Wow. It wasn't long-ago that Malcolm Gladwell was a media darling. Critical remarks on his writing came from only a few sources, including federal judge Richard Posner and writer Steve Sailer's blog. But now he's gone and challenged one of the central myths of our times--the Myth of Enron Evil--and all bets are off. The Times' Joe Nocera published a long, critical piece on Saturday (which we missed because, well, who reads the Times on Saturdays?).
(By the way, when we refer to the Myth of Enron Evil we don't mean to imply that the folks running Enron did nothing wrong. By calling it a "myth" we simply mean to indicate how important it has become to the way people think. It has reached iconic, legendary almost religious status. Even though much of what people are angry at Enron for has little to do with the wrong-doing at the company.)
Anyway, here's an excerpt of Nocera's critique of Gladwell:
Mr. Gladwell makes much of Enron’s use of so-called special-purpose entities — those supposed “independent” partnerships that were run by the company’s chief financial officer, Andrew S. Fastow. Those entities, Mr. Gladwell argues, are incredibly complicated, and Enron’s were more complex than most. Mr. Gladwell calls them examples of Enron’s “recklessness and incompetence,” but not an example of inadequate disclosure. Even if Enron had publicly disclosed every page of every special-purpose entity, he says, it would have made no difference; they were just too convoluted.
This, however, is where he runs off the rails. Yes, the fact that the entities were run by “a senior Enron executive” is something that the company disclosed (usually in some buried footnote). And it should have raised a huge red flag. Shame on Wall Street for not picking up on it.
But Enron’s S.P.E.’s were not always used for some legitimate purpose. Mostly, they were used to hide poorly performing assets and to launder loans as income. Not all of them were structured illegally, but many of them were — a fact that Mr. Gladwell glosses over, and which Enron never disclosed publicly. Mr. Skilling, according to prosecutors, secretly guaranteed that Mr. Fastow’s partnerships would never lose money in Enron assets, violating the law. It is also a reason Mr. Skilling is in prison now.
The point is not the sheer volume of disclosure; it’s whether disclosure illuminates or obfuscates. Enron usually did the latter. In effect, Mr. Gladwell has conflated fraud with overvaluation. James Chanos, the short seller who first raised questions about Enron’s numbers, told me that until the summer of 2001, when Mr. Skilling abruptly and inexplicably resigned, “even I only thought it was a case of overstated earnings; that is all you could tell from their documents.” He thought he would ride the stock down for a while, and then, eventually, cover his position once the market corrected for the overstatement. You could find plenty of evidence of overstated earnings in Enron’s financial documents — but you’d never know that the company was a Potemkin village. The kind of information that would have led to such a conclusion was precisely the information Enron hid from investors.
But Gladwell's over-arching point--that there may be something wrong with the disclosure model of corporate governance and that solutions demanding ever more disclosure might not help the situation--stands. (As does the point that Jeff Skilling's 24-year sentence is groteque.)
Tipping Over a Defense of Enron [New York Times via the ledger.com]