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INSIGHT

Five Years After the Enron Scandal

Aired November 27, 2006 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


(BEGIN VIDEO CLIP)
SHIHAB RATTANSI, CNN CORRESPONDENT (voice-over): Enron unraveled. Five years after the corporate scandal that had investors seeing red, are businesses any better? And is the bottom line now black and white?

SHERRON WATKINS, FMR. ENRON EMPLOYEE: I think the problem, basically, at Enron, at many of the corporate meltdowns, is a lack of accountability, with the top guy saying, "I just didn't know." Well, if you don't know, what are you paid the big bucks for?

Well, if you don't know, what are you paid the big bucks for?

(END VIDEO CLIP)

RATTANSI: And welcome to INSIGHT. I'm Shihab Rattansi.

Almost five years ago, one of the giants of American business came tumbling down. Enron, then the seventh largest U.S. company, collapsed under its own weight when top executives padded the company's bottom line with fraudulent accounting and deceptive earnings.

In December 2001, it was clear that Enron's numbers weren't adding up, and the company went bankrupt. Thousands were laid off, many employees lost their life savings, investors lost billions. The scandal sent tremors through Wall Street and the U.S. government passed new legislation to try to protect investors from being left out in the cold again.

It was a corporate revolution that started with an e-mail.

Here's Maggie Lake.

(BEGIN VIDEOTAPE)

MAGGIE LAKE, CNN CORRESPONDENT (voice-over): Consider it the memo heard 'round the world. Words of caution from a concerned employee that helped lead to the downfall of one of the world's biggest companies.

Within months, her testimony before Congress helped usher in the post- Enron era.

WATKINS: Mr. Skilling was aware of the problems.

LAKE: Soon, President Bush was signing off on the Sarbanes-Oxley Act, which aims to clean up corporate America. The downfall of the Enron empire and the fight for the little guy. You could say it all started with one voice of protest.

That voice landed her on the cover of "Time" magazine as one of its people of the year in 2002.

I caught up with Sherron Watkins in the shadow of the Capitol, where she told her story five years ago. In fact, we met at the very same hotel where she stayed before delivering testimony that might have been the death blow to Enron.

(on camera): When you look back at Enron, are there things you would have done differently?

WATKINS: Oh, certainly. Certainly. I saw problems with very aggressive accounting that I personally thought had crossed the line as early as 1996. I made some complaints. I got a lot of push-back. And so I just switched divisions within Enron.

But I look back at it, and that's when I should have gotten with more people and made a much bigger stink, because those transactions in '96 were actually like a seed for what became the fraudulent structures in '99.

LAKE: Do you think that corporate America is less corrupt now?

WATKINS: I think outright financial statement manipulation, the way Enron or WorldCom had done, is certainly less so and less chance of it. For one thing, CEO's can go to prison much easier with the Sarbanes-Oxley Act. However, the Tyco kind of behavior or the Adelphia kind of behavior, where the CEO treats a company's assets as if they were his own, the attitude of entitlement and "me first, the organization second," still seems very prevalent.

LAKE: Businesses have complained that it's been too onerous, and it's actually more the negative than a positive. How do you feel about rolling back some of the Sarbanes-Oxley that was put in place?

WATKINS: I think the act is fine the way it is. It's more the focus on how the SEC is going to interpret it. I'm very alarmed, actually, by this group of -- this informal group that's reporting up to the Treasury secretary, trying to get CEOs and accounting firms less accountable to their shareholders, less liability and ability for shareholders to sue. That's alarming.

I think the problem, basically, at Enron, at many of the corporate meltdowns, is a lack of accountability, with the top guy saying, "I just didn't know." Well, if you don't know, what are you paid the big bucks for?

LAKE (voice-over): Jurors decided that with those big bucks comes big responsibility.

(on camera): Do you think justice has been served in the case of Enron?

WATKINS: I do think justice has been served. The top guys were convicted. Jeff Skilling is headed to prison for 24 years. Many other Enron executives will go at varying lengths of time. I do think going for the top is important, and I do think a long sentence is important.

If you are convicted and all you do is, sort of, two years or three, I don't think that's enough of a deterrent, while the 20-plus years sure is.

LAKE (voice-over): Sherron Watkins now embraces her role as, to quote "Tim" magazine, "the Enron whistleblower."

WATKINS: Truth be known, I don't think people stuck with the label whistleblower, it usually doesn't go well for them. You know, I certainly will not have a career in corporate America in a traditional sense.

