May 28, 2010
Note to readers: The following story first appeared in UtiliPoint's Issue on 8-8-03. In recent weeks, I've watched a documentary on CNBC regarding Enron's plight, and this has been coupled with the scrutiny now given to the investment banking world. In thinking about these issues over and over, I have thought about what I would say to readers with respect to the media's role -- only to realize that I've written it before. And with UtiliPoint's permission, Energy Central has decided to re-run this particularly story, with slight modifications to keep it somewhat current.
Inveterate writer Walter Lippman said in 1925 that the "American press is the bible of democracy, the book in which a people determines its conduct." He not only spoke of the ideals of the Founding Fathers but he lived them as well by providing "trustworthy" information to the American people.
While that sense of altruism is pervasive at many news organizations, it is often clouded by limited resources, tight deadlines and yes -- a lack of interest in complicated subjects. Simply put, stories that require an understanding of economics are too complex for many journalists who instead flaunt stories with more allure. Charismatic leadership is more titillating than seemingly mundane corporate policies.
That dynamic was apparent during Enron's reign. The company and its captivating chieftains were profiled on numerous magazine covers and always with lavish praise. While the company was busy cooking the books, the front men were out taking honors for best this and best that. Sadly, many who dared to challenge those accolades were rebuked by their companies as well as by Enron.
The extent of Enron's complexity was unknown to all but those in its inner circle and its internal auditors. Still, the journalists covering Enron did fail. They helped provide the tools that Enron used to wheel and deal. As such, media organizations fell into the trap of believing in Enron's invincibility, or that it could leverage its knowledge of markets and use that to profitably sell any commodity.
It seemed convincing. After all, the stock values of not just Enron but other power marketers were going through the roof. At the same time, the dot-coms were revolutionizing business methods. So, it stood to reason that the new thinkers within the energy sector would be rewarded for their insight. But even as Enron was being toasted from the White House to the investment houses, telltale signs were surfacing among those in-the-know -- evidence to which the media would eventually get access.
Enron "was not the press' finest hour," Business Week editor Stephen Shepard told the Columbia Journalism Review. While the company had started to come undone in secret, it had only begun its public decent after a hedge fund manager informed a Fortune magazine reporter that things were amiss at the "Crooked E."
According to one analyst, Enron didn't pass the smell test from the get-go. It was just too difficult to understand how it was making money. That's why he advised clients to steer clear of the company, even as it was ascending. The analyst, for example, points to one unexplained inner company transfer of $197 million that was booked as revenue in Enron's retail energy services unit in its 1999 third quarter financials.
Carol Coale at Prudential Securities and John Olson at Sanders, Morris, Harris Group were two other analysts who were not fooled by Enron. They had begun downgrading the stock as others were singing its praise. As Houston residents, they say that the rumor mill had been swirling for a long time about the company's dubious activities. The concerns led them to question the quality of the company's earnings and what appeared to be fabricated profits.
The unraveling began in earnest when James Chanos, the hedge fund manager, called Bethany McLean at Fortune to explain his concerns. She then paid Enron a call and subsequently wrote a story titled, "Is Enron Overpriced" -- a mission that led to her de facto blacklisting at Enron. In the same fashion, former CEO Jeff Skilling berated Olsen and Coale -- ironic, given that they now thrive while Skilling is now imprisoned.
"For all the attention that's lavished on Enron, the company remains largely impenetrable to outsiders," McLean wrote in Fortune's March 2001 issue. In October of that year, the company began its precipitous decline into the abyss.
Why was the press not more skeptical earlier on? For sure, corporate accounting and finance are difficult subjects and not really the domains of the typical reporter. After all, Enron was able to dupe folks paid to know better, such as government regulators.
But such thinking ignores some facts: Certain reporters with limited backgrounds in energy and finance were able to smell a rat. Fortune's McLean, for example, didn't rely solely on analysts who may have had inherent conflicts. Instead, she asked others without the direct links the hard questions.
Consider the California energy debacle of 2000-2001: Reporters were getting amorphous tips that something was amiss. That is, generators were staying offline longer than usual and other forms of manipulation such as phantom transmission line congestion were occurring, all of which contributed to skyrocketing prices in the state.
The loudest voices, however, had cast the blame on fat incumbents that didn't know how to run utilities as well as on a flawed regulatory design. Initially, it was those strong voices that were heard in the press while the ones with lesser credibility were often shunted aside, reflecting the difficulty in parsing through the layers of conflicting reports.
Former Gov. Gray Davis' press secretary, for example, complained early on that his office was unable to get information from power marketers and was asking just what those traders had to hide. At the same time, consumer groups were also sounding alarms that power marketers were gaming the system. One charged that the energy crisis "wasn't a shortage, (but) was a shakedown."
As more and more evidence has come out and given credence to reports of marketplace manipulation, journalists began receiving an increasing number of calls from people who explained how such exploitation occurred. And the volume of mail that each receives from those hurt financially by the deception has left an indelible impression. "In a democracy with a Free Press, it will eventually all come out," one analyst says, although the damage in the interim can be ruinous.
The press, unfortunately, is often behind the curve. It's a problem partly of its own making as many organizations are more intent on focusing on the sensational instead of matters of real substance. In the case of Enron, the hype got out of control. At some point, more journalists should have departed from the herd to ask the tough questions. At the other extreme and as the California debacle shows, journalists often report attacks and counter-attacks and the truth becomes a victim amidst the mudslinging.
"Journalists are always tempted to put powerful people, like CEOs, on ever loftier pedestals," Gretchen Morgenson of the New York Times told this writer. "But when reporters start to worship the people they are supposed to cover, they lose their objectivity and can't even question what the executives tell them. When this occurs, journalists become little more than an arm of the company's public relations machinery. And that happened all too often during the bull market of the 1990s."
Those are powerful words. If heeded, the wisdom might have mitigated some of the problems that helped derail the energy sector -- and perhaps the global economy in 2008 and 2009.