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May 16, 2006


The prosecutor should have had the victims of the Enron fraud testify about the horrific damage done to them in the same way the prosecutor in the Moussaoui charade had the victims testify as to what 9/11 had done to them. If Lay and Skilling do not receive the harshest sentence possible, there is no justice.


If they're found guilty, I assume we'll see a lot of that in the sentencing phase. But first they've got to be found guilty.


Except, correct me if I'm wrong, all those mitigating and aggravating factors will be directed towards the judge during the sentencing phase, not the jury. I don't know if that will particularly persuasive with the judge.

And I believe his hands are largely tied by the Federal Sentencing guidelines. Now, I know he CAN if he wants to, sentence the defendants to the maximum sentence allowable, but I think in practice, and especially in high profile trials, the judge is likely to stick to the guidelines.

Of course, all of this presupposes a conviction, and we don't know what the jury will do on this trial. Did they start deliberations today?

Any takers on how long before a verdict? I'll guess at least 2 weeks.


I think you and I cross posted effectively the same comment?

For those interested, just a little primer on Enron.

The question isn't actually whether Lay and Skilling knew the company was collapsing around them. Enron didn't collapse; it imploded in just under six months. Instead, the question is whether Lay and Skilling knew the company never was profitable and whether -- over the course of several years -- they knew (or pretended not to know) that the company's accounting -- at its most basic levels -- was a massive shell game designed to make the company look profitable.

When Skilling took over the company, one of his conditions for accepting the job was that Enron use "mark to market" accounting. What this means is that as soon as a deal is signed, the company puts on its books -- at once -- all the anticipated profits for the whole life of the contract. There is obviously a tremendous incentive to keep the company looking profitable (and the stock price pumped up) by being unrealistically optimistic about the anticipated benefits of the contract.

The company was on tenterhooks while the SEC was reviewing Enron's request to use mark to market accounting. When the SEC approved the method, the company literally broke out the champange and people cheered.

The flipside of mark to market accounting is that when a deal starts to go sour, you have to put the anticipated downside on your books immediately. Aside from trading in natural gas and electricity futures, all of Enron's other divisions were massively unprofitable -- broadband, electricity services, water, international electricity generation. This was because there was tremendous pressure to close a deal -- any deal -- that could then be optimistically put on Enron's books as a big anticipated profit. If you didn't close deals, and lots of them, you were fired, since the company had a policy of firing 10% of its executives each year. In doing deals, Enron execs always got taken to the cleaners because their compensation -- and tenure -- depended not on the long term actual profitability of the deals they made, but on how many deals they closed.

It was to avoid the mark to market downside of theses bad deals that Andy Fastow -- who was Skilling's boy -- worked his magic. When a deal started to sour, the company would shift it off Enron's balance sheet by "selling" it to one of Fastow's partnerships. These weren't really independent from Enron because they couldn't be. No independent entity would buy a sour deal from Enron and pay Enron far more than the deal was worth (which allowed Enron to book even more mark to market "upside" by pretending to sell at a great price a bad deal it had done just a year or two before).

And on it went, very much like America in the Republican era.

The tough row that Lay and Skilling have to hoe is to argue that they honestly knew nothing about how Enron operated at the most fundamental levels and that they were snowed by Arthur Anderson and Enron's law firm, Vinson & Elkins.

This argument may have just enough plausibility to raise a reasonable doubt in the mind of at least one juror. Think of it -- all of the major investment banks -- Goldman Sachs, Citibank, Merrill Lynch, all of the major financial journalists, all of the securities analysts, and most major accounting firms went along for the ride with Enron. They were getting so many strokes and were making so much money that they all pretended that Enron's obviously stupid deals were sound and that entities obviously NOT independent of Enron were in fact independent companies. Lay and Skilling can make the argument that if all these other supposedly respectable entities were fooled, it might be reasonable to think that Lay and Skilling were also fooled by the venal Fastow.