I had to kind of go with the punches and learn how to speak in front of large audiences. But I don't think a system, a government, an organization, works if it's relying on people like me to sort of bluntly tell the truth when disaster is on it. You know, it works when a system of checks and balances in place, when the people that are on the control or risk management side have a voice.

LAKE: Sherron Watkins came to Washington as a workaday accountant, a successful one at that. She walked away an outcast of corporate America, but one with a message, a message that helped change the way the world does business.

Maggie Lake, CNN, Washington.

(END VIDEOTAPE)

RATTANSI: And as Maggie just reported, several of Enron's executives paid a high price for their company's false profits. Enron founder and former chairman Kenneth Lay was convicted of 10 counts of fraud and conspiracy. He died soon after the conviction, but the U.S. government filed a civil lawsuit last month against Lay's estate to try to reclaim more than $12 million for the victims of Enron' collapse.

Jeffrey Skilling was the former CEO of Enron. He was sentenced to 24 years in prison, a term scheduled to start in just a few weeks' time. Skilling says he is innocent and plans to appeal.

Andrew Fastow was Enron chief financial officer. He was sentenced to six years in prison. He struck a deal for a lighter sentence that involved cooperating with the trial and giving up $29 million, including several luxury homes.

We'll take a break, but when we return, the Enron legacy. How are companies different now, five years after its fall?

(BEGIN VIDEO CLIP)

JEFFREY SKILLING, FMR. ENRON CEO: August 14, I did not believe the company was in financial peril.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

RATTANSI: Former Enron CEO Jeffrey Skilling hasn't even settled into his jail cell, but already a backlash appears to have begun. Senior officials in the Bush administration and on Wall Street are already lobbying for the more stringent requirements on the oversight and regulation of corporate accounting, passed in the wake of Enron and other scandals, to be rolled back.

So has big business really changed its attitude?

Welcome back.

The Sarbanes-Oxley Act was passed in 2002 in an attempt to prevent any more scandals, like Enron, Tyco or WorldCom. However, last week the U.S. Treasury secretary called for another look at the regulations currently in place. Many interpreted that as a show of support for those who argue that the new rules went too far, that the competitiveness of the United States has been stifled.

Joining us now is Dean Baker, co-director of the Center for Economic and Policy Research.

Thanks for joining us.

Do you sense, then, that some of these regulations might actually be rolled back?

DEAN BAKER, CTR. FOR ECONOMIC & POLICY RESEARCH: Clearly, there's an effort to do so. It might be harder now with the results of the election, which I think the Democrats are going to be more likely to stand behind them. But, again, everything is kind of up for grabs. And clearly there will be a push in the Bush administration to roll them back, and I'd say at least a 50/50 chance they'll make some headway.

RATTANSI: What about the argument, though, that the regulations went too far, that that competitiveness has been affected?

BAKER: Well, there are two issues. One, at the most basic level, you know, if we think that the regulations have gone too far and impeded corporate profitability, we'd expect to see low stock prices. We don't really see that story. Stock prices are pretty high relative to corporate profits, relative to GDP, pretty hard to tell that story.

The second point, you raised issue about U.S. markets losing competitiveness, and I think here it's important to understand. There's an issue of international trade here. The people who decide where to list their company, where to engage in new offerings, to do their business, that's corporate management. Now, if you could in effect persuade corporate management to go on Wall Street by having more lax regulation rather than lower cost, that's a form of protectionism for Wall Street.

So I think what's going on here is Wall Street is trying to buy itself a privileged position in the world market by having more lax standards than are currently in place to benefit corporate management, not to benefit the investors.

RATTANSI: As far as Enron is concerned, has everyone who should have been punished been punished now? Is the case closed?

BAKER: Well, the case is probably closed in a legal sense in the sense that it's going to be hard to get further indictments, you have statutes of limitations, the case is getting old in that sense.

But, you know, obviously, there are a lot of people that went along with this that presumably did know they were breaking the law, or should have known, who are largely getting off. Now the ones who are in the sidebar, you could say, probably that held a lot of Enron stock and lost a lot of money, so we can at least feel good about that. But given what was at stake, you know, just getting off, losing a bit of money, might be relatively good in the scheme of things for those people.

But I don't think we'll see many more punished at this point.

RATTANSI: What about, though, the case of Enron five years or six years later, or so? I mean, was it just the case of a few bad apples, or is the whole system in some ways to blame for things like this?

