Muddy Sight
So, it's early on in my sophomore year at Michigan State University, and I go into my counselor's office one Monday morning to declare my major as economics. I had recently enrolled in the business college, and was about a couple of weeks into my first macroeconomics class. I thought it was fascinating.
The next day, two planes crashed into the World Trade Center.
Now, we all have our bouts of superstition. This was one of mine. My feeble human brain correlated the two, so I kind of freaked and decided to switch majors. Which worked out in the end, because as it turns out, the honeymoon phase ended quickly for me and economics, which ended up being an even worse academic topic than philosophy. (Philosophers may comprise a large chunk of the unemployed, but at least their actions are never responsible for mass unemployment.)
I gravitated towards accounting after that, figuring that it was a general skill that I could take anywhere I wanted. If, for some then unknown reason, I ended up wanting to go to Indonesia as a volunteer to help small businesses when I turned 40, I figured that accounting would help me. Or if I wanted to get rid of annoying people at parties, I could bore them by talking about GAAP.
Shortly after I did this, the accounting scandals at Enron and Worldcom broke. Oh well.
I stayed the course, so I ended up in a lot of different accounting classes. And since it was timely subject matter, almost every professor talked about Enron. And all of them had the same take on it: everyone should have seen it coming.
They clues were all there, my professors said. They were buried in reams and reams of financial statements, but the truth was there for anyone with enough savvy to dig for it. Even if you checked their financial ratios, an easy enough thing for anyone to do without much financial training, things seemed out of whack. A healthy company should be leveraged at about 40%. Shortly before the cards tumbled down, Enron was leveraged at around 98%.
Now, even back then, I accepted that much of this was probably human ego and hindsight bias. Of course all of my professors saw it coming. To suggest otherwise might imply that they weren't good at their jobs. But of course, that isn't necessarily true...there are a lot of publicly traded companies, and the MSU accounting department professors aren't responsible for monitoring all of them.
Last year, I read one of the articles in Malcolm Gladwell's What the Dog Saw. He had an article in the New Yorker about the Enron scandal in 2007. The article chronicles a Dallas reporter getting a tip in 2000 about Enron's earnings. And to investigate, he asked for help from, among other people, a Michigan State professor in the accounting department named Thomas Linsmeier. According the article, they spent about a month digging, and determined that something very fishy was going on.
The things my professors were telling me started to make more sense. Of course they all knew, because one of their own was involved in the informal investigation that started the slow and public unraveling of the company. It must have been a topic they discussed with one another at university functions. Or something.
I'm not assigning any blame here. But I do find it very odd, and more than a little tragic, that many highly educated people were aware of the Enron problem over a year before the company ended up finally collapsing. And yet, despite this, so many employees at Enron, who had their life savings tied up in a single stock (a bad idea, by the way) ended up losing their shirts.
The knowledge was there, but the dissemination of this knowledge to the parties that might have benefited from it never happened. Or didn't happen in time. Or once it was published, it wasn't given enough credit.
To anyone interested, I'd recommend reading Malcolm's article if you haven't already, and you have 15 minutes of rapt attention to spare. It makes some good points. And I believe that Malcolm's footnote to the story (which is in the book) is right: we didn't learn enough from the mistakes of Enron to prevent the subprime mortgage crisis.
So it goes.
The next day, two planes crashed into the World Trade Center.
Now, we all have our bouts of superstition. This was one of mine. My feeble human brain correlated the two, so I kind of freaked and decided to switch majors. Which worked out in the end, because as it turns out, the honeymoon phase ended quickly for me and economics, which ended up being an even worse academic topic than philosophy. (Philosophers may comprise a large chunk of the unemployed, but at least their actions are never responsible for mass unemployment.)
I gravitated towards accounting after that, figuring that it was a general skill that I could take anywhere I wanted. If, for some then unknown reason, I ended up wanting to go to Indonesia as a volunteer to help small businesses when I turned 40, I figured that accounting would help me. Or if I wanted to get rid of annoying people at parties, I could bore them by talking about GAAP.
Shortly after I did this, the accounting scandals at Enron and Worldcom broke. Oh well.
I stayed the course, so I ended up in a lot of different accounting classes. And since it was timely subject matter, almost every professor talked about Enron. And all of them had the same take on it: everyone should have seen it coming.
They clues were all there, my professors said. They were buried in reams and reams of financial statements, but the truth was there for anyone with enough savvy to dig for it. Even if you checked their financial ratios, an easy enough thing for anyone to do without much financial training, things seemed out of whack. A healthy company should be leveraged at about 40%. Shortly before the cards tumbled down, Enron was leveraged at around 98%.
Now, even back then, I accepted that much of this was probably human ego and hindsight bias. Of course all of my professors saw it coming. To suggest otherwise might imply that they weren't good at their jobs. But of course, that isn't necessarily true...there are a lot of publicly traded companies, and the MSU accounting department professors aren't responsible for monitoring all of them.
Last year, I read one of the articles in Malcolm Gladwell's What the Dog Saw. He had an article in the New Yorker about the Enron scandal in 2007. The article chronicles a Dallas reporter getting a tip in 2000 about Enron's earnings. And to investigate, he asked for help from, among other people, a Michigan State professor in the accounting department named Thomas Linsmeier. According the article, they spent about a month digging, and determined that something very fishy was going on.
The things my professors were telling me started to make more sense. Of course they all knew, because one of their own was involved in the informal investigation that started the slow and public unraveling of the company. It must have been a topic they discussed with one another at university functions. Or something.
I'm not assigning any blame here. But I do find it very odd, and more than a little tragic, that many highly educated people were aware of the Enron problem over a year before the company ended up finally collapsing. And yet, despite this, so many employees at Enron, who had their life savings tied up in a single stock (a bad idea, by the way) ended up losing their shirts.
The knowledge was there, but the dissemination of this knowledge to the parties that might have benefited from it never happened. Or didn't happen in time. Or once it was published, it wasn't given enough credit.
To anyone interested, I'd recommend reading Malcolm's article if you haven't already, and you have 15 minutes of rapt attention to spare. It makes some good points. And I believe that Malcolm's footnote to the story (which is in the book) is right: we didn't learn enough from the mistakes of Enron to prevent the subprime mortgage crisis.
So it goes.