January 23, 2002

Enron: bankruptcy and "ruin"

Enron: In finance, reward is proportional to risk. So, corporate insiders have an incentive to take big risks. If they succeed, they are vastly rich. If they fail, the current stockholders are wiped out. The insiders, however, typically have previously sold enough stock to manage to shield millions of personal assets from corporate creditors, so they walk away merely rich. So, why not take huge risks? In J.P. Morgan's time, in contrast, bankruptcy meant "ruin:" i.e., poverty. That's why they jumped out windows back then. Corporate bankruptees never kill themselves anymore because they still have highly comfortable lives ahead of them. The solution is to make top corporate officers more personally responsible for paying off corporate collapses.

More Enron: Having noted yesterday how business insiders never kill themselves anymore over being "ruined" (largely because, unlike in the past, they aren't really ruined - they always escape poverty) comes word today that former Enron Vice Chairman J. Clifford Baxter has shot himself in the head. Still, like the Enron scandal in general, that's an exception that proves the rule.

No doubt, prison sentences are in order for several Enron bigshots, but the truth is that criminal trials aren't an adequate deterrent for corporate malfeasance in general. The standard of guilt - beyond a reasonable doubt - is high and the complexity of the cases often makes reaching that level of certainty beyond juries' capabilities. You'll note that Enron is a huge once-a-decade story in elite circles, but it's making most of the public's eyes glaze over.

No, civil trials and regulatory proceedings are more appropriate for deterring routine bad behavior. The problem is that the penalties are seldom severe enough. Executives generally escape scandalous bankruptcies with their lifestyles merely cut down from filthy rich to highly affluent. Consider a parallel case: O.J. Simpson's daily life after losing a gigantic civil suit. He didn't have to get a job at Burger King. He merely went from playing golf daily at ritzy Riviera to playing golf daily at the public courses like Knollwood at which I occasionally treat myself to a round. 1/25/02

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