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Skillings' crime was materially misrepresenting the financial status of a publicly traded company for which he was an officer.

That's all. Others do this a lot also, although this was one of the worst cases. It's always been illegal, seldom prosecuted.


Might another conclusion be possible? Perhaps the WSJ got it wrong but created a panic/run on the bank that overwhelmed the market's more sober, well-informed view? There were a lot of disturbing admissions in "24 Days" about rushing to publish unconsidered stories in order to make the front page and/or beat the competition, primarily the NY Times.


I used to work in the hedge fund industry, and it was my understanding that a short biased hedge fund manager uncovered Enron. He then alerted journalists.

Nedra Weinreich

I don't know that the takeaway lesson is that we need to save the newspapers. The same type of journalism can be practiced, whether it is printed on dead tree pulp or online. There definitely is value in having news organizations whose role is to provide objective investigation and reporting, but I disagree that we have to "save newspaper journalism" per se.


I think you're wrong about this too. I remember the WSJ as being late to the party. Jim Chanos, a short seller, and Bethany McClean at Fortune Magazine deserve the credit.

Malcolm Gladwell

The story was broken by Jon Weil at the Journal. Chanos read Weil's story, and that's why he shorted Enron. Then Chanos tipped off McLean. If you're interested, I detailed the chronology in my New Yorker piece.


Malcom: Thanks, I wasn't aware of Weil. Maybe his editors also had "receiver failure," since the story was apparently buried in a "Texas Journal" insert instead of the A section.

I do agree with your point. Why didn't the people with their money or their firm's money or their client's money at risk see the problem before some underpaid reporter?

Paul Lightfoot

I don't have too much faith in the efficiency of markets. I'll point to Buffet again. Read Lowenstein's book "Buffet: The Making of an American Capitalist" and you really get a sense for how Wall Street makes mistakes over and over and over again without ever learning it. "Mr. Market" is ephemeal, emotional, volatile, and often misses the action and makes decisions in total disregard for what really matters.

Good for the journalists! They did do a good job in this case. I think that certain journalists are similarly doing a good job beating the drums regarding the impending executive compensation scandals (notably Floyd Norris and Gretchen Morgenson). We need more of that sort of stuff.


I think the only way we can really tell whether hedge funds found out about this initially is to examine, in detail, the records of who was trading enron. Chanos seems to be getting credit b/c he admitted to shorting enron, and because he notified other news outlets. But if another hedge fund had noticed this earlier (based on, say, the same type of analysis run by the finance grad students) they'd simply short without telling anyone, and wait for the inevitable collapse. The only incentive to publicize an Enron type case, from a money-making perspective, is if you've leveraged everything and can't short any more Enron stock (or don't want to for a variety of risk and/or liquidity based reasons) at which point the stock price's collapse is in your short-term, rather than mid-to-long term interest.


Malcolm, you may be interested in Mark Cuban's Share Sleuth blog, which he uses to influence his own trading activity.

See here:

Cuban believes journalists can do a better job at figuring the worth of a company than the the pros can.

Erik Baard

On "Seeing Truth"

I was an energy reporter for Dow Jones Newswires (a sister service of the WSJ) during Enron's reign. My primary markets were in the mid-Atlantic and northeastern states, so I spent far less time on Enron than my western and southern markets colleagues, like James Covert. And being nearly-real-time market reporters, deeper analysis was a luxury.

Traders were in much the same situation -- scurrying in a data fog. Except for the Enron guys. They always had a very clean, logical answer for fluxuations when others were befuddled. In time the reporters grew quite suspicious of Enron's pat view of the universe. We started to see cluelessness as a badge of honesty.

Of course now we're all familiar with the other legs of the Enron scandal, especially in western markets. It was a corporate culture that rewarded cleverness over wisdom.

But then what do I know, Malcolm. I just freelanced for the New Yorker once before running away to nature...well, within the city.

Thanks for the great work.

Antid Oto

I have yet to read your New Yorker piece, but I'm looking forward to it. Nonetheless, I have read most of the relevant works on Enron, and I don't really think your paradox is, in fact, that puzzling.

