Enron - I still don't feel sorry for these folks... (1 Viewer)

[Rich Malloy]

I just want to point out yet again that a publicly traded company is required to publicly file financial statements and annual reports with the SEC. If a company lies in its disclosures - say by hiding billions of dollars in debt via off-balance-sheet partnerships and counting as revenues the non-existent proceeds of "round trip" transactions for which no money/goods exchange hands - then that company has defrauded its investors.

It makes no difference whether any of those investors had a diversified portfolio or all eggs in the Enron basket. They have each been defrauded just the same. And criticizing someone's investment acumen is not an affirmative defense to securities fraud.

I don't care whether any of you empathize with the defrauded investors, or whether you empathize only with those who had diversified portfolios. The final chapter of this sad story will go something like this:

-Few of the Enron principals will pay for their actions on the criminal side (we shall see, but proving criminal intent in these circumstances is very difficult);

-Few or none of the defrauded investors/former employees will receive damages comprising even a pittance of their actual losses through civil actions against the entities involved (both Enron and Arthur Andersen are now nothing but the proverbial stones from which blood cannot be drawn);

-Most of the Enron principals will retire lavishly, living a lifestyle that few of us can even dream of. Most of the former Enron employees and defrauded investors will not be so lucky;

-With respect to those former employees and defrauded investors, we working taxpayers, as always, will foot the bill for Enron's malfeasance. This will occur in many ways and without any mandated "bail-out", and won't be limited to the obvious unemployment benefits and healthcare costs for those left unemployed, and retirement and medicaid costs for those whose nest-eggs were gobbled up. When billions of dollars of retirement savings and wages from ongoing jobs are suddenly wiped out, the obligation to care for our fellow Americans falls upon the social safety net. Which, I remind you, is paid for by you and I.

I think the problem many of us are having with the "no sympathy for non diversified portfolios" position is (1) it's just a petty sentiment; (2) it's divorced from the reality of the situation vis-a-vis the limited retirement options offered former Enron employees (to wit, Enron stock); (3) it fails to contemplate the vast effects of Enron's fraud and collapse with respect to the true and often unseen costs that fall to all of us; and (4) it's just a petty sentiment (did I say that already?)...

 

[MickeS]

Interesting way of looking at it. I guess you don't see your salary as being your money either?

I don't care to answer the rest of your argument. You're right they should have diversified, but to say they have only themselves to blame for someone elses criminal acts is not even worth responding to.

 

[Eric_L]

MickeS - Hmm, lets compare. Since I don't have a salary I'll just use the word income. Income has a federal minimum - 401k match does not. I pay taxes on my income - I do not pay income on my 401k match, My income goes INTO my 401k, but my match cannot go into my income. When I qualify for a loan nobody is interested in my 401k match. Does that make it unimportant or somehow not mine? No. It simply makes it free. I performed no service for it other than contributing money to my 401k with a generous employer who CHOOSES (not required) to match it. In fact the fact that they CHOOSE to even offer a 401k is generous and unusual compared to most other employers - The matching is just gravy.


I find it interesting here how quick people, particularly the media, is to paint a quick sob story about people who foolishly failed to diversify their Enron 401ks. Oddly, nobody seems too concerned about the peope who made the same mistake at other firms (LU, ATT, AWE, DAL, GTW, etc.) which also experienced dramatic losses.

Did Enron have the corner on the market for foolish 401k investors?

It seems without an antagonist to point to the media is unwilling to address these people with the same problem.

Could it be that the mantle of personal responsibility falls harder on them? I think not. It is not newsworthy because these people lost their money all by themselves with nobody to point blame at. Yet they are all still just as broke.

It is criminal how the media and other people attempt to absolve these folks of foolish investing. It only reinforces, if not sets up, other people who are/may perform the same mistake. Pointing out the foolish behavior would go miles at preventing others from falling into that same trap. But I guess just pointing at Ken Lay and demanding blood just feels better.

The best thing the media can do is point out how absolutely foolish it is for ANYBODY to invest heavily in one stock - 401k or otherwise. I don't care if it is Microsoft or Google, it is good to be lucky, better to be good.

 

[Justin Lane]

Eric,

You are confusing 401K contributions a bit. Most people invest pre-tax (does not really make sense to invest post tax unless you really love a few investment choices), and these investments are not subject to income taxes in the present day, and actually reduce your yearly earnings. When funds, personal and employer match are withdrawn early, they are both subject to income taxes as well as penalites. When funds are withdrawn at retirement, both personal and employer matched funds are subject to income tax (if originally contributed pre-tax).

