KEY POINTS:
The sub-prime mortgage crisis shows the lessons of Enron's collapse have not been heeded, says Bethany McLean, the Fortune magazine reporter famous for breaking the story that the energy giant was an emperor with no clothes.
A lack of transparency, the use of off-balance sheet vehicles and the
dodging of responsibility underlie the carnage on credit markets.
"It's Enron all over again," McLean said in an address to journalism educators in Wellington.
In financial markets, innovation would inevitably get ahead of regulation.
"Ordinary people end up paying a very high price, while those responsible walk away with millions. Capital markets depend on trust. If that breaks down, we've got a really big problem."
McLean co-wrote a book about Enron's rise and fall, The Smartest Guys in the Room, which was the basis of a documentary.
Enron went swiftly from being the darling of the market and the seventh largest company in the United States to its biggest corporate bankruptcy.
It is easy to see it merely as wrongdoing at a single company, where brilliance turned to hubris and aggressive accounting to outright fraud.
But it was also a systemic failure. The layers of governance and scrutiny which investors and other stakeholders rely on all failed.
First it was Enron's directors.
"I think the board was far too willing to go along with what the executives told them because they had such a belief that they really were the smartest guys in the room. The directors didn't ask the questions they should have asked," McLean said.
And almost until the end, the company's share price kept climbing.
"I think that rising share price made the board think they didn't have to ask questions because there was the market validating Enron's strategy."
Second, the auditors.
The scandal destroyed the venerable accounting firm of Arthur Andersen.
"Accounting has become a business, not a profession," she said.
In its last year Enron was paying Arthur Andersen $1 million a week in fees.
"They forgot that it was Enron shareholders who were their clients, not the company itself."
Accountants knew that the market-to-market accounting treatment Enron relied on was incredibly dangerous, McLean said.
It involves booking as income up front the net present value of the expected cashflow from a deal, instead of spreading it over the life of the contract.
In Enron's case it created a widening gap between cashflows and reported earnings, making it harder and harder to deliver the continual growth in the latter that the share price depended on.
"They stole from the future until there wasn't anything left," she said.
Third, the analysts.
At the time McLean became interested in Enron, it was rated a buy by all the equities analysts.
But before becoming a journalist she had worked in a back-office number-crunching role on Wall St, which left her cynical about how analysts arrive at their conclusions.
Conflicts of interest are one reason. One sceptical analyst was dumped by his employer, Merrill Lynch, which was subsequently rewarded with a slice of Enron's investment banking action.
The banks, she said, became Enron's partners in crime, participating in ventures which were, in substance, loans to the company but which were structured in ways which kept the debt off Enron's balance sheet or made loans look like operating revenue. But McLean also points to a psychological explanation for Wall Street's group-think on Enron, whose accounts were by common consent a black box, where no one outside the company - and few within it - could tell whether it was really making money.
Its chief executive, the "incandescently brilliant" Jeff Skilling, was very good at intellectual intimation, she said.
His ultimate put-down was "You don't get it".
"We all want other people to think that we're smart. The analysts just didn't want to be the person in the room who said 'I don't get it'."
Fourth, the financial press.
At the time McLean's article Is Enron over-priced? was very much a contrarian view. She is self-deprecating about it, describing the piece as meek and lucky in its timing.
"I didn't say it was fraud. I was too naive to understand the depth of the problem. I didn't include the partnerships [a device Enron used to conceal how much debt it had]. After all, the directors and auditors had signed off on them. They are the gatekeepers and they must be doing their job."
And she credits Fortune's editors for encouraging her and deflecting the pressure Enron applied to kill the piece.
"I just got lucky. I wrote the story and the stock started to collapse. I don't think it was cause and effect. I think I picked up on a scepticism that was brewing about the company."
It is commonplace after a corporate collapse to accuse the financial press of failing to warn investors of impending trouble.
"People always want journalists after the fact to have had some sport of omniscient insight and we don't. We are as good as our sources and the available information. We are not seers."
Enron's collapse cost about 20,000 people their jobs and rendered billions of dollars in pension entitlements worthless, to say nothing of the destruction of shareholder value.
McLean is discriminating with her sympathy, however.
"An Enron pipeline worker who had to depend on [chairman] Ken Lay for every piece of information about the company is one thing," she said.
"But for sophisticated investors who just chose to go along with Enron even though they had the capacity to look at it and say something doesn't add up here, there's a bit of personal culpability there.
"They benefited from the company's fraud until they didn't. So when people say "I lost $1 million in Enron", comparing the peak share price to the bottom, well it was never worth $1 million." While researching the book, McLean interviewed hundreds of former Enron employees.
"Very few people had any idea what was happening in front of them. We operate in silos," she said.
"But some were blinded by rationalisation and self-delusion."
And at the very top of the company a kind of moral squalor prevailed, a sense that the rules which apply to ordinary people did not apply to them. Egregious insider trading in the company's last year was just one symptom of that.
It is a mind set, McLean suggests, that is not unique to Enron. It offends her because she has an innate respect for business - when done well - and a belief in free markets, when there is equal access to information.
Enron's slogan was "Ask why".
Its downfall was that too few people did.
GIANT TOPPLES
* Texas-based energy company Enron Corporation went bankrupt in 2001.
* It was revealed that the firm's financial figures were sustained through systematic accounting fraud.
* Jeffrey Skilling, who was Enron CEO in 2001, was convicted of multiple felony charges in 2006. He is serving a 24-year prison sentence.
* Former chairman and CEO Kenneth Lay was found guilty in 2006 on fraud charges. He died of a heart attack before sentencing.