First, there were analysts who were skeptical of Enron. The lonely figure in Houston who was an early critic of the company -- and then was made a pariah in the community -- is well-known. There was also an analyst in Boston (I forget the name, but based in the Brattle Street area) who wrote a long report very critical of Enron. This was done some years before all hell broke loose. As I remember, the poor cash flow of Enron -- as opposed to reported earnings -- was the key factor in that particular analysis. The SPEs were just noted as a mysterious red flag.

The reason that journalists uncover fraud more readily than the seemingly motivated hedge funds can be found, I think, in the recent look by Michael Lewis (ESPN Magazine) at why more football coaches don't go for it on 4th down. This journalism, drawn from the convincing technical economics literature, reasoned that coaches don't go for it more often because, against reason, most coaches still didn't believe that going for it was optimal. So performance-maximizers were outside the mainstream, which jeapordized coaches' career options (when fired, they would become assistant coaches, etc., unless they were perceived as total idiots, which their maverick behavior might imply).

Analysts are in a similar position. Money can be made by riding with the herd, at least until the collapse. And then, if it does all collapse, you can say: hey, nobody saw it coming. On the other hand, if you were a bear all along your reputation would be secure only if Enron did indeed implode, an event that the bearish analyst might predict, but not be certain of.

Journalists, on the other hand, would seem to be immune from these same reputational pressures. If Fortune and the WSJ had been wrong about Enron, life moves on, the journalists don't have their tens of millions of dollars in invested capital pulled out, etc. Thus the herd instinct would seem to be less powerful. That's my thoughts, at least.



I'm not as puzzled by the apparent triumph of the media over the investors in this case. Newspapers and magazines generally succeed by publishing their analysis of a "mystery" (to use the term from your article). Investors make their money by completing their analysis only as far as necessary to make a decision, then move on (typically keeping their analysis to themselves because they have little audience and less incentive to share their conclusions broadly).

Isn't it likely that that the non-media analysts who solved the "mystery" of Enron just adjusted their portfolios accordingly and turned their attention to other companies? I'm not one of these analysts, but I thought there was a significant number of investors who sensed something funny about Enron and stayed away. Once they made that decision, there would be no need for them to "solve" the mystery more fully. The media, on the other hand, make their money by fleshing out a more complete solution to the mystery, giving them an incentive to press further than the basic buy/sell choice.


The first commenter said it best, and it is a point you did not address anywhere in your article or here: the board and officers of a public company have a fudiciary duty to shareholders. Skilling was not a man who did his job poorly due to ignorance (not a crime), but acted with willful dissimulation.

The length of disclosure statements are a red herring of the highest order. You summarized the process rather readily. The SEC has been pushing for 'plain language' disclosure for years, well before the scandal broke.

Anyone involved in financial services marketing or reporting has been in an Annual Report meeting where people knowingly, if carefully, framed the limits of disclosures, notes, or other material conditions that might have an adverse effect on share price in the future. Not revealing that information clearly is a breaking the most fundamental bond a corporation officer (an employee) has with shareholders (the owners), even if the effect may be minor. The fact that officers often have significant stakes does not justify their actions, since we have statistical data that they often act with narrow self interest, not with the concerns for the broadest possible range of shareholders (the majority).

The overall intent of SaOx was quite simple: to try and force officers (those with the most intimate knowledge of operations) to attest to a fairly simple point: do your documents reflect the true state of your business? Would Skilling or Fastow or Lay been able to verify their filings were SaOx in force then? That is question worth pursuing.

If an officer of a company cannot concisely represent either their financial dealings or circumstance, why do they have a job?

I generally enjoy your writing, but this is an abysmal example of a highly skewed analysis. Talking to someone with far more experience in this area, such as Chris Byron, would have been very helpful.

Christopher Horn

I believe this argument has more or less been made by Antid, kingspawn and others, but...

...in the simplest terms, the analyst and the journalist have different reward structures, and thus different motivations, with respect to sharing Enron insights.

Assuming the right circumstances (e.g. liquidity), the analyst maximizes his well-being by limiting the audience for his Enron-related insights.

(Almost) regardless of the parameters, the journalist maximizes his well-being by spreading his insights as broadly as possible.

Having unravelled the Enron mystery is a version of arbitrage -

itself a rare and precious gift on Wall Street. Not the type of thing to be casually sacrificed for a headline or fleeting fame!


