Talking heads at all points on the political spectrum have alluded, usually vaguely, to the relationship between the collapse of Enron and the easing of governmental regulations. Often such people do not even specify what kinds of deregulation they are talking about, or whether deregulation caused or merely correlates with the Enron bankrupcty. Furthermore, they occasionally allege that somehow Enron’s cozy relationship with the government engendered a climate of deregulation and fraud.
Be that as it may.
I can identify three realms of alleged deregulation that pundits argue are at the heart of the issue.
Deregulation of the energy market.
Deregulation of corporate accounting practices.
Deregulation of the once carefully-delimited roles of banks, brokers, and insurance houses.
To be honest, I don’t really want to talk about the first issue. I am satisfied that deregulation of energy markets is a good thing when done prudently, and that the California energy crisis was certainly not perpetuated and probably not seriously exacerbated by Enron’s business practices. I also do not have a problem with the fact that Enron most likely profited from a climate of deregulation.
Dewey has more than satisfied me in the previous Enron thread that no such deregulation of accounting practices exists. I do not know how columnists and others can make this claim. I will turn up a cite if I can, but I do not believe it is ultimately germaine to this discussion.
The Gramm Leach Bliley Act, which effectively overturned the Glass-Stegall Act of 1933, is relevant. You may find a plain-language summary of the highlights of this act here.
I am but a lowly legal assistant, hence I have neither the experience nor the knowledge to evaluate the effects of the merging of financial services and the potential conflicts of interest that this merge may generate. So is the “climate of deregulation,” represented by the GLB Act, responsible for the environment in which Enron executives were able to bilk stockholders? If it weren’t for the GLB Act, would investment houses be able to invest millions of dollars of their own money in bogus partnerships and conceal huge loans as assets?
Was Enron able to take greater advantage of SPE accounting techniques due to this deregulation?
Just FTR, to clarify, there isn’t much in the way of accounting deregulation because the accounting profession is largely self-regulated. The government can’t deregulate what it has not regulated in the first place.
Also, the other thread Maeglin refers to is here. (and Mandelstam, you did forget about me after all!). Then end of that thread has a link to a really good article on the accounting issues at play in the Enron collapse; I highly recommend it to anyone who is interested.
Finally, WRT the OP: I don’t think GLB had much of an effect on the use of SPEs, except to the extent that it may have allowed more players to enter that market. SPEs were in use long before Glass-Steagal repeal.
And GLB doesn’t have anything to do with SPE accounting techniques (those are entirely the purview of the FASB, a private entity), so I think the answer to the latter question is “no” as well.
By the way, in an Enron thread that bit the dust after the hacker attack on the SDMB, there was a link to a discussion on another message board that gave a good, detailed explanation of how SPEs work. Unfortunately, that message board has also bit the dust. However, the thread is cached by Google. Here’s the links:
The explanation and examples provided are so good that I printed the thread and keep it in my “interesting article” file at work. I did the same for the accounting article referenced in my prior post, The Rise and Fall of the Enron Empire. I recommend interested parties read both articles.
I agree that there really hasn’t been any “deregulation” of accounting practices and that GLB really doesn’t have anything to do with Enron’s problems.
Enron seems to have failed to fully disclose all material aspects of its financial position in a clear and understandable way. It is required to do so by the securities laws. This standard has been in place for a long time and has not changed. The regulator that enforces compliance with the securities laws is the SEC. So, the claim can be made that the SEC failed in its oversight role because, at some point over the long years of Enron’s problems, some registration statement/10-K should have been reviewed and questioned by an SEC staffer not afraid to ask pointed questions.
The SEC is not, of course, a guarantor of any company’s disclosures. A public company may actually get reviewed only once in 5 years. Market players (rating agencies, analysts, investors) help out in this system by bidding less for securities of issuers that do not provide the information the market wants. Nonetheless, the issuer is responsible for full disclosure and the regulations/laws are in place to bring a company down if its fails to properly disclose.
It can be argued that the system is not sufficient (one of the main charges has been that the analysts were not willing to attack Enron because their investment banker arms didn’t want to alienate Enron–where we look to analysts as part of the system, should their conflicts of interest be regulated?) and that there is not enough regulation. When some people blame Enron loosely on “deregulation,” they may really mean “lack of regulation.” There are still plenty of people who would prefer a “merit-based” securities law (where the government decides on the worthiness of any proposed security) over the “disclosure-based” law we currently have.