BAKER: Oh, we clearly have a system that's out of whack. We have a system where control is hugely tilted in favor of management at the expense of other stakeholders, the shareholders and the workers. And there's been very little -- I mean, Sarbanes-Oxley is a good step, but we have ongoing scandals. We have the back-dating of stock options. I mean, you just have to pick up the paper almost any day of the week, there are scandals by management at the expense of the shareholders, at the expense of their workers.

So we have a real problem where we have to redress this imbalance of power and give more weight to the shareholders and less to corporate management, so they can't get away with these abuses, plus paying themselves off in, you know, six, seven, eight-figure salaries. It's very hard to make the case that anyone is worth $100 million, $200 million, and you have some CEOs walking away with compensation packages like that.

RATTANSI: But is the government now working on behalf of the investor, from what you're saying, given what Mr. Paulson, for example, said last week. You seem to be saying that he is trying to go back to a state where corporate America wins and the investor loses.

BAKER: Well, I would say he is doing that. That's right. And, you know, I think we have to, if anything, go further to redress the balance. You know, you cold have things like requiring Barney Frank, who is going to be the head of the Financial Services Committee in the House, he's proposed a measure where you would have to have compensation packages for top executives sent out to shareholder approval at regular intervals. That's a good step. It won't solve the whole problem, but we have to think of things like that, that will give more power to the shareholders and have more constraints in corporate management.

RATTANSI: But given that so many of us rely on financial markets, allowing companies like Enron to preserve our financial wellbeing in the future, for our retirement and so on, how optimistic, how confident, can we be?

BAKER: I think there's lost of grounds for concern. Let me mention a big area, the hedge funds, private hedge funds, that, you know, are very secretive. They have very few disclosure requirements. My guess is that we're going to see a lot of big surprises, possibly in the not very distant future, associated with these hedge funds, where we're going to find out that many have engaged in far more risky activity than people realized.

And a lot of us are invested in those hedge funds without even knowing it. You could have a mutual fund that puts a lot of money in a hedge fund and unless you read your statements very closely, you'd have no idea.

RATTANSI: Very quickly, though, I mean, the stock market is buoyant in the United States. Are you optimistic about the economy? Is that a good sign for the economy?

BAKER: No. The stock market and the economy often go in different directions. You know, 2001 wasn't that long ago, you know, when we had the stock market going very well and suddenly it plummeted, and then the economy fell along with it.

So, no, I think there's lots of real big problems in the economy, centered in the housing market, and that will show up in the stock market eventually.

RATTANSI: Dean Baker, thank you.

BAKER: Thanks for having me on.

RATTANSI: We'll take a break, but when we return, after the scandals of years past, we'll look at corporate health today. People are shopping, the stock market is strong. Is consumer confidence back on Wall Street?

Stay with us.

(COMMERCIAL BREAK)

RATTANSI: Black Friday is known for its bargains, bustle and bugs. This year's day-after-Thanksgiving sales in the United States drew in the crowds and the cash, with a 6 percent increase over last year's profits. But some investors worry that the holiday shopping spirit won't last the season.

Welcome back.

It's a different financial world today. Enron helped to change that. So we thought we'd take a closer look at how businesses are faring today.

Wall Street opened down on Monday, today, in part because of the weak economic report from one of the world's biggest shopping stores. Wal- Mart announced its estimated sales for November were lower than expected, and this is already led to worries about overall retail sales this Christmas.

Despite the bump in spending after Thanksgiving, it seems there is caution amongst U.S. consumers. Lisa Sylvester reports.

(BEGIN VIDEOTAPE)

LISA SYLVESTER, CNN CORRESPONDENT (voice-over): Many middle class Americans are making their list and checking it twice, only to find out their coming up short of cash.

A recent consumer survey found 1 in 3 people will be spending less this holiday season.

BILL HAMPEL, CREDIT UNION NATIONAL: The primary reason is just the general level of household expenses. Because of the amount of expenses they already have, they don't have anything left over to spend on the holidays. Sort of suggests that most people live paycheck to paycheck, and so they don't have much set aside for holiday spending.

SYLVESTER: The survey by the Credit Union National Association and Consumer Federation of America suggests many shoppers are concerned about racking up added credit card debt during the holiday season. So they're scaling back.

UNIDENTIFIED FEMALE: Some of us are killing ourselves, and then we place ourselves in debt, and then next year comes around and you're paying back and you're going through the same regimen. So sometimes you want to break the cycle and try something else.

