SEC Rule 10b-5 and Enron

SEC Rule 10b-5

Let me paint a picture for you. You are the CEO and CFO of a major Fortune 500 corporation. You know that one of the things that has made you a darling on wall street is perception. You know that you have had a tremendous amount of success due to the deregulation of parts of the electricity and gas markets and have invented a genius trading platform. You also know that due to market conditions and "behavioral finance" the public markets have become increasingly innefficient.
You know that your company actually may turn around and be successful, assuming that it is allowed to work off its losses slowly and over time. You need to restate earnings and unwind partnerships as profits from other businesses come in. You know you need a restructuring plan.

However, in order for you to succeed, your restructuring to succeed, and your company to turn around, you need to maintain a decent stock price since your special purpose entities are reliant on an elevated price. You can maybe hold off the investors in the special purpose entities while you kill expenditures on broadband and weather trading, power plants in India, and focus on your core energy trading platform, while reigning in the traders.

Do you go to your employee meeting and tell everyone that your company is in the toilet and they should dump their stock? No.

Do you sell your personal shares and positions in the company? No.

What happened at Enron at the time of the implosion was akin to a run on the bank. Anyone who doesn't see that is incorrectly assessing the situation. However, Skilling and other top brass, where the first in line at the bank. That is wrong. But pumping the company in a bad time, well, they had no choice. The only problem is not putting their money where their mouth was.

But Fastow's partnerships, and conflicts of interests, and all these things...he just postponed the crash with brilliant finance. If only they could turn the business around to be profitable, Enron would be an example of brilliant finance rather than an example of an sinking ship that Skilling got off of and then told everyone that the ship would right its course.

I'm not saying there was no wrongdoing here on the part of Skilling and Lay and many of the top brass, or that Fastow may have crossed some lines. However, the ridiculousness of the whole situation is that Enron is the poster child for 90s excess, comparatively speaking, the things Enron did, was doing, and failed because of was no different than other companies being lauded now.

This is typical of public opinion reacting to stock market losses and look for someone else but themselves to blame. My favorite is when they interview some pipeline operator who said he had a million dollars worth of Enron stock that imploded. A million dollar portfolio? All in Enron? Well he wasn't complaining when his portfolio got to a million and his friends at Dynegy or General Motors where telling him to diversify...

Cisco Systems has a policy of writing off router inventory from a quarter or two ago as obsolete, then storing that inventory in a separate location at a value of $0.00, when someone comes along and buys an old router from them, oh I dunno, a quarter or two later in the year, THEY BOOK THE ENTIRE SALE AS PROFIT!! But that's not fraud....Enron, those bastards were taking the pensions of little old ladies, clubbing baby seals, and beating up hungry orphans.... give me a break...

It's like my brilliant finance professor said when this thing first went down...in a good market its called financial engineering in a bad market its called fraud.

Delphi, Poor Delphi, Poor Detroit...Lift Up Your Weary Heart...

Hey, Delphi just announced another 1400 people took buyouts...bringing the total to 20,100. Crazy, right?

I feel bad for everyone involved, but this is the restructuring Detroit need 20 years ago. I feel like the heavens are releasing tied down capital. Will some of this money leave Detroit? Yes. Will this be a drain on the economy? Yes. Will Detroit recover? It always does.

Is this question and answer format getting annoying? It always does. Here's the link if you didn't click up there...

http://www.chicagotribune.com/business/
chi-060926delphi-buyouts-story,1,380961.story?coll=chi-business-hed

Fastow got 6 years

"William Sansinger with a six month sentence..."

http://biz.yahoo.com/ap/060926/enron_fastow.html?.v=38

So in the Dylan song, William Sansinger killed poor Hattie Carrol, etc., etc., but really what did Fastow do, besides be the little scapegoat for Enron. Wait, I take that back what did Enron do exactly? Besides do some of the most ingenius financial engineering ever? Wait, let's take the flip side of the coin, what if Enron's stock kept going up, what if these special purpose entities had a net asset gain? (If you remember Enron used their call options on their own stock as an asset to pull debt off their balance sheet into these special purpose vehicles, they got investment banks and other investors to pay cash for these call options...it was basically brilliant structured finance). Did they go to far? Probably. Did Skilling and Lay know about it? Definately. Should Fastow be the villain they are making him out to be? No. People lose money in the market and look for someone to blame. Blame yourself, you big dummy.


