Legal Commentary

That other hurricane

By Tom Kirkendall

So, while the Houston area was enduring a hurricane, the financial markets were enduring one, too.

As with Enron and Bear Stearns, the demise of Lehman Brothers reinforces the inherently fragile nature of a trust-based business (related posts here). 

Larry Ribstein has been insightfully pointing out for years that more regulation of those businesses will not prevent the next meltdown, just as the more stringent regulations added after Enron's collapse did not prevent Bear Stearns or Lehman Brothers to fail. More responsive forms of business ownership certainly are a hedge to the inherent risk of investment in a trust-based business. Better investor understanding of the wisdom of hedging that risk would help, too.

But as Warren Meyer eloquently wonders, what must Jeff Skilling be thinking about all this? Is Skilling's inhumane sentence -- as well as the barbaric handling of the criminal case against him and other Enron executives -- the sacrifice that American society needs to quench its blood thirst to do the same to the leaders of trust-based businesses that suffer the same fate as Enron? I hope not, but  .   .   .

The truth is that Enron -- as with Bear and Lehman Brothers -- was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch when the markets became spooked by revelations about Andrew Fastow embezzling millions in the volatile months after September 11, 2001.

Fastow's embezzlement is a crime, but Enron's demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that an angry  mob convicted Skilling, trumping the rule of law and the dispassionate administration of justice along the way. None of us would be able to survive "in the winds that blow" from the exercise of the government's overwhelming prosecutorial power in response to the demands of the mob.

I continue to hope that Skilling's unjust conviction and sentence are reversed on appeal. Not only for his benefit, but for ours.

Full post as published by Houston's Clear Thinkers on September 16, 2008 (boomark / email).