California, and the RICO statutes could easily have been applied as well (underlings committing felonies under orders from management).
Like Fannie Mae's downfall, they had to go back and start restating revenues and financial reports, which dropped the perceived value of their stock from the $80's, to basically a penny stock. Without the shareholder equity to convert to working capital every day, they were out of money immediately. The assets they mostly had were very hard/fixed assets - power plants in India, etc... nothing that can be converted into liquid cash easily.
I have no sympathy for them, having founded and managed a medium sized corp and ran it for about 10 years, it is just not an easy thing to do if you are playing within the rules, but 99.999% do. The cheating of the system and making up the numbers that some do, to get ahead when their business model doesn't otherwise support the level of success... it's insulting. They didn't get anywhere near what they deserved in my opinion.
Ultimately, the surging California renewables market would have forced Enron into collapse anyway, we're not far from having 20% of the homes & businesses with solar power (probably will be there within 10 years). The surplus of free power every day pushes into the grid and reduces the daily need for generation during peak demand periods and only a moderate demand develops during dark hours. Enron's business of brokering generation on long term contracts from coal/oil/nat-gas facilities would have been less and less profitable in a very large segment of the population.
The politicians purposely used Enron as an excuse to cram SOX down our throat, which has caused 1000000s of times as much damage as all the Enrons put together. The point of the article is that SOX would not and did not stop future Enrons and we just play into the politicians and the statists hands when we blame the financial problems of 2000s on Enron.
You cite Intel and others, but those are incorrect citations, Intel for example owns a tremendous amount of intellectual property and industrial capacity and is basically the core of the entire computer industry. A slow quarter doesn't undermine their business. Apple deciding to shift back to their own technology in a Mac does... but is it 10% of Intel's sales? Probably... its not Armageddon. If Apple switched back to their own technology AND Intel posts record numbers AND Windows products continue to diminish compared to Apple and mobile devices, then you start to wonder about what Intel is talking about and the same thing could happen to them.
Much of a stock price is based on reputation of the company, future earnings, and intrinsic value... if the reputation is zero, and future earnings are doubtful, especially when facing billions in fines from California... then it becomes a penny stock, as it did. If the value of the company as a going concern was sound - meaning they had on-going cashflow that could sustain the company, the stock price is just that, it doesn't affect anything other than the CEO's net worth. Look at Netflix, they lost some confidence and collapsed from $300 a share down to like $60 a couple of years ago, but it steadily climbed back because the underlying business was sound and profitable and they continued to execute on sales & revenue. If Enron had done that, the scandal wouldn't have mattered, but in Enron's case, there was nothing to keep it afloat when it couldn't raise money on a daily basis from Wall Street. They actually needed daily loans just to pay their daily expenses... when the overnight finance market dried up for them, they were screwed and the weight of their overhead crushed them.
I watched the Pentium 'miscalculation fiasco' evolve, and for the life of me, I could not fathom the upset expressed by the news media when virtually no home users would be affected by the error, and academic or manufacturing customers just needed to know what the error was so they could work around it until an alternate solution evolved and was delivered.