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Martin Sandquist

John Maynard Keynes knew the answer a long time ago: "The market can remain irrational longer than you can remain solvent"

Great work!


Just finished The Tipping Point--awesome. Love ya Malcolm, please blog again soon.


Enron! Enron !! Enron!!!


I found the article fascinating, and the "puzzle/mystery" viewpoint very interesting. The other topics you touched on (health care, etc.) should warrant more investigation/writing about. I suggest this should be your next book idea.


Enron and TMI: Too Much Information!

Thanks for the analysis on Enron. This is another example of our struggle to grasp pertinent facts in the tsunami of information that we receive daily about issues like Enron, Iraq, global warming, etc. What information really matters in a world bursting at the seams with data?

America is a country of experts where no one opinion is valued over all others. Consequently, we are the recipients of a vast array of information that often proves useless in the final analysis. Speaking of which analysis, critical thinking, is what is so often lacking when all is said and done. If it is presented, it is often overshadowed by the bloggers, talking heads of the world’s news rooms and so called experts, and or worse simply ignored. We need more critical thinking, not less. We also need to listen to those who truly know more. There are those who do. In the race for intelligent thought, I am sad to say that it seems like the brainless are winning.

American will continue to face this challenge if we do not learn to value analytical thought. No small feat in a country that shuns intellectuals and those who are willing to shed light on those of us sitting in the darkness of the information age.

I look forward to your next book on how too much information and too little analysis are preventing us from seeing things as they really are. Enron is a great example of a case where the facts were buried in plain sight if we had only looked for them.

Christopher Horn

In the prior thread, Malcolm challenged someone to sum up Enron's crime in three sentences. Here's one:

Enron's material misrepresentations of their financial performance resulted in investors trading Enron stock based on false information.

How does one invest? The majority of (price-making) investors follow approximately this process:

1) Check out the company's most recent financial results.
2) Apply their required growth rate to infer next year's earnings.
3) Determine if the company can achieve the target concluded in #2.
4) Buy the stock, or stay on the sidelines, based on the outcome of step 3.

As an example, suppose the Acme company reports earnings of $500 this year. You want to hold their stock for one year, and you need a 10% rate of return on your investment to buy the stock.

Will Acme make $550 next year (10% up on this year's $500)?

The answer to that question determines whether you buy the stock.

Now - suppose Acme "reported" $500 this year, but they really only made $400, since $100 was phony debt-as-revenue, such as occured in the Enron fiasco.

Of course, you bought Acme stock expecting the company was capable of 10% growth, which you were misled into thinking would result in $550 next year, a number you thought was reasonable.

Guess what? Unless Acme continues with their chicanery, it turns out that Acme has to grow by 38% to make your investment pay out. 38% = $550/$400; $400 after all is the amount Acme "really" made last year.

Still want to buy Acme's stock if the earnings have to grow 38% next year? Probably not.

For further perspective, several commenters have defended Enron by saying that several companies manage earnings. Maybe - and that's always illegal.

But there's a huge, huge difference between choosing to recognize a real economic activity in this period rather than some other, and ... fabricating economic activity in a period.

Both are bad. Reporting economic activity that didn't really happen (Enron's crime) is far worse because it gives investors (consumers) an incorrect perception of what they're buying.

Seen through this lens, Malcolm's semi-defense falls apart. Using the Acme example, Malcolm's semi-defense would claim that a shrewd investor might have been able to determine that the reported $500 was really a $400, if they had the appropriate level of expertise or maybe access to Cornell super-sleuths.

Now imagine a fraudulent manufacturer that took cheap shirts and sewed little polo figures on them, then resold them as Ralph Lauren products to unsuspecting consumers.

Would anyone advance the argument that consumers are "responsible" because the execution of the fraud was just bad enough that consumers "should have known"?

You may actually believe that consumers should have known, but such a view is unsustainable in order for a market to function effectively.

Consumers should similarly be able to expect that when a company reports earnings, that reported number represents the outcome of the actual economic activity in that period. If not, the market will fall apart.

jean pierre flores pavez

Dear Sir:

The reason for my letter is the following one, I am going to be to him frank and direct, since that its time is valuable in addition that my problem is enough serious like covering it in flatteries, you criticize, etc… and to give returns before raising my situation to him: I am in a quite serious problem to which one talks about economically, I have too many debts and I do not have way to leave them at the moment. I am a Young person of 23 years of age that it wants to fulfill the dream to leave ahead next to the person who master, but I cannot do it by economic reasons and of health since my even return time of Argentina and has not long ago not been able to find a job to sustain its expenses in medicines due to an accident that happened to him in that country and I leave it with an operation in the column. Single I can say to him that I do not know to who to go, sometimes I think that the best thing than can happen to me is to request a life insurance and to force suicide on to me so that it at least leaves to the love of my life without the debts. I hope that this letter really arrives to him at the heart, since at least to me, it has been having to me without being able to sleep for but of 3 months, thinking about like being able to obtain food and silver for the leasing of my home. I wait for You you help me, would be thanked for it as nobody has never done it, I request it putting its hand in the heart and thinking about that at some future date that writes to him it will be thankful to him of by life his aid. I need one hundred thousand chilean pesos (USS 185) before the 25 this month to be able to continue sleeping in my home and to buy foods. Hoping that the present has a good welcome and it arrives to him at the heart takes leave

Pease send money for Western Union at: Jean Pierre Flores Pavez, 15.719.144-6, Vina Del Mar, chile

And send mail to me.


