Bank of America Corporate Jet - PowerPoint

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					           Econ 103 D

    Economics In The News
   “Taking Care of Business”
         The Enron Story
The Crisis in Corporate Capitalism
   Crotty Analysis and Video
           PRS Quizzes
“TAKING CARE OF BUSINESS”
Corporate Fraud Companies
 Enron                       Adelphia
 Tyco                        Global Crossing
 Quest                       Dynegy
 ImClone                     Sunbeam
 WorldCom                    Sysco
 U.S. Foodservices           Xerox
 Martha Stewart/Omni Media   First Boston Bank
 Bank of America
The Enron Towers
The Enron Story: Cast of
Characters
   Ken Lay, CEO
   Jeff Skilling, COO (Later CEO)
   Andrew Fastow, CFO
   Sherron Watkins, VP in Corporate
    Development and various other positions.
Ken Lay
 Ken Lay
• Born Tyrone, MO (pop. 100) 1942
• B.A and M.A: Economics University of
  Missouri. Phi Beta Kappa, President of
  Fraternity. PhD. Economics University of
  Houston
• Formed two close friendships, fellow student
  Rich Kinder, protégé of Pinkney Walker
  (economics professor)
• Lay became fascinated with markets and how
  they worked. He believed success went to the
  man who could predict evolutionary changes.
  Ken Lay cont…
• Job History: 1966 Senior Economist Humble Oil
  and Refining Co. (predecessor of Exxon). 1981
  President, Florida Gas. 1982 President and COO
  Transco, a Houston pipeline company. 1985
  CEO, Enron (Enron: merger of HNG and
  Internorth-Omaha)
• Politically Active: George Bush Sr., Ann
  Richards-Texas Governor, Senator Phil Gramm,
  George W. Bush
Ken Lay presents a silver platter to George H. W. Bush as
           sons George W. and Jeb look on.
Jeff Skilling
  Jeff Skilling
• Father sales rep for valve company.
• Childhood in Chicago
• B.A Finance-Southern Methodist University.
  M.B.A Harvard.
• Job History: Loan Officer, First City Bank.
  Partner, McKinsey & Co. Consulting (Houston
  Office). Enron used McKinsey as consulting
  firm. Skilling hired by Lay away from
  McKinsey.
Skilling‟s Dream
• Creating a new business model that could
  change American capitalism forever.
  Passion for commercial innovation in
  services. Initially hired to run Enron gas
  services.
Jeff Skilling and
Ken Lay
   