Tuesday, 11 February 2003 8:30 am
Last summer a senior writer from one of the major business magazines sent me an email message asking for my assistance. He said that he was in the process of writing a book about how a handful of people conned $750 billion out of hapless telecom investors in the 1990’s, and was hoping to get my thoughts, ideas and leads. He was specifically looking for anecdotes about life “inside the telecom bubble”. He was also interested in “some incidents from the past which are going to be colorful to say the least”, and wanted introductions to key people whom I thought would have “something unique to contribute”.

My response was: “I would be happy to chat.  But I do not agree with the premise that your book title implies.  There was no $750B heist and some conspiracy of evildoers who pulled it off.  I know that this is the popular explanation for all things at this moment in time, but it is bunk.  If everyone in the media and government looks around hard enough, you will find a few scoundrels anywhere.  But what has gone wrong in telecom would have happened without them.  All of the people I have come into contact with in my 25 years in the industry are extremely honest straight shooters.  Yet that did not prevent me from predicting circa 1984 that AT&T could go bankrupt 10 years out, or in 1992 that Lucent would hit the wall within 10 years, or in 1997 that Iridium had to crash, or in my book last year and the entire industry was in much more trouble than commonly thought.  My timing has at times been premature, but, unfortunately, the predictions are all now accepted as common knowledge.  And none of my predictions or analyses had anything to do with scoundrels and bandits being involved. What is going on now, and what happened, is far more complex than that.  I don't believe any good purpose is served by digging up anecdotal evidence that the telecom bubble and crash was caused by some clever 'bandits' on purpose.  I am certain that it is not true.”

The writer’s response was polite, but included this explanation: “In order for the mass market to read it, one does have to highlight the crooks – nothing sells like a scandal”!

Yesterday the New York Times ran an article about Ken Lay, the former Chairman of Enron.  Recall that Ken Lay became a household name when it was charged that he had sold enormous quantities of Enron stock as Enron crashed into bankruptcy in 2001, all the while encouraging Enron employees to invest in the stock.  The scandal and outrage were so big that even the President of the United States felt obligated to express his displeasure.

Yesterday’s New York Times article reported though that a detailed review of previously undisclosed financial records paints a completely different picture: it turns out Ken Lay believed in Enron to the end.  He believed in the company so much that he had margined his Enron stock to the hilt.  The sales that took place in 2001 were forced sales, caused by margin calls as the stock price plummeted.  He even took a number of actions to try to prevent the forced sales at prices that he believed were too low.  He even bought more stock by converting 200,000 options into Enron stock that summer without selling the stock.  When Enron entered bankruptcy in 2002, Ken Lay still owned 1.2 million shares of the worthless stock, and 5 million unexecuted vested stock options.  His total losses from the beginning of 2001 exceeded $400 million, and virtually wiped out his net worth (he still retains around $10 million of illiquid investments, according to the article).

We know that Bernie Ebbers, former CEO of WorldCom, had a similar belief in his company, borrowing heavily to buy more WorldCom stock, and refusing to sell as the stock plummeted.  The result was the same: he appears to have been completely wiped out.  In fact, it was the collapse of Bernie’s huge margined stock holdings in WorldCom that caused the board to give him a temporary loan of $400 million to avoid an uncontrolled forced sale.  Once the board realized the $400 million loan was unlikely to be repaid, it decided that the Bernie’s financial problems would distract him from his CEO duties and fired him.  The accounting problems and resulting bankruptcy filing came later.

So maybe the real scandal was the creation of false scandal by the press!  Clearly there were some severe structural problems in WorldCom and in the telecommunications market as a whole, some of which I documented in my 2001 book.  Clearly there were some big problems in Enron’s business model and auditor relations.  But perhaps the problems that brought the companies down were errors in business judgment, rather than crookedness.  If Ken Lay and Bernie Ebbers were out to hoodwink innocent investors, why would they have hoodwinked themselves and their family trusts in the process?