Blink author Malcolm Gladwell has a characteristically fascinating piece in this week’s New Yorker magazine, detailing how Enron’s massive financial problems were exposed. He uses the topic to explore the theme of puzzles versus mysteries – puzzles have a solution and simply require the correct information, mysteries require judgements based on huge amounts of disparate data – and how an ability to investigate the latter is becoming increasingly important in everything from financial markets to national security. En route he takes in second world war intelligence analysts and Watergate, and the article has some remarkably clear descriptions of economic machinations. It becomes clear that there was no whistleblower – all the information required to spot Enron’s problems was in the public domain:
But you can’t blame Enron for covering up the existence of its side deals. It didn’t; it disclosed them. The argument against the company, then, is more accurately that it didn’t tell its investors enough about its S.P.E.s. But what is enough? Enron had some three thousand S.P.E.s, and the paperwork for each one probably ran in excess of a thousand pages. It scarcely would have helped investors if Enron had made all three million pages public. What about an edited version of each deal? Steven Schwarcz, a professor at Duke Law School, recently examined a random sample of twenty S.P.E. disclosure statements from various corporations—that is, summaries of the deals put together for interested parties—and found that on average they ran to forty single-spaced pages. So a summary of Enron’s S.P.E.s would have come to a hundred and twenty thousand single-spaced pages. What about a summary of all those summaries? That’s what the bankruptcy examiner in the Enron case put together, and it took up a thousand pages. Well, then, what about a summary of the summary of the summaries? That’s what the Powers Committee put together. The committee looked only at the “substance of the most significant transactions,” and its accounting still ran to two hundred numbingly complicated pages and, as Schwarcz points out, that was “with the benefit of hindsight and with the assistance of some of the finest legal talent in the nation.”
Yet despite this it was journalists who studied the figures and broke the story, not financial analysts, and MG follows up on this point on his blog. He describes the article as a “semi-defence” of the company – they still behaved illegally, but there are interesting questions as to why the financial community didn’t notice earlier, when logic would suggest that’s its job and in its best interests. There’s no suggestion of wrongdoing, just that, perhaps, the current system isn’t capable of investigating this kind of mystery without outside help. If you check out the article, be sure to stick around for the final two paragraphs.
I continue to be amazed by Malcolm Gladwell’s writing ability. Anybody who can not only prevent my eyes glazing over but actually get me interested in stock markets, bank loan criteria and hedge funds must have quite the talent.