Resources

First published in the November 2003 issue

• Three wonderful readings on the state (and implications) of America’s surging productivity: a special report on this specific subject in the September 13 Economist (reading time: 15 minutes); an op-ed piece in the September 30 WSJ by Columbia’s Richard Clarida called "Where Are Rates Headed?" (10 minutes); and Fed Governor Donald Kohn’s September 24 speech to the Philly Fed’s monetary seminar, "Productivity and Monetary Policy" (30 minutes; www.federalreserve.gov/boarddocs/speeches/2003/20030924/). Have your assistant pull these three resources together, and invest one lunch hour seriously and uninterruptedly reading them. Even as the so-called "jobless recovery" shuffles off the stage to take its place on the "Chimerical Crises of 2003" list (after deflation and SARS), journalism still sees productivity as a glass half full. You mustn’t.

• Even a guru has to have gurus. My guru with respect to dealing with aging clients and prospects is Mike Sullivan of 50-Plus Communications Consulting. Mike and his partner Dick Ross have just self-published a paperback book called 101 Easy Ways to Increase Business with Boomerplus Clients! (109 pps., $32 including shipping and handling; bulk discounts available). As the title and page count imply, this is a compendium of short, easily digested, immensely practical tips. Let me just repeat the jacket blurb I gave Mike: "No one understands the interaction of physiology and psychology in the aging — and its effect on financial decision-making — better than does Mike Sullivan. This book by Mike and his partner Dick Ross is full of forehead-smacking ‘aha!’ moments — insights and instructions that can’t fail to make the reader a wiser, more compassionate, and significantly more effective advisor." Website: www.graymoney.biz.

• The March 2001 issue of Fortune (yes, the same Fortune which had named Enron America’s "most innovative company" six years in a row) featured an article by senior writer Bethany McLean titled "Is Enron Overpriced?" It was the moment in the fairy tale when the little boy who doesn’t know any better cries out that the emperor has no clothes. And at 2:00 a.m. on Sunday, December 2, Enron’s lawyers electronically filed the largest bankruptcy in U.S. history.

  The closest we will ever get to understanding the whole Enron story is McLean’s and fellow Fortune senior writer Peter Elkind’s breathtaking book The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio/Penguin, 434 pps., $26.95). Methodically, dispassionately, encyclopedically, McLean and Elkind enable us to comprehend the incomprehensible: how a company which once had the seventh largest market capitalization in the U.S. could have been a house of cards. And how it could have

  bullied and bamboozled accountants, rating agencies, investment banks, security analysts and an army of institutional shareholders - not to mention its own directors - into admiring the emperor’s illusory raiment for so long.

  Everyone knows - or thinks they know - that some phony off-balance-sheet financing was the sword on which Enron ultimately fell. (Put three percent of the equity of a special-purpose entity in the hands of friendly "outsiders;" secure a mountain of debt with Enron stock; have the SPE buy some troubled Enron project at an inflated price; let Enron book the fictitious gain as earnings so it can hit analysts’ estimates and keep pumping up the stock.)

  But, as McLean and Elkind document, this was merely the second act in the farce. The root cause of the divorce from reality - the original pact with the devil - was mark-to-market accounting, which lets you book the entire estimated profit over the life of a project on day one, and then adjust for real outcomes over time. This gave rise to a deal culture at Enron: getting the transaction done, and all its lifetime revenues booked, so you could get your bonus thereon, and go on to the next deal. It was only when these projects began not working out that the SPE fiction became necessary.

  The Smartest Guys in the Room is an extraordinarily lucid book, never bogging down in the prolixity of nefariousness, but clearly tracing the progression of Enron’s addiction to fantasy. The personalities of the actors in the drama are drawn in sharp focus, for this is anything but a dry exercise in forensic accounting. The book is thus a surprisingly fast read, which busy advisors will find welcome.

  One final note: read this book about Enron, or none. Avoid at all costs the self-referential 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America by John Emshwiller and Rebecca Smith. This is not actually a book about Enron, but about the investigative exploits of Emshwiller and Smith, who seem to believe themselves the Second Coming of Woodstein. They are mistaken.

  

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