To summarize, the matching funds are not considered income on your W-2, but if you decide to take them out early, you better darn well beleive they will be taxed as income. Doesn't seem free to me

J

 

[Eric_L]

Justin - I'm not confused, I was referring specifically to the employer match portion of 401k assets within those plans which offer matching contributions.

If you win a cash prize on a radio station you also must pay tax. That don't mean it wasn't free.

 

[Rich Malloy]

We should do something! Help me out - what criminal statute or statutes were violated by the media and these "other people" you speak of? We must report them to the authorities. Defrauded investors... who cares?! Not criticizing those defrauded investors for lack of proper investment acumen... why that's criminal!!!

I feel I'm making the same points again, which usually indicates that a discussion has run its course. And I really don't think any of us is so deeply offended that Eric only empathizes only with defrauded investors with sufficiently diversified investment portfolios.

 

[Lew Crippen]

I tried to carefully read Eric’s posts, and since both of you believe I missed his point, I accept that I have.

If Eric means that investors who put all their eggs in one basket have only themselves to blame I can understand (though disagree with) that argument.

But for me at least, some of the blame for their failure to diversify must rest on Ken Lay and friends, who touted the company stock until the last.

No doubt those employees who believed the party line should have been more sophisticated and in that they were not, one can take the view that it is all on themselves. In this, I agree that you have a consistent argument—just not one that I buy.

 

[Lew Crippen]

I think that you hit the mark in post #41.

 

[Jeff Gatie]

That's easy! Work for the state!!

Not me, of course. I actually earn my salary and cushy position (plus my State employer is one of the few that turns a profit).

 

[Michael Reuben]

I agree, and it's the main point where I disagree with Eric.

Excellent points have been made throughout this thread about the nature and extent of the fraud perpetrated by Enron's senior management. However, I don't think many of these arguments are responsive to Eric's argument about diversification. The purpose of not putting all (or most) of your eggs in one basket is to protect against the basket being broken for any reason, including market reversals, terrorist attacks, natural disasters and fraud (which has been with us for as long as there have been investors and investments).

If you've invested entirely (or primarily) in a single company, then everything depends on that company remaining healthy. From that point of view, it would have been just as foolish to have invested everything in Merck before the withdrawal of Vioxx as to have put everything in Enron. (Admittedly, the consequences of the Merck mistake would have been less dire, but the principal is the same.)

What I think Eric continues to overlook is the fact that, by all accounts, the fraud at Enron also included a concerted effort to get the employees to invest as much of their money in the company as possible -- in other words, to disregard the cardinal rule of diversification. With 20-20 hindsight, it's easy to forget the time (not so long ago) when people like Lay and Skilling were considered pillars of the business community, as eminent, respectable and credible as Bill Gates or Warren Buffett. When people like that are sending out the message that the best thing an employee can do is to invest in the company, it's a powerful lure.

M.

 

[D. Scott MacDonald]

It's hard for me to take Eric's posts as little more than flame bait, and I still think he's missing the entire point of a 401K.

Companies 401K's matches are free exactly in the same way that my salary and medical benefits are free. They are part of the compensation that I agreed to when I accepted the job. The fact that taxes are deferred until the time that I draw the funds from the 401K makes absolutely no difference.

While I agree that people need to diversify more does not mean that I blame the employees (or other investors) that were lied to. The Enron fiasco was criminal, and I refuse to blame the victims over the perpetrators even if the victims could have somewhat mitigated their downside.

I don't know Eric's background, but he certainly comes off as a college freshman who is in the middle of his first finance class.

 

[Michelle Schmid]

I don't agree. Now, I have never taken a finance class so could be way off, but my salary is not free. They don't just give it to me--I have to work for that. They don't pay me if I don't show up (but I'm an hourly employee, not salaried, so maybe there is your explanation). In some respects I also work for my medical benefits, as they are a direct result of me working for the compay, but my employer can dink around with those if they feel like it. For example, my premiums were raised 7% this year, while my deductible also increased 100%. I don't work any less hours. I just pay more. I also can't work more hours in order to have reduced premiums/deductible. There is nothing I can do about the increases short of declining this insurance, so whether I work more/less doesn't matter.