Jean Pierre Flores Pavez
Vina del Mar, Chile

Phone: 56 09 8 2589095
mail: jeanpierre.fp@vtr.net
msn: jeanpierre.fp@hotmail.com


I believe you are giving too much credit to the WSJ. If I read the article correctly, it was a Hedge Fund manager who tipped off the Media to the problem. The same Hedge Fund manager was short Enron stock and stood to benefit from the negative press and its effects on share prices.

Trisha Parks

Can't wait for your next book keep it up!.. I hope Enron will be the last.

Jack Aboutboul

Malcolm, that was very interesting, although I somewhat disagree with your statement about newspaper journalism being at a point of critical social value. Yes there is tremendous social value in disclosing fact and exposing fiction and falsehood. It can be considered a great public service.

However, we must ask ourselves, how efficacious, in our modern times, are newspaper and other forms of journalism at actually affecting change? Aren't journalists usually always in the least advantageous position to do so? Sure, many journalist *live* to expose the unsavory, but the buck usually stops there with a cry for action. There is only so much space on a page and so much time on the television.

I would argue that in this and age, at a time when the the social fabric of both groups and society at large are being redefined, there are more effective mechanisms for affecting change which are of greater social value. For example social news aggregation sites, blogs and online video logs offer avenues for anoyone, not just journalists to perform the same function. In an age where everyone has information and can distribute it, not only is the amount of news changing, but so is the breadth and depth of what can be and is covered. Traditional forms of journalism just won't stack up.

Essentially, I think that the title and function of a "journalist" needs to become embedded in each and every stakeholder in any sphere of interest, since as you pointed out, the members of a community have more of a vested interest in keeping antagonistic forces at bay. It is only when those involved have more at stake to lose that they will not merely be journalists and reporters but also activists on behalf of their own cause. What else can we appraise as socially valuable but something which enourages action and inspires passion? Certainly not something as passive as a newspaper.


Actully it was Rebecca Smith and Eishnhower in 24 days..nice read.


Quote: "On Wall Street, seeing truth gets you a million dollar bonus"

Tragically, it often doesn't... Closing the deal is what gets you the million dollars. Seeing the truth and dropping the deal can earn you a reputation as a pessimist / nitpicker / lazy / someone who "doesn't get it". And if you're later proven right - *maybe* a pat on the back :/

Aishwarya Palwai

I am a regular reader of your New Yorker articles. Firstly, it was a good read, and helped me sort of understand the whole mess.

I was surprised...how did such a big typo get through to the final print version. The PDF version of your " Open Secrets" article has the wrong title. It carries the title of your previous article "The Formula". Is it possible for you to correct it for later readers? If a zillion people have already asked the same question, then I apologize for bringing it up again!

-Aishwarya Palwai

Matt Searles

You might not believe me, but I was expecting something like an Enron to happen... I mean just the way CNBC seemed during the tech bubble, it gave the clear message that there was a lot of room for things to go on out of site.. Similarly, I saw the trouble in Iraq coming from far away, along with Bush's fall from graces. All the time I wonder why I don't see anything in the main stream media that investigates this stuff.

I wonder if it might not be a little like.. Well say you read a whole lot of Freud and Marx.. and maybe Theodor Ardono.. or lets say Frederick Winslow Taylor.. I'd end up with a kind of materialistic / mechanistic world view.. and so with that lens, that kind of conceptual model for reality.. I'll see certain things and not other things.. So for instance maybe I might not see the virtue of religion.. and I might fail to appreciate the sort of postmodern discontents of our civilization..

Do you see what I'm saying.. maybe the values of the system and everyone involved have simply effected the way they see reality... another words maybe we are always thin slicing.. and our past experience creates the foundation for how we thin slice.. and inside of a kind of collective conceptual migration... to put it poorly.. maybe we just choose not to to evolve in such a was as to not see our own shadow and that's why God made terrorism, or something? That sorta makes sense to me.. Terrorism as globalizations feed back loop.. A demon being a Buddha when your not ready... I'm not the first to say such things... But it seems sorta clear enough?

Charles Frith

Not one mention of Sherron Watkins the Enron Employee and whistleblower. Far from Journalists taking the credit (an ailing institution that is in for reinvigoration Sherrin who after nearly a decade at Enron was high up enough, or grumpy enough, to send the boss a pull-no-punches, put-it-on-record letter telling him — for a very detailed seven pages — that his company was more or less a Ponzi scheme, and it sounds like she knew she wasn't telling him anything he didn't already know.

Journalists that ask tough questions of business are few and far between. Let's have none of this standing by a sinking ship when it needs to sink in order to renew itself (a bit like advertising does).