Anyway, Fastow is a brilliant CFO. Jeff Skilling was a brilliant CEO. The only problem Skilling lacked was some discipline and moderation. Trading energy was a brilliant idea. Enron Online was a brilliant idea. Screwing up California? Stupid. Rebecca Mark traveling around the world building crappy power plants by ramrodding them through local governments? Stupid? The worst thing about the whole house of cards (I say that without taking anything from Fastow's brilliance) was that they couldn't let the stock go down because it would kill the special purpose entities which they needed to unload debt. So it perpetuated this crazy cycle, where they kept feeding the beast. Meanwhile, broadband and weather trading was just too early... and they kept throwing money at this trading platform idea. If they had put some controls on their traders, thing would have fallen in line, and the money they made there combined with being more disciplined about their new business investment process, would have kept their numbers in line.

Obviously, Enron went overboard and crossed some lines in terms of business. However, the amount of grey area that Enron and the market was operating in at this time was enormous. A more conservative company would have emerged. However, let's be clear, there was no fraud here. They just kept feeding the monster.

Was there incomepetence at Enron? Yes. Was their fraud enough to send a mother to jail for a couple years and her husband to jail for 6? NO.

Fed Leaves Rate at 5.25%

Federal Reserve and Oil and Economic News, Galore... figured I could give you some links on this...

Fed Leaves Key Interest Rate Unchanged - NY Times Article

Crude Oil Falls Again - Bloomberg Article

The economy is slowing down, hopefully the housing market won't send it into a tailspin...

Its not the commodity bloodbath I expected, but nonetheless

Thanks to the illustrious Golden J for clueing me in on this story. I have long bemoaned the run up in commodities since it affected our little business and blamed those nasty hedge fund traders, I thought they would get theirs when the market turned...

However, I thought the bloodbath was going to be in commodities like copper and gold, but natural gas took such a nosedive last week that it really hit these Amarnth guys...

http://money.cnn.com/2006/09/20/news/companies/goldman.reut/
?postversion=2006092012

I think I read somewhere that an Amarnth is a never fading ficitonal flower... now it will be associated with fictional positive returns.

Michigan is #1 in the Journal Again Baby!

At least someone appreciates my alma mater...

http://www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=8712

What do those morons at US News & World report know about business schools anyway?

Looking more and more like the fed won't cut rates

With recent economic news out last week, all signs point to the fed keeping rates at their current level. Oil has settled in the low sixties and prices are moderating.

Read the AP article:

http://biz.yahoo.com/ap/060920/fed_interest_rates.html?.v=5

It's like my man McManus from the Usual Suspects said...

"Falling energy prices, further weakening of the housing sector and a few tame inflation reports have put a lid on inflationary expectations for the time being," said Thomas McManus, an economist at Banc of America Securities.

New Yorker Article on Neuroeconomics

In last week's issue of the new yorker, a fascinating article came out in regards to a new field of study called neuroeconomics. The field of neuroeconomics questions one of the most basic and traditional principals of economics. That the market participant is rational in his decision making. The article claims that certain situations and decisions cause overactivity in the frontal region of the brain, which tend to limit risk. It focuses on some simple situations where a person makes decisions about risk that it seeks to explain more as emotional rather than rational. It further, shows that people who have had brain damage to the front of their brain actual made riskier decisions, but had higher payoffs.

The article can be found here:

http://www.newyorker.com/printables/fact/060918fa_fact

Your comments are welcome as I found it a worthwhile read.

Housing Construction Down Again

Housing construction down, more bad news for the housing sector, but more good news for those looking for a deflation of the housing market...

http://biz.yahoo.com/ap/060919/economy.html?.v=7

Inflation is Moderating...yipee!

Some economic news out today...

