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THE NATION | THE FALL OF ENRON

Media Missed Clues to Enron's Troubles

January 26, 2002|DAVID SHAW | TIMES STAFF WRITER

A Fortune magazine survey called it the most innovative company in the country--for six straight years. The New York Times said it was "a model for the new American workplace." The Dallas Morning News described it as "one of the most envied and respected corporations in the United States." Business Week looked at one of its pioneering ventures and said, "The risk is remarkably small."

That "low-risk" broadband venture by Enron Corp., the billion-dollar, Houston-based energy trader, wound up with a $102-million operating loss in the second quarter last year and was but a prelude to a complete corporate collapse, the biggest bankruptcy in U.S. history.

For the most part, until the Enron collapse was well underway, the nation's news media--including the presumably sophisticated financial outlets--missed a number of early warning signs and failed to alert the public to the company's potentially precarious situation.

"When something this big comes as this much of a shock, it suggests that something has been very wrong with the journalism," says Robert Lichter, co-director of the Washington-based Center for Media and Public Affairs.

John Olson, an investment analyst in Houston, was one of the few in his field--and in his city--who was not on the Enron bandwagon. He says there were "signposts out there for people to see, but the company kept giving the media head-fakes and playing hardball."

Olson, of the Sanders Morris Harris Group, says a number of former Enron employees and associates repeatedly warned him to "be careful. . . . The numbers aren't what they seem to be."

Jim Chanos, president of Kynikos Associates in New York, began issuing similar warnings in the fall of 2000 after reading a column in the regional Texas edition of the Wall Street Journal warning that the extraordinarily high price/earnings ratio for Enron and two other Houston energy companies suggested that "investors . . . could be in for a jolt down the road."

That column prompted Chanos to do his own research and to start selling short on the stock--in effect, betting it would decline--and to talk to two other journalists who wrote relatively brief, early stories raising questions about the company.

Media Ignored the Red Flags

The warning signs? There was a major, longtime discrepancy between Enron's profits and its cash flow. Its return on investment also was remarkably low for such a high-risk venture. Its financial statements were incomprehensible. Its top executives repeatedly were selling huge quantities of the company's stock. A surprisingly large number of senior executives were leaving--68 of them over an 18-month span.

All these red flags, many financial experts and journalists now say, should have triggered intense media scrutiny. Instead, says the New York Post's Christopher Byron--a longtime financial writer who's worked for Forbes, New York magazine, Esquire and the New York Observer--"too much of the media were part of the cheerleading squad for Enron."

Did Byron take a hard, early look at Enron?

No.

"I'm in New York and I saw Enron as just an out-of-town energy trading company--obviously a . . . mistake in judgment on my part," he now concedes, echoing comments made by many other journalists.

Why did most of the national media--and the home-state Texas media, for that matter--miss the Enron story?

"I think it was in part a product of the bull market of the '90s," says Jim Michaels, whose tenure as editor of Forbes magazine from 1961 to 1998 featured many aggressive investigative stories on just such go-go companies as Enron.

"Everyone was investing in the market, and the market was going up and up, and people didn't want to hear bad news," Michaels says. "I think there's been too much emphasis in recent years on these great success miracle stories, and too many reporters have gotten away from doing the hard, slogging reporting--looking at the footnotes in disclosure documents, wading through the dry-as-dust numbers and asking the tough questions about them that would have cast a great deal of doubt on the Enron 'miracle.' "

But the media's failure concerning the Enron story was "part of a total failure by everyone, a complete breakdown in the system, in all the checks and balances," says Frank Lalli, editor of Money magazine from 1989 to 1998. "It was a failure by the Wall Street analysts who just went along for the ride, and by the auditors who were collecting so much money they couldn't walk away from it, and by the government agencies who are supposed to monitor these companies."

Relying on the Analysts

Like investors, many financial reporters rely heavily on stock analysts. But analysts often have an inherent conflict of interest. Companies such as Enron have considerable leverage over them, saying (implicitly, if not explicitly), "We support the analysts who support our stock," meaning they'll give their lucrative investment banking business to those firms whose analysts issue strong "buy" recommendations for their stock.

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