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A fool, his money and Enron
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January 29, 2002: 6:43 p.m. ET
Don't let sad tales of financial ruin set the tone for 401(k) and accounting reform.
Commentary by Ken Kurson
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NEW YORK (Money Magazine) - Stop thinking about Enron's investors as "victims." Big-monied managers took a bath. Long-time Enron employees lost it all. But while it's sad indeed to hear these stories, the investors can't pass off all the blame. They were slack, arrogant, susceptible to hype -- and they got burned.
Americans labor under the illusion that no amount of carelessness should result in painful consequences. I smoked my whole life despite warnings on every pack of cigarettes? Not my fault, pay me. I tripped while skiing at your resort? Not my fault, pay me. And now at Enron: I put all my money in a wildly overvalued stock after being repeatedly warned about the risks of putting all my eggs in one basket -- you get the idea.
You wouldn't buy a house without inspecting it, simply because you're entitled to sue afterwards if the seller misrepresents the condition. You don't loan money to a guy you meet on the street, simply because Judge Judy could theoretically enforce a judgment if the borrower fails to pay. Yet time and again, investors plow their money into the Enrons of the world, expecting some white knight to make them whole when the scheme falls apart.
In retrospect, the warning signs were obvious. Top executives sold millions more shares than they bought. The company's last annual report, filed in April 2001, showed a giant disparity between revenues and earnings -- revenues more than doubled; earnings barely moved.
Mediocre improvements in cash flow were either mysterious or suspicious, like $1.1 billion in cash flow from "other operating activities" and a net improvement in working capital of $2.7 billion from sources that don't add up to that amount on the balance sheet.
The system works
Lost among all the crying in the Enron debacle is the basic math behind all transactions. Every share that was bought was also sold. So for every sad buyer, there was a happy seller. Enron's officers sold stock adding up to hundreds of millions of dollars, while the company's market cap topped out at $80 billion. That means plenty of investors did just fine.
If Pension Fund Z got stuck with a million shares and takes a $50 million loss, that $50 million gain was booked by Pension Funds A and B. Z sues Enron to "recover" its losses, but Enron didn't get Z's cash -- A and B did.
Innocent investors will always be stuck with shares of crappy companies, and the only difference is who is holding them when the music stops.
The real loser in the Enron debacle is the capital formation process. The ease of capital formation in the United States over the last twenty years has provided us with just about every good thing we have: high employment, increased productivity, an unquestioned lead in high-tech savvy.
Our willingness to hand our kids' college fund and our retirement nest eggs over to strangers managing enterprises we can only generally review rests on the assumption that everyone's playing by the same open and honest rules. That is why crooked officers and auditors have to be punished -- as a deterrent to other finaglers.
So we need to expose any wrongdoing committed by Enron and Arthur Andersen. But I wouldn't mind if, along the way, we threw some cold water on the people who lost money this time and told them to get on with their lives.
This is important stuff. We saw on Sept. 11th what happens when we assume that the world is a safe place and ignore our responsibility to make sure that's so. Enron investors have to realize that an overmatched SEC and nakedly conflicted auditors cannot substitute for common sense.
Ken Kurson is an editor-at-large for MONEY Magazine
Additional reporting by Michael Craig 
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