Housing Starts Drop 6%, more than economists expected
http://biz.yahoo.com/ap/060919/housing_starts.html?.v=2

Inflation pressures moderate as wholesale prices edge up only 0.1%
http://biz.yahoo.com/ap/060919/economy.html?.v=6

Its now beginning to look like we may see a interest rate cut before we see another rate increase. The remaining concern is the lack of equity in people's homes, upside down mortgages, and the big debts they racked up. Hopefully, the hope that incomes will rise to help people pay the interest and they will tighten their belt accordingly, look for discretionary retail spending to take a hit. People will buy the things they absolutely need, not just the things they want. Either way, a wave of defaults is still on the horizon.

"Lift Up Your Weary Heart Detroit!"

It's a Sufjan Stevens lyric....

Given the fact that I am a Detroit lover and former long time resident of the great city of Detroit, I wanted to talk about the implications of the recent layoffs of white collar workers at Ford and the general mass buyouts in the auto industry.

The auto industry always offers us incredible lessons in globalization, labor costs, unions, and manufacturing in general in the United States. As the whole country bemoans the loss of manufacturing jobs in the United States, foreign automakers are fighting each other for new sites to build cars in the South and all over this country. What do they know that the American politicians crying foul don't?

One remarkable principal that continues to manifest itself in our economy is the concept of Creative Destruction, introduced to the field of economics by Joseph Schumpeter(sp.). We have see this in the telecom industry which shed 600,000 jobs in three years only to reemerge and begin hiring again. Of course, the industry is faced with multiple challenges, however, we know that parts of the sector are back, investment is up, and the industry was able to reposition itself in as little as three years to combat a different competitive environment. In order to do this they had to "destroy" parts of their old business model. Labor flexibility allowed them to do so.

Let's get back to our situation in Detroit. Robert Stempel and the United Auto Workers signed a contract in the early 90s giving unprecedented salaries and benefits to the UAW employees and creating the now infamous job bank. This concept guaranteed salary and benefits to UAW employees even if the company did not sell enough vehicles to keep these employees busy. Therefore, even if a plant would be closed, the workers would still keep their full salaries and benefits.

Fast forward ten to thirteen years and the US auto industry is struggling again due to labor disadvantages as compared to their Japanese and Korean counterparts. Are the cars from made in the US by the Japanese that much better. Some can argue that they are, but General Motors in particular closed the many quality gaps, redesigned vehicles and have made some headway on product. However, General Motors maintained a capacity to make enough vehicles to take 35-40% market share, when their actual market share was around 27%. Why couldn't the company adjust to a changing competitive environment with 6 large auto companies competing for the world's largest and most competitive market? They lacked labor flexibility and their labor costs are much higher than the rest of the industry.

The Wall Street Journal several months ago did a comparison of two plants in Texas. One plant owned by General Motors that produced highly profitable SUVs such as the GMC Yukon and Chevy Trailblazer had a average hourly cost per worker including retirement benefits and health care of $81 per hour or $1800 per vehicle. 300 miles down the road a new state of the art plant built by Toyota to produce the Toyota Tundra to take away the truck dominance of the domestic auto manufacturers has a labor cost of $30-$40 per hour including benefits and a $800 cost per vehicle.

Back to our faithful motor city, what does this all mean? It means that although Ford and General Motors have had quality, design, and operations problems over the years. However, GM and Ford's management, quality, design and operations are not far enough behind to be the sole problem for the success of the Japanese firms and the Americans failure. The issue comes back to labor flexibility. In order to restruture the social welfare city-state, I mean Metro Detroit, GM and Ford have to make the painful cuts the way the telecom industry did in three years. However, this restructuring has been coming since the early 80s.

Unfortunately, in the short term Detroit and Michigan suffers. Everything from Doctors to Plumbers to Housing will suffer. But when a similar thing happened in the early 80s, Detroit recovered and will recover again. Most people understand that capital has been trapped in the Auto industry. That capital in a different city would be redistributed into other industries. However, again the process of creative destruction is hurt by the lack of labor flexibility.