However, I do not believe I work for my company's match. That is a direct result of my choosing to set aside some of the money (salary) I have already worked for, and the company choosing to match a certain percentage (in my case a whopping 3%, but still better than nothing)--and they can decide at any time to stop offering the match. That won't change the amount I am expected to work, or even what I contribute. Even if I work the same number of hours, and don't choose to set aside some of my own money, I get nothing. It is only by agreeing to contribute some of what I have already worked for they give me "free" money by matching. While it's certainly an incentive to set aside something for later years, it is not a part of my "salary."

 

[D. Scott MacDonald]

No, but it is part of your benefits package, and I assure you that you do work for it.

 

[Lew Crippen]

While I can understand your view Michelle, it is not quite correct.

You should look at your total compensation (salary, social security contributions, medical (and other) benefits, sick pay, holidays, paid vacations, any pension contributions, and any matching contributions to your contribuions), not just your salary.

It is very hard to just separate out salary. For example, assume that you work for a company that provides no benefits at all. You just get your hourly wage for the hours worked—not one day or hour of sick pay and not one paid day off for a holiday or any paid vacation.

Even then, you actually receive more money than just your salary. Your employer must contribute to your social security account. Now that money does not show up as salary, but nonetheless it is real and is a part of your compensation.

While I don’t know where you work, I’m betting that your company does not just ‘choose’ to match any contributions you make. Their choice is made in order to attract employees and to comply with local, state and federal laws, as well as any contractural obligations that they may have.

It is true that some companies have very much better benefits than others, but this is usually a method of attracting and retaining the best employees rather than pure altruism.

 

[Michael Reuben]

Your participation in the 401k plan isn't free either -- you have to work for it. No work, no enrollment in the plan. That's why 401k plans are considered part of total compensation (which also includes salary, medical, vacation, etc.).

Employer matches for 401k contributions are designed to make those plans more attractive as part of a total compensation package. You may choose to forgo that portion of your compensation by not making employee contributions, but that doesn't mean you didn't earn it.

M.

 

[Holadem]

I consider every good and services received from an employer as part of the total compensation, including that discounted six-flags season pass. It's part of the stuff that lures one to work there in the first place.

Businesses don't match 401Ks out of the goodness of their hearts.

--
H

 

[Eric_L]

401k Matching contributions are free money.
Who should accept responsibility for these companies 401k participants who were non-diversified and all experienced dramatic or total losses just the same as the Enron 401k investors who failed to diversify?

Also, Warren Buffett and Bill Gates, among nearly all other CEOs, are bullish on their stock, even though Bill Gates' MSFT stock has been about 50% off its high for years. I've yet to see a CEO who was not bullish on his/her company stock. Any argument that Ken and gang were considered credible sources on their stock as a justification or an excuse for non-diversification is moot.

D. Scott - Speculating about my experience/education is borderline insulting. I promise not to speculate about your own if you apologize. This thread is not about me or my experience/education. My credentials are as irrelevant as a street crossing.

 

[danDo]

If this were the case I would guess that a lot of companies would stop their matching contributions. I am not a corporate finance person, nor do I play one on TV, but it has to be cheaper for corporations to make their 401k matching stocks more economical for them than straight purchases of other stocks/mutual funds. For example, my last company matched in thier own stock. The value for the stock on NASDAQ was ~$26/share but the matching stock was over $200/share.

Of course, we were spun off into a new company and this company matches on our actual investments instead of company stock, which I like.

 

[Eric_L]

danDO, without knowing the specifics, I suspect that your discrepancy has more to do with erisa requirements. Often company stock is given in the form similar to a mutual fund of just that company's stock. Its price may vary from the actual stock but it tracks the performance. It also may have been a private or restricted stock. The cost to the company is the same - though they do get some tax benefit. Also, I was specific to employee purchases, not the employer match.

I am glad that now you get cash matchng. I hope you invest it prudently.

 

[Lew Crippen]

I’ll comment since you bring it up again—I refrained before because there are a couple of things in that statement with which I take issue.

The first is a logic problem with the statement, “Oddly, nobody seems too concerned about the peope who made the same mistake at other firms”, which is mere speculation on your part and (at least in my case), not true. This is an example of a “strawman” argument, where one posits an argument that exists for the sole purpose of knocking it down. In this case Eric, you have stated that no one cares about what happened to people who have lost their savings through stock problems at other companies.

But the argument is fallacious in that it is not true. While the problems at Enron have received more coverage, this does not mean that losses elsewhere were not reported and that no one cared.

Secondly, I find your use of emotive words, such as “sob story” interesting.

And most of the examples you chose (AT&T, for one) did not suffer problems due to corporate or personal malfeasance. Were you to cite other examples, such as Worldcom, your assertion would be immediately not true.