Interesting couple of threads on Enron. I enjoyed the New Yorker article as well, though as is often the case I do not think that your interesting stories really support your broader naratives.
As an aside, based on his/her comments I have to conclude that the anonymous who has posted on this thread and the last must in fact be a close relative of Jeff Skilling, perhaps friendly Chicago weatherman Tom Skilling.

Oran Kelley

One of the perverse little facts about our society: we are structured to provide huge rewards to people in certain positions, even though they usually haven't done anything particularly extraordinary.

Newspapers ultimately generate a lot of the news that gets kicked around here on the Internet, and yet the Internet is killing newspapers. Maybe somebody will figure this one out before the Internet loses its contact with reality.

The fact that Enron represents a "receiver failure" is no surprise, really. Enron *was* a publicly traded company. There was, as you say, information out there for those who dug through it enough. And the bankers, accountants and others from the outside who were brought into some of these bogus deals had to have an inkling that something was wrong.

Some of them decided to invest anyway--why spoil the fun when we can make our money now and let the next set of suckers take the fall. The knowing way of entering a pyramid scheme. Lots of people do it.

What's the best treatment of the psychology of the bubble out there?

Joe Pabon

We can credit the WSJ with breaking the options backdating scandal, as well. All that took was some well structured probablity analysis, once some disclosure rules were modified regarding stock options, but we didn't see the SEC doing it (at least not until the big WSJ article).

BTW, I'm reserving judgment on their new format, though it appears easier to hold during a subway ride.

Oh, and Steve Sailer, let a brother live. Seems we're all imperfect, especially with hounds waiting to cut us down on every post and article, but I've seen some of your shots boil down to 'Malcolm makes more money than me.' It's a misconception that there's a fine line between criticism and insult. There's actually a big'ol wide line, clear as day, and you're all over that puppy.

Bob Holmgren

Any day now the New York Times will report on it's own shakey business and prove the necessity of newspapers. Until then I remain unconvinced.


Malcolm Gladwell is one of the smartest writers around. But his comments on why newspaper reporters, not Wall Street, first spotted the problems at Enron are at best naive and, in some cases, ignore recent history.

Case in point: I laughed out loud when Gladwell wrote this howler:
"On Wall Street, seeing truth gets you a million dollar bonus. At a newspaper, it gets you a slap on the back."

No, no, Mr. Gladwell, if the history of Wall Street has taught us anything, the big money comes from the ability to obscure the truth, or to disguise it well enough to deceive gullible investors.
Just ask disgraced analysts Henry Blodgett or Jack Grubman, or the others who touted troubled companies on CNBC but disparaged them in private e-mails.
Skilling, Lay, et. al., got away with their scams with the help of a lot of Wall Street players who made some big money based on some very dubious deal-making, while at the same time holding their noses and looking the other way.

And let's be clear about the business press:
In the great majority of cases it was little more than a cheerleader for Enron, WorldCom/MCI and the other Wall Street darlings that later imploded.

davis merritt

Whether the Enron mess was broken first by newspaper specialists (WSJ) or the newspaper generalists you describe, the crucial point is that it was in fact newspaper people. What is happening in the newspaper business isn't just ironic, it's tragic and dangerous for democracy. It isn't particularly important, as I argue in "Knightfall: Knight Ridder and How the Eronsion of Newspaper Journalism is Putting Democracy at Risk," that the newspaper business survive long term in its present form, but it is absolutely crucial that newspaper journalism--those layered, traditional processes of reporting, verification and editing under professional standards--be preserved through the business crisis and successfuly migrated to whatever new business models are established. Thus the key issue, for journalism and for democracy, is how dedicated existing newspaper companies are to preserving those underlying values while their platforms inevitably change.--Davis Merritt

Peter McBurney

Malcolm --

Just read your brave and fascinating article, and want to thank you for it. As a computer scientist, I have long battled a widespread, but erroneous, belief among my brethren (and among economists and physicists), that additional information never leads to an increase in uncertainty.

This conclusion is only true under what computer scientists call a closed-world assumption -- that the total universe of entities, their properties, and their relationships is fixed in advance, and does not change over time. If this assumption is false, then new information may well reveal the existence of relationships, properties or relationships which did not exist or were not known about beforehand.