I want to make the point that unions have built this country in partnership with corporations since they first gained prominence. Their sacrifices and successes cannot be trivialized and the rights they fought for created a better life for the American worker. But in the auto industry and in certain places they pushed too far and lacked the foresight to make changes that would guarantee their potential jobs in the future and help the future of Detroit.

Hopefully, Detroit will reemerge as a new city, with capital redistributed, a stronger and more educated labor force, and more industries with flexible labor forces.

Its the Economy Stupid...Doesn't Economic Data Make You Feel Safe

What a day of economic news!

Consumer Price Index - up 0.2%
Core Consumer Price Index - up 0.2%
Industrial Capacity Utilization - 85.4%
Oil - under $63.00 a barrel
Natural Gas - under $5 per btu

What does it all mean, well, it means the consumer in America will be getting a break from high energy prices, but overall it means the consumer has slowed down and hidden his pocketbook. Finally the interest rates, oil prices, gas prices, and other high prices have put the breaks on the drunken spending of the consumer. The economy is slowing down, and this may mean an end to interest rate hikes, but it may mean that the housing sector which has been slowing may seem some very deep cuts in certain over valued markets.

However, there is optimism in the market that could push the Dow above 12,000. A slowing economy was desperately needed to calm the housing market, inflation, and rising commodity prices. The basic materials, industrial, and energy boom is being tempered, and hopefully the market will fall back into moderate growth and go into recession. We have a good head central banker who has tempered our economy and paused at the right time. Did he do too much, the verdict is still out.

Mainly, my personal opinion is the bloodbath for the consumer is just beginning. Business spending may go up, M&A will continue to grow, and the economy may progress, but the consumer is in for some problems in the housing market. My contention is that we haven't seen the hangover from Option ARM mortgages and the housing problem is still lurking. People are working, unemployment is down, business have money to spend (because they have been conservative), but anytime a mortgage jumps $500 per month in a span of four months is too much of a rise for most families to handle. Look for more foreclosures, and stay from consumer brands.

For some headlines on this economic news:

Inflation Pressures Moderate in August - AP

U.S. August Consumer Prices Rise at Half July's Pace - Bloomberg

Small businesses should be looking to secure sales to business customers. Those who sell to the consumer should hope that those consumers don't categorize those small business's products under discretionary spending. I feel that the word discretionary spending is tied to the equity in everyone's home and the home equity boom is drying up.

Introduction - Or an outlet for my frustration according to Jess W.

Hello, My name is Joseph J. Ravitsky. I am 26 years old and have been working at a family startup for about four years. I have created this blog to discuss several topics:

1. Economics
2. Small business, startups, and the young entrepreneur
3. Work-life balance and goals of the "Young Professional" in today's economy

By the overuse of the word "Young," you can probably guess that these topics will be approached through the perspective of the recently graduated and 20 something professional out in the work world for two to ten years. Naturally, being that I am 26 and recently graduated 4 years ago, I believe I fall into my target audience and hope that they are interested in the same information I am.

Of course, in order to retain the interest of my audience, I would have to be some kind of expert in these topics or at least lie about having this expertise. Although I am not an expert in economics, small business, or work life balance, I believe that my experiences attending a top undergraduate business program, living the life of an entrepreneur and vice president of a startup, and pretty much struggling with a work life balance. I will be posting more information about my biography in the side bar or something, as I don't believe that it is my expertise or lack thereof or background that is important, but the contribution and participation of people intersted in these topics.

I hope to use this as a forum to involve past classmates from Michigan, professors from Michigan and other schools, and other "real experts" on economics, work life balance to write and publish stuff here. Further, like any forum, I hope to bring in relevant information from other sources online and articles that fall under the topics that I have listed above.

I believe that there is not enough accessible information out there for the young professional struggling with career choices, work/life balance, and our place in the economy. Further, I think the young professional in this economy, grew up more accustomed to change and interested in entrepreneurship than generations before him, and I hope to provide insight into my experiences taking a less sought after route after graduating from college. I hope that I can serve that perceived void here both with my experiences and the contributions of friends, colleagues, outside articlesand information, and relevant experts.

I look forward to trying to make this a forum that can be a place for friends that care about these topics and are struggling to understand them as well.