SYLVESTER: According to the consumer survey, 33 percent of Americans worry about credit card balances. That's up from 25 percent last year. Home heating costs, a jump in college expenses, slumping housing prices, job insecurities, it's all putting a crimp in the holiday spirit.

JOHN CHALLENGER, CHALLENGER, GARY & ASSOC.: It's getting harder to make payments, to make ends meet. That means when it comes to the holiday season, you're just more cautious about spending money on gifts.

SYLVESTER: The advice from the experts: set a budget for gifts this season and stick to it, and start thinking about saving for next year's holiday season.

(on camera): The National Retail Federation expects the average consumer will spend about $800 this year on gift giving.

Lisa Sylvester, CNN, Washington.

(END VIDEOTAPE)

RATTANSI: Well, in recent months the American president has pointed to what's been termed a very strong, or relatively strong, stock market performance, as proof of the U.S. economy's buoyancy. However, it would seem American consumers are being a bit more circumspect right now.

Are they right to be cautious? After all, companies like Enron were the darlings of Wall Street before their implosion. Should the health of a country's economy be judged by the health of its stock market?

Joining us now to talk about this is Justin Fox. He's editor-at- large at "Fortune" magazine.

Thank you for joining us.

Are consumers right to be worried?

JUSTIN FOX, "FORTUNE": Well, yes. The U.S. economy has slowed down already and the big question is whether this is something that's going to get worse or we're already seeing the worst of it right now.

And so, yeah, I would say consumers are absolutely right to be a bit concerned. Their houses, in many cases, are worth less than they were a year ago. So why not worry a little.

RATTANSI: And your outlook, then, for the future, is pretty pessimistic. You expect there to be a property meltdown, for example.

FOX: I have no idea. I would say we're already having a definite housing recession and I would think these things usually go on for longer than a couple of months. But, yeah, meltdown is not the right word, but I would say that a couple more years of a really tough housing market, I'd say that is pretty likely.

RATTANSI: So why is the stock market doing so well?

FOX: Well, part of it is, the stock market is always playing this game of chicken with the Federal Reserve, and, basically, the economic slowdown has meant that the Fed hasn't felt the need to raise interest rates to fight inflation, and so the stock market is happy about that. The stock market likes low interest rates. Therefore, the market has held up.

RATTANSI: But for the small investor, for those, again, of us who have money in the stock market and are relying upon the market for our pensions and so on, how can we ever trust Wall Street again?

FOX: I can't hear a word that you said.

RATTANSI: Did we lose our audio connection? Justin Fox, can you hear me now?

I believe we've lost our audio connection. Perhaps we'll take a break and we'll try to resume contact in a moment.

(COMMERCIAL BREAK)

RATTANSI: Welcome back.

Through the wonder of live television, we were cut off in our prime with Justin Fox, editor-at-large of "Fortune" magazine.

And, Justin, the main point is, we've been burnt before by Enron. How can we ever trust Wall Street again? Most of us rely on Wall Street for our futures and our pensions and so on.

FOX: Well, we should never trust it completely, and that was sort of the problem, I think, in the late Nineties, is that people were putting too much confidence in the companies they were investing in on Wall Street.

And if you look now, even though the market is back up pretty significantly, the prices people are paying in terms of price-to-earnings ratio, which is the dollars you're willing to pay for a dollar of earnings, is significantly lower than it was five or six years ago. It's about half of what it was when Enron's meltdown began.

And so I would say investors are more cautious, and that's always a healthier situation. Dean Baker was talking before about the need for regulation, and I'll buy some of that. But in my view, the best corrective for bad behavior, like at a company like Enron, is suspicious investors, and there are more of those today than there were five years ago. And that's a good thing.

RATTANSI: But where do we look to for advice? "Fortune" magazine, for example, is one of those who were Enron's biggest cheerleaders. Did you learn a lesson? Can we trust you even about this sort of thing?

FOX: Yes, we were one of the cheerleaders. We were also the first publication to really begin raising questions about Enron, well before any of these problems became public. So I guess you could say, I don't know, if you read "Fortune" truly, religiously, you would have gone in at the right time and got out at the right time.

But I would agree that we in the business media were far too susceptible to hero worship back in '98, '99, 2000, and I think we're a little less susceptible now, although to tell our business stories we like to create heroes, and I don't know that that will ever go away.

RATTANSI: Justin Fox, thanks so much. Sorry, a bit shorter interview than we had expected.

That is this edition of INSIGHT. I'm Shihab Rattansi.

END

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