This is the essence of your distinction between puzzles and mysteries. Puzzles operate under a closed-world assumption regarding our knowledge, mysteries do not.

The counter-example I typically use concerns the return of Steve Jobs to Apple. When we learnt this information, the range of possible futures for the company suddenly widened, because it was known he was open to radical ideas. The universe suddenly had more elements in it than before. Thus, this extra information increased our uncertainty about the company's future, rather than decreasing it.


I agree with many of the points stated, especially Christopher Horn and several of the other recent posts.

Those who've said individuals on Wall Street are in the interest of obscuring the truth are right on. Information=Power. When decisions are based on imperfect information, if I know more than everyone, that's going to make me a lot of money.

Moreover, the truth means little when a powerful herd effect is already in place. Everyone knew that dot-coms weren't bringing in any profits, but that didn't stop people from investing in them until the bubble finally burst.

As for journalists, investigative journalism operates on what we might call "The Woodward & Bernstein effect" (Feel free to steal it if you will, Gladwell)- everyone wants that "big catch" which most often means taking down a powerful individual or institution. The rewards in such a case are certainly more than the usual "pat on the back" that one has received previously in one's career.

However, I do not think this can only happen in the realm of the mainstream print media. Certainly many-a-blogger has made a name for themselves by digging up some good dirt. When the system works best, bloggers, youtube-ers, and basically anyone has the opportunity to uncover the truth in places the mainstream media just doesn't have the care or the resources to cover. Often something uncovered on a blog is "lobbed-up" to national media attention, but I would be wary to think we need to always operate in this distict hierarchy. The mainstream media does not have a monoply on citizen-journalism, but what it does have is one of the best ways to get it out to a maximized audience. For that reason, it will survive.

David Kesmodel

I think Malcolm's points are spot-on. And when he worries about the future of newspaper journalism, I don't think he is specifically referring to the dead-tree kind. Just about every newspaper reporter today is an online newspaper reporter, too. The bloodbath at the Philadelphia Inquirer this week means the paper's Web site, not just its print version, is sure to suffer a decline in in-depth reporting. The broad concern many of us have is that a future of largely online newspapering (with perhaps print versions that provide a minority of revenue) will result in smaller overall revenue, and thus smaller editorial staffs. On the Web, newspapers slug it out with many more types of competitors in the quest for ad revenue than they do in the print medium. Perhaps we'll see increasing fragmentation of online media, with former newspaper reporters continuing to start their own blogs and similar microsites. But will those sites be able to generate enough cash flow to allow their scribes to do the kind of investigative reporting long practiced at the nation's best newspapers? Will non-profit organizations rally around the former dead-tree gumshoes and restructure the source of funding for the nation's investigative journalism? We're in the middle of a scary but exciting time in the history of mass media.

Christopher Horn

Not sure I agree with the assumption of malicious intent from institutions - causing finance professionals to fail to grasp the seemingly obvious (e.g. Enron's imminent doom).

The area of decision-bias in security analysis has been well-researched by great economists such as Dick Thaler at Chicago. They're still a ways off from having a systematic understanding of bias, but surely they make a compelling case that such biases are real.

For a less scientific demonstration, drop by the Yahoo! Finance page once in a while. Now and then, Yahoo! Finance has a feature from Investor's Business Daily (a reasonable business rag) titled:

"Five Stocks that are hot this week!" (or something to that effect).

Usually you have never heard of those stocks, but here's one thing you can be sure they all share in common:

In the parlance of Peter Lynch, they are all at least two-baggers (up 200%) in the prior twelve months, some are even five-baggers (up 500%) or ten-baggers (1000%).

"Hot" stocks? Hot for what? To be shorted? Perhaps. The message of the segment, unmistakably, is that "you really want to buy these great stocks!"

In truth, if the only thing I know about a stock is that its price has appreciated 1000% in the past twelve months, I'm sure the LAST thing I would do is buy it!

In my humble opinion, this IBD demonstration points to the fact that people love winners and hate losers. Its part of life, and part of investing life.

Investors MAKE MONEY typically by doing the opposite. Its hard to get people excited about an ugly duckling, even if they would be made richer 12 months hence when it becomes a swan.

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