All of this makes sense, but I think my uneducated conspirator’s mind is playing tricks on me.
Major financial services houses have relationships with Enron. When the GLB allowed banks, investment banks, insurance companies, etc. to expand their business models, did this not allow them to develop their relationships with Enron in more complicated ways?
AA is supposed to keep its financial services and its accounting departments separate, but is this really a possible scenario? And should banks that profit from enormous credit agreements with Enron also be able to encourage their small investors to buy Enron stock?
So while these complicated relationships have nothing to do with SPE accounting, do you think they exacerbated the situation and made it possible for corporate ruin on such a grand scale? After all, would the various financial services institutions have been able to sink so much money into Enron so secretely if GLB had never been passed?
Well, yes and no. Like I said earlier, GLB certainly increased the number of financial institutions who could participate in a given transaction – instead of, say, just going to a bank to finance a special project, a company could now also go to insurance companies. And it certainly also allowed participants in a transaction to take a fuller role in the transaction – instead of having to go to a bank for a loan and an investment house for another piece of the financing puzzle, one could now get both services from the same institution. In that sense, it allowed individual financial institutions to have greater exposure to the risks of any given deal.
However, that didn’t cause Enron to collapse. Enron could have entered into the complex transactions it was performing even before GLB – it might have had to look to a larger cast of financial institutions for the various necessary services, but it still could have done those transactions. GLB had nothing to do with that.**
Well, these are both hot topics right now. Resolving these types conflicts issues are one of the more complex challenges presented by the Enron collapse.**
Short answers: no, yes. SPEs have been around for quite awhile now, and by definition if you are setting up an SPE, you’re sinking a lot of money into an off-balance sheet project. Any company that has large, capital intensive projects will use them (and in most cases, there’s nothing wrong with that).
To vastly oversimplify, the Enron debacle was caused by the intersection of (1) SPEs, (2) mark-to-market accounting, (3) assets that aren’t actively traded (and thus not really suited to mark-to-market accounting) and (4) a willingness to flout even the minimal accounting rules for SPEs. Hard as it seems to believe, the Enron debacle is really more about accounting run amok than it is about deregulation. If the accounting rules had been better tailored to reflect economic reality, this collapse wouldn’t be nearly as catastrophic as it is.
I’m not a GLB expert, but hey, why should that stop me?
GLB did 2 big things: 1. it effectively overturned Glass-Stegall, and 2. it put limits on the use of our personal information by affiliates of financial institutions (those credit card stuffers that asked whether you gave permission for them to use your name for marketing purposes). Glass-Stegall is the Depression-era law that prevented banks from owning securities firms (and thereby losing all of their depositors’ assets when the securities side of things got wiped out in a stock market crash).
Banks lobbied for ages to overturn Glass-Stegall–we need to compete globally by integrating back-office expenses and serving as a one-stop shop for clients, blah, blah. The banking regulators were sympathetic. Even before the repeal was passed, banks gradually came to be able to own securities firms in subsidiaries anyway as the regulators loosened the regulations. So, yes, this IS deregulation. (Deposits are still protected in other ways.) Here’s a quick link that summmarizes what GLB did for banks.
This deregulation probably did nothing for Enron, however. Enron’s biggest banks (don’t know who they were) probably already had securities brokerages under the pre-GLB workarounds the regulators allowed, so the ability to tell small investors to buy Enron was already there. The special-purpose/off-balance sheet financings were also already permitted pre-GLB. GLB really addresses bank holding company/family group structures; the complicated relationships Enron had with some of its financial advisers probably all existed pre-GLB (GLB is adopted in 2000–many of the off-balance sheet stuff was in place long before this). When you say they sunk money into Enron, this was done by purchasing equity interests or by lending money. Both types of transactions could occur pre-GLB because the use of subsidiary structures was already permitted–and if you went back to the pre-workaround days, the transactions could still have been done, just not within the same family of affiliates. Enron had plenty of different investment banking firms and banks competing for its business.
The accounting firms have really nothing to do with GLB because they have never been regulated as financial institutions subject to Glass-Stegall. Their consulting services are contractual services and typically do not involve providing financing.
Dewey’s post (I see you on preview) covers most of this, but since it’s typed and says some additional stuff, I’ll post anyway.
