Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble , by D. Quinn Mills. Financial Times, Prentice Hall, 286 pages, $21.60.
How Companies Lie: Why Enron Is Just the Tip of the Iceberg , by A. Larry Elliott and Richard J. Schroth. Crown, 200 pages, $18.95.
Scrubbed from the Astros’ ballpark and the memory banks of the Cheney energy task force, the name Enron is suddenly popping up on the cover of every new business book. It’s usually a last-minute addition. Neither How Companies Lie: Why Enron Is Just the Tip Of the Iceberg nor Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble is really about Enron, per se. They’re about a culture of semi-sanctioned numbers-fudging, feather-bedding, self-dealing and sketchy bookkeeping, all the Enron-style abuses now crowding the business pages.
The scandal-shouting headlines should be telling us something, and both these books confirm it: Forget individual acts of villainy; forget who set up what dummy L.L.C. in the Caymans. Ask instead: What is the fate of those Cato Institute buzzwords, “transparency”and”efficiency”? What about those hymns to the glory of deregulation and the free market, the sing-along that shaped public attitudes and public policy in the 90’s? Was that only a sweetener for venality and graft? In the aftermath of Enron (of Sunbeam, Waste Management, Tyco, Global Crossing, WorldCom, Harken Energy), we confront a bitter irony: What if, instead of freer markets, all the talk of Adam Smith and Friedrich von Hayek was actually a smokescreen obscuring a Nomenklatura-style crime wave?
Your conservative pundit, terrified that shifting winds will expose the crony capitalists clustered under the free-market banner, has decided, rather perversely, to blame the public. “Everybody knew they were participating in a bubble,” The Wall Street Journal ‘s Holman W. Jenkins Jr. wrote recently in Slate -a fair representative of the new strategy for coping with the rash of corporate scandal. The media, Mr. Jenkins assures us, are resorting to “off-the-shelf narrative devices and standard clichés of the ‘evil businessmen did this to us’ variety. Of course, we’re not criminalizing any office clerks or … ordinary shareholders who also sold at the top, though thousands did.” According to this logic, we’re all implicated, and we’re punishing Ken Lay, Gary Winnick, Mary Meeker, Martha Stewart et al. for our own sins.
How Companies Lie and Buy, Lie, and Sell High spare the public and heap the blame squarely on corporate malefactors. Not unlike a late-90’s I.P.O., each book feels a little quick and dirty, as if it’s been rushed to market to satisfy fickle demand. ( How Companies Lie is by far the worse offender: It seems to have been dictated in real time rather than written and edited, and it’s filled with floating assertions and half-attributed anecdotes.) Nonetheless, together they paint a portrait of corporate America that’s like something out of Hieronymus Bosch: Our traditional corporate watchdogs morphing into partners in crime, our traditional financial stewards into predators. “In the modern world,” writes D. Quinn Mills, a professor at Harvard Business School, “a financial bubble is made by professional players who take advantage of public excitement to realize profit opportunities.” And, of course, it’s the small investor who gets screwed.
Saucy title aside, Buy, Lie, and Sell High is everything the boom-boom years weren’t: orderly, patient, sober and a bit boring. (Be warned: This is a book whose lone blurb comes courtesy of Orrin Hatch.) Foursquare as it is, Professor Mills’ treatise drives right to the heart of the most pertinent question: Who made money and who lost money on the $4 trillion round trip known as Nasdaq 5,000? The Internet bubble and the accounting scandals represent two rather startling transfers of wealth: in the case of Enron and its brethren, from shareholders to executive-level managers; in the case of the speculative bubble in Internet shares, from small investors to the supply chain that dumped increasingly flimsy public offerings onto the market.
As Professor Mills doggedly documents, nowhere in this supply chain did anything resembling professional disinterest assert itself. V.C.’s forced entrepreneurs to hurry fledgling companies to public markets long before they were ready, all the while bullying them to overspend on mass marketing.Next,theinvestment bankers-after performing no real due diligence-grossly underpriced the I.P.O., the better to use the new issue in their own elaborate system of favor-trading (which diverted money away from the entrepreneurs, giving it instead to high-roller clients, who promptly flipped the rocketing new issue). Finally, the banks supported the stock in the after-market with hype dressed up as research, often selling them to the mutual funds, who were all too happy to goose their own near-term results by providing mindless buy-side support.
Well, you may say, plus ça change. (“This vast, mysterious Wall Street world,” wrote Edith Wharton almost a century ago, with its “‘tips’ and ‘deals.'”) But hasn’t the recent deification of “The Market” encouraged a swashbuckling, almost robber-baron style among people who once might have taken pride in their upright professionalism? Perhaps they were sold on the idea that greed promotes the common good.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” goes an Adam Smith quote that made the rounds in the 90’s, “but from their regard to their self-love, and never talk to them of our own necessities but of their advantages.” Self-interest is the public interest. No wonder Adam Smith enjoyed such a vogue.
What passed unnoticed, though, was the precise way in which this bastardized philosophy-Adam Smith meets Gordon Gekko-helped erode ethical probity in the business world. Self-interest was elevated at the expense of the old ideal of professional disinterest.
Professions, after all, are cartels. They distort the market by erecting barriers to entry, by establishing elaborate-and sometimes purely arbitrary-credentialing procedures. In exchange for years of hoop-jumping, professionals regulate fees in a way that cannot be considered strictly competitive. What’s in it for the consumer? Protection: We allow this market distortion because professions protect the layperson against the abuse of expertise. (I may know something instinctively about the quality of my beer or my pork loin that I cannot know about tracheotomies or “swaptions.”) In theory, professions regulate themselves by sanctioning or expelling predators.
They also encourage in the good professional a certain gentility regarding money, an old-fashioned prudishness. Professionals aren’t supposed to haggle; they set standard fees, then bill you. They’re allowed to be very well-off, but not very rich. When the accounting firms went whole hog into consulting, collecting fees that often ran into the tens of millions; when mutual-fund managers became rock stars; when C.E.O.’s became fat-cat Messiahs-that’s when we should have noticed that professional gentility had been tossed overboard.
So let’s own up to it: Maybe greed is not so good after all.
Stephen Metcalf writes for Slate and reviews books regularly for The Observer.