As Gautam said, many of the folks doing the analysis are bright, but not
the
most knowledgeable in the field. Thus, there is a strong economic
incentive
to fool the analysts. Add the incentives given to auditors to play ball
with the companies that they are auditing, one has a strong disincentive
for
transparency.
Dan M.
There's one other point I wanted to make, actually, about this whole thing,
which is that Enron's collapse is a product of the _greater_ transparency
and accountability of the American economy as opposed to that of its
competitors. My old job was to be the Administrator of the Russian
Investment Symposium - essentially the largest discussion of the Russian
economy in the world every year. One of our featured panels was on the
topic of Corporate Governance - essentially, what people are talking about
when they talk about what failed in Enron. In the process of organizing it
I had to acquire some level of knowledge about the subject. The Russians
are essentially attempting to create a functioning system of corporate
governance from the ground up. When they decided to do that they
essentially went to the American system of laws and said - how can we adapt
this for the current needs of Russia? They barely even glanced at the
European and Japanese models. This was basically because they thought
(correctly) that the American model was vastly more transparent than any of
its counterparts. Enron collapsed because someone finally discovered its
bad debts, for example (note - we still don't fully understand what
actually happened at Enron, so this may not actually be correct). _Every_
major Japanese bank is crippled by bad debts, but the Japanese government
and culture are simply unwilling to accept the idea of failure - even
though no one doubts that would be best for Japan in the long run. David
Ignatius of the Washington Post published a very good article on this topic
- the URL is
http://www.washingtonpost.com/wp-dyn/articles/A40849-2002Jan25.html
I think that very few people really understand what's going on. In part
because corporate governance is a terribly arcane topic. Unless you're a
total geek (like, well, me) it's enough to put you to sleep in 30 seconds.
In part because much of this takes place in a world that is, for all
practical purposes, almost entirely separate from the lives of most
Americans. My junior year of college I had only the vaguest idea of what
Goldman Sachs _did_. My senior year I was interviewing for a job there,
and, to be honest, I _still_ wasn't entirely clear what they did. This may
help explain why I didn't get the job :-) But GS and its counterpart firms
(Morgan Stanley, CSFB, and so on) draw talent from a very limited pool (Ivy
League schools and their equivalents), interview ferociously (Goldman,
famously the most exclusive of them, probably accepts 1 out of every 50
applicants from a fairly selective talent pool to start out with, and the
interview process usually involves multiple stages and interviews that can
last 10 hours), and pay exceptionally well. Once you're there a Goldman
analyst is expected to work 100 hour weeks _routinely_. Think about what
that means, btw - I have gotten phone calls from friends at Goldman at
11:30pm on a Saturday night from the _office_. You have very little
background in the field (my concentration was in government, I have friends
who work there who were in fields ranging from Economics to English to
History, some of them with _no_ college training in Economics or Business)
and maybe a few weeks of training, plus the assistance of other people in
your office - who are, after all, a product of largely the same monoculture
that produced you. So you get a group of ferociously smart, dedicated,
hard-working, and _young_ people involved in this sort of work. I don't
know for certain - again, as far as I can tell no one fully understands
what happened to Enron - but this sort of environment probably does make it
a little easier to pull off scams for a little while. OTOH, it also (I
think) makes it absolutely impossible to pull them off for a very long
period of time. Enron managed for years, it looks like, but they _were_
caught, and not by the government.
Gautam
