Skilling, Lay on Trial in Houston, Not Utilities

Feb. 9 (Bloomberg) — Here's a reminder: the Enron trial is about Jeff Skilling and Ken Lay, not the utilities industry.

After all, under these men Enron Corp. took a perfectly sunny accounting principle like "marking to market" and distorted it until it resulted in the opposite. At Enron, a utility that morphed into the world's biggest energy trader, a vague future dream was booked as if it happened this morning.

Such moves caused shareholders to lose billions of dollars in the end. There's something wonderful about being able to hedge the risk of a drought with financial instruments. Thanks to Enron, the American public now thinks that weather futures are fraudulent hocus-pocus.

I've thought about this more than some people because my brother was in a non-accounting corner of Arthur Andersen, Enron's now-defunct auditor, when the scandal broke in 2001. But no matter who you're related to, the message the former top men at Enron are sending is hard to take.

Consider the courtroom exchange this week between Skilling's lawyer, Dan Petrocelli, and Mark Koenig, the former investor relations chief of the company. "I pled guilty because I was guilty," Koenig said. Koenig was explaining his decision to serve as witness for the prosecution. But Petrocelli taunted the man by reminding him of the good life he had enjoyed in years past as an Enron executive: "It's the American dream, wouldn't you say?" Petrocelli asked.

Clear Terms

The terms are clear: If you put Enron on trial, you're putting the dream on trial. And especially, putting utilities on trial. Sure, Enron was a rough bunch of dirt bikers. But no utility company can innovate without being rough. You have to either love utilities, contemptible as they may be, or do without them, goes this line of thinking.

Enron critics offer another version: love them, or reform them.

That doesn't mean either message is correct. After all, plenty of fine utilities executives have managed their companies without creating falsehoods named "Chewco," a so-called special purpose entity used among other things to get debt off Enron's books.

If you want to be audacious, you can even argue that the Enron gents are worse than one of the best-known utilities magnates ever to come up against federal prosecutors: Samuel Insull of Chicago.

Power Potentate

As my fellow Bloomberg News columnist John Wasik points out in a new biography, "Merchant of Power," Insull started as the financial manager for a big man — not Ken Lay, but Thomas Edison. Insull's own great innovation was the central power station. Before him, many individuals preferred private generators. J.P. Morgan, for instance, had a generator belching smoke behind his mansion in Manhattan's Murray Hill area. In those days, Wasik points out, having your own power station was like having your own yacht — good for status, but hardly efficient.

The central station enabled Insull to wire Chicago from the South Shore to Lake County and bring power to the people. In the 1920s, the man ruled the Windy City in manner every bit as flamboyant as Lay and Skilling in Houston. He had a glamorous wife — the actress Gladys Wallis — and built an opera house more than 40-stories high on North Wacker Drive that today is home to the Lyric Opera.

Tangled Finances

There were other similarities. The Insull empire, like Enron, kept confusing books. It had no Chewco, but Insull did create holding company upon holding company to raise the capital for his giant investments.

When the Great Depression brought deflation, the empire collapsed. Shareholders, including employees, lost fortunes. Federal prosecutors moved in and State Department officials escorted Insull back from exile in Greece. The federal court set Insull's bail at $200,000, four times the amount asked of Al Capone in the same courtroom. Insull infuriated President Franklin Roosevelt, who made the holding companies his targets and the justification for passing the Public Utilities Holding Company Act.

But Insull's response was different from that of Enron executives. For one thing, Insull didn't sell off his own shares before the bad news hit.

He didn't quarrel with Andersen, either, though in the Insull case the Andersen at issue was Arthur Andersen himself. The founder of the accounting firm shepherded Insull's company into receivership and was so impressed with Insull that he said admiring things about him later.

'Honest Mistakes'

Insull, though well into his 70s, in the end borrowed millions of dollars under his own name from General Electric Co. and banks to help his company. A man of Victorian sensibility, he actually felt responsibility toward his shareholders. Certainly Insull defended himself: "I made mistakes, but they were honest mistakes." But his defense was stronger because he was putting his money where his mouth was.

One consequence of Insull's forthrightness was that the Chicago jury acquitted him. The jurors saw that Insull hadn't demonstrated the sort of arrogance that attends fraud. He hadn't been cynical about his employees or shareholders, or laughed at them, saying "that's the market."

The jury for Skilling and Lay may not be so kind, and we can understand why. The Insull story is old but relevant, for it reminds us that it is possible to innovate legally and without arrogance. Even if you are a utility.

(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2006 Bloomberg

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