Allen Arnn

Sorry this is off topic. But, I wondered if you are looking into what made the Boston terror scare yesterday tip even though those blinking devices were in other major cities for weeks without causing a frenzy.


they were in boston for weeks without causing a frenzy, too, allen, which makes the overreaction once they were noticed all the more disturbing. other cities found them, checked them out, determined that they posed no threat, and dealt with them sensibly; that's why this is the first the nation is hearing of them. it's a shame boston city officials went insane the way they did, sending out multiple bomb squads to investigate each device individually instead of checking out one or two and telling people there was nothing to see, and i think it reflects pretty poorly on the city's preparedness that it would foster a state of hysterical, paranoid fear and then allow its citizens to remain in that state for hours after officials knew the devices were a harmless advertising ploy. but what made it tip is what always makes it tip--a game of telephone. someone heard that police were investigating a strange, blinking box and said, "hey, i saw one of those over by mass ave. the other day," and multiple phone calls started coming in, which made officials more anxious, so they sent out a few more bomb squads, which made the public more anxious, which sparked another wave of phone calls . . . and so on and so forth. people on the ground said, "you know, that's a cartoon character," and people in city hall said, "IT'S A POST-9/11 WORLD!!!!"

my city done let me down; what can you do? it's probably part of the same statewide emotional disorder that makes us such terrible, inconsiderate drivers. i blame the rotaries, but it might be dunkin' donuts runoff in the water supply.

Tom Quinn

I disagree with Gladwell's New Yorker article on Skilling and Enron. The issue is not whether Enron's finances were a "puzzle" or a "mystery" at all; rather it is whether Enron, Skilling and Lay committed a criminal fraud, that is whether they intentionally misrepresented the financial condition of the company. In court trying to cleverly change the subject will not work as one's attention is focused, sometimes excruciatingly, on the narrow issue at hand through the charges, the rules of evidence-including strict perameters of relevance-and the judge's jury instructions. The jury's verdict was supported by overwhelming evidence meriting the confidence and gratitude of the public that these swindlers were brought to justice. If an underclass defendant can get 25 years to life for stealing a pizza under the Three Strikes Law, it is only fair and just that corporate gentry who misappropriate hundreds of millions from the investing public and their own employees receive stern punishment.

Allan Brown

I just read the Tipping Point. I do have one question for you. How would explain the craigslist.org epidemic? How could someone like myself determine the Tipping Point for this phenomenon?

nicole cruz

Good reporters are rewarded!!

Richard Belding

hey hey hey

China Law Blog

The WSJ is not your ordinary newspaper. First off, it makes money. Secondly, virtually all of its reporters are top notch and very well paid. None of these things are true of most newspapers and since most newspapers could never come up with an Enron story (or really much else of significant import), it will not be such a great loss when some of them die away. Indeed, the death of the weaker newspapers might only serve to strengthen the remaining ones.


It's time, Malcolm, to post again before the tipping point loses interest.


Halliburton/KBR is following the exact model that you lay out for Enron -- the "puzzle" as opposed to the mystery.

KBR was spun off a few months ago and is now publicly traded. At the time of the IPO, Halliburton partially indemnified KBR against liabilities associated with the then-ongoing investigation of KBR for alleged bribery of government officials in Nigeria, but did NOT issue any indemnifications for liabilities arising from cost overruns or other misuse of funds in Iraq. (This is all public information in the KBR prospectus filed at www.sec.gov)

Thus, Halliburton has shielded itself from any liability for Iraq fines or criminal penalties. There is in fact a way to stop them from walking away without a scratch, though. Halliburton still owns 81% of the stock of KBR, which it plans to distribute pro rata to its (Halliburton's) shareholders in a couple of weeks. If an injunction against this distribution were issued, then when KBR declares bankruptcy (as we all know they will when the Iraq audits are complete and the fines and penalties are assessed), Halliburton could be consolidated with KBR in bankruptcy, and would bear ultimate liability for the conduct of its division.

I am very distressed that not a single lawmaker that I have contacted has looked into this. I fear that people think I'm a conspiracy theorist. I'm not. I have disdain for conspiracy theories. I am a lawyer, however, and I've worked in securities issuance as well as (to some extent) in bankruptcy. Starting at the time of the IPO, I have contacted Dianne Feinstein, Nancy Pelosi, Barbara Boxer, Henry Waxman, a couple of newspapers and both truthout.org and halliburtonwatch.org. I think this issue is simply too complex for the average person, but I am completely disgusted with the members of Congress for not lifting a finger to find out whether there's any merit to what I'm saying.

Myspace Generator

Enron ruined our families stability - we moved up north to get away -

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  • I'm a writer for the New Yorker magazine, and the author of four books, "The Tipping Point: How Little Things Make a Big Difference", "Blink: The Power of Thinking Without Thinking" and "Outliers: The Story of Success." My latest book, "What the Dog Saw" is a compilation of stories published in The New Yorker. I was born in England, and raised in southwestern Ontario in Canada. Now I live in New York City.

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