ALTHOUGH YOU WOULDN'T
know it from the wall-to-wall O.J.-style coverage, most Americans, in fact, didn't work at
That is...until now. As no fewer than 10 congressional committees pick through the rubble, the investigation might end up pinching more collective pocketbooks than the implosion itself.
That's because most Americans and their elected representatives will draw the wrong lessons from Enron: Investors were robbed. Big-business executives are evil. Free markets and deregulation just don't work.
But the real story, as best evidenced by trading in Enron stock itself, is once again that trading is a game of risk management. We live in a world of uncertainty, and at any given point in a free market, the risk of an enterprise is borne solely by those who choose to take it. Somewhere down the line we forget that stock investing is a speculative game for any number of reasons including fraud.
The success of the free markets here is that investors did lose billions, but those who were hurt were solely those who freely took the risk of holding the company's securities. (Enron's employees, who lost vast sums in their retirement accounts, are the one exception and that's because they weren't operating in a free market but were instead forced to accept and hold Enron shares in those accounts.)
Almost every single market day as the scandal unfolded, Enron has been priced and actively traded, first on the prestigious New York Stock Exchange, and then in the Pink Sheets. And while the company has declared bankruptcy, you can still buy and sell its shares which trade for pennies apiece.
This is the untold success of the Enron debacle. The public securities markets, in their pure, unregulated form, have again proven themselves to be the finest mechanism for risk transference in history. At any point during the past 12 months, an unrestricted shareholder has been able to get out of owning Enron stock. The market has been deep and liquid.
Enron's collapse was abrupt, but it wasn't instantaneous. As we first noted a few weeks back, one point that's continually overlooked by both the media and government alike is that Enron didn't fall from $80 to pennies in just one day. And the risk of holding Enron wasn't borne solely by Mom-and-Pop investors. It was sliced up by the options traders, market makers, hedge funds and small speculators who regularly trade in and provide liquidity to a company's shares. By and large, those who had money in Enron were making a bet they wanted to take. This is the main triumph of a free market: Risk is transferred and traded, not forced upon anyone (with again, the exception of Enron employees). What we saw in Enron last year was not the worst of the free market but the best of it.
In the wake of Enron, Kmart and ImClone, many investors are calling for new regulations to protect American investors from unscrupulous auditors and executives. But let's not get ahead of ourselves. Enron's case is the exception, not the rule. And shareholders always have the right to sell their shares. When in doubt, get out. Enron reminds us that regardless of the fundamentals, the tape never lies. Arthur Andersen and Moody's are credible to a point, but at the end of the day, the only thing you can trust is the price action itself. Because the name of the game is wealth protection, there's something to be said for learning when to just cut your losses.
Ironically, one wishes that the government regulators who are now swooping down on Enron, denouncing its executives and business model, would take a closer look at their own management skills instead. While most Americans will lose no money on Enron, we all continue to fund an equally foolish and malignant business enterprise in which we unfortunately can't reduce our risk.
It was reported last week that Amtrak, the federally subsidized national railroad, lost more money than ever before, clocking a 2001 operating loss of $1.1 billion. For fiscal 2002, the railroad has received an additional $521 million dollars in taxpayer money. Since 1971, when Amtrak was created, we've been unwilling shareholders in a company that has cost approximately $25 billion. Amazon.com made a profit in five years as a publicly traded company; Amtrak has yet to post a profit in 30 years as a privileged, private firm.
Amtrak, like Enron, pays no income tax, although Enron had to resort to some complicated accounting to achieve its tax-free status; as a quasi-governmental agency, Amtrak is exempt altogether. How'd you like to run a business that didn't have to pay any taxes, lose a billion dollars and still> get another federal subsidy worth hundreds of millions?
And unlike Enron, whose natural-gas and energy trading platform was widely used by industry players, ridership on Amtrak has barely budged, even with the Sept. 11 disaster. Americans took only 22.5 million trips by Amtrak compared with 665 million trips by commercial aircraft. In 1996, the average taxpayer subsidy per Amtrak rider was $100, or 40% of the total per-passenger cost. But because this isn't a stock you can choose to own, but a tax that's forced upon us, we can't get out.
I wish our senators and representatives would focus more on the companies they've decided to run, at public expense, instead of devoting their attention to a problem that doesn't need fixing.
Enron's collapse is tragic for the investors and employees who went down with the ship. And in cases where there's criminal wrongdoing or securities fraud, justice will be ultimately served. But the real story here isn't the free market's failure, but its success, best exemplified by the peaceful right of investors to buy, sell, trade and assume or avoid risk as they see fit.
Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund. At the time of writing, his fund was long shares of Enron.>