I was going to write some thoughts about Malcolm Gladwell’s defense of Enron in last week’s New New Yorker, but the New York Times‘ Joseph Nocera has done a far better job than I could. Gladwell argues, in essence, that we should have seen Enron’s problems, because the company was, in effect, hiding them in plain sight. Nocera’s counter is that Enron’s actions were, in fact, designed to obscure the true health of the company. I very much recommend the whole column, but, for those of you not inclined to spring for Times Select, here’s the meat:
The point is not the sheer volume of disclosure; it’s whether disclosure illuminates or obfuscates. Enron usually did the latter. In effect, Mr. Gladwell has conflated fraud with overvaluation. James Chanos, the short seller who first raised questions about Enron’s numbers, told me that until the summer of 2001, when Mr. Skilling abruptly and inexplicably resigned, “even I only thought it was a case of overstated earnings; that is all you could tell from their documents.” He thought he would ride the stock down for a while, and then, eventually, cover his position once the market corrected for the overstatement. You could find plenty of evidence of overstated earnings in Enron’s financial documents — but you’d never know that the company was a Potemkin village. The kind of information that would have led to such a conclusion was precisely the information Enron hid from investors.