In this sense, the Enron implosion is very much a mataphor for the Bush Administration -- a massive and obvious fraud in which all the pillars of our society have played along, pretending not to notice the obvious. Unfortunately for us, we're all shareholders in the US polis, economy and society.

Superb comment, kaleidoscope. Thanks for providing the details I listened to Sharon Watkins' book, but couldn't have completed my analogy between Lay and Bush nearly as intelligently as you did.

[Full Disclosure: I was an IT consultant at Enron during the collapse. I didn't directly suffer from the collapse, but I had many friends who did.]

kaleidescope has it exactly right. Mark to market accounting was the key to the whole fiasco and most people don't understand the role it played. Mark to market accounting arguably made sense in the energy trading business, but applying it to Enron's other businesses was a recipe for disaster. During the time I worked at Enron, I never could figure out how the whole thing worked. A few months after the bankruptcy, I had lunch with my old manager and he said something I'll never forget.

You and I are pretty smart guys. If we can't figure out how a company's business model actually works, we should know that something is very wrong.

This guy had 20+ years of experience in the energy industry and I never realized that he was just as confused about what was going on as I was.


I guess what I was trying to say, is that unlike the Moussaoui trial, where the decision of either life in prison or the death penalty was in the hands of the jury, any sentencing phase of the Enron trial will be solely in the hands of the judge.

And as such, I expect any mitigating and aggravating factors to be approriately toned down, as judges seem not to base their sentences on the emotions evoked by such factors, where juries are notoriously swayed by tearful testimony from victims' family members. So if one were looking for high drama like we saw with the Moussaoui trial, I'd say they're going to be disappointed.

Given that this is such a high-profile trial, I doubt should Skilling and/or Lay be found guilty on any counts that Judge Lake will deviate too far from the recommended sentencing guidelines for the charges. Now, the aggravating factors may add on a few points to the guidelines given the scale of the Enron collapse, and one could reasonably argue (and I assume the Enron task force will) that such a scale amounts to making the criminal acts all the more heinous, which earns you points.

But I doubt that whatever sentence the Judge imposes would be in excess of whatever the final calculation comes out to based on the appropriate use of the guidelines.

I was just reading this silly blurb about whether a massive wave could flip a cruise ship, as in Poseidon:

With extreme conditions, a freak event could happen, Dr. Asher conceded. But with modern technology, even a good old-fashioned Titanic-like collision with an iceberg is highly unlikely. "You can't run your ship into an iceberg anymore, the radar is just too good," he said. "It would have to be manned by a complete idiot."

An executive not knowing how his own company runs seems by definition willful blindness. But then I'm a sucker for all that "accountability" the Republicans are always running on from.


Got it. Thanks.


I think I've said it before. But I used to work with a company that did some business with Enron (in the early 90s, so early). Then, in 2000, I remember reviewing the list of Bush's top donors. It was mostly big tobacco and big credit card. And Enron. I remember thinking, then, that Enron clearly was relying on business intervention for its business model, and was probably skating on thin ice.

I've been trying to figure out how to set up a hedge fund based on campaign donations ever since.

Off-topic, EW, but have you seen Judy Miller's latest?

Look who gave her a soapbox.

EW, I put the cart before the horse as I am apt to do. Of course, my first hope is that Lay and Skilling are convicted--something I have always sincerely doubted will happen--and that their sentencing will cause them to suffer in some significant way. Any punishment they receive will in no way compare with the suffering of those whose lives they ruined. If by chance Kenny Boy is convicted, I believe Bush will pardon him if at all possible.

landreau, thanks. Working on it as we speak.

yo, emptypockets,

"It would have to be manned by a complete idiot."

he doesn't have to be an idiot, he could be drunk

see: Joe Hazelwood

Although Enron contributed largely to Republican politicians and to a lesser extent to Democrats let's not loose sight of the fact that corrupt business men like Lay, Skilling and Fastow will seek to influence any politican that they can rent for a particular purpose. The greatest problem remains the access to power that our political process allows from anyone that can come up with the bribe.

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