Post-Enron Fixes Solved Nothing

By NICOLE GELINAS

Six years after Enron, we're right back where we started.

In 2001, politicians saw Enron's collapse as an unprecedented market failure needing an unprecedented remedy: the Sarbanes-Oxley corporate "reform" act.

Yet, as the mortgage crisis shows, no law can protect investors and the economy from catastrophic misjudgment — and Sarbanes-Oxley may have made things worse.
Enron failed because it overvalued its assets while undervaluing its liabilities. It was easy for Enron to do this because many of its assets were difficult to value. They were worth what Enron said they were — until the market decided otherwise.

By booking future profit immediately, Enron worsened its predicament. A mistake or a lie compounded over 20 years is far greater than one that covers only one year.
What's more, the company didn't disclose clearly enough, in hindsight, that it was funding precarious investment partnerships with its own stock — which it might have to replace with cash if the stock price fell.

Sound familiar? Until last spring, mortgage-backed securities were worth what their "securitizers" said they were worth, and it's obvious they disregarded, at minimum, some key risks to shareholders and mortgage-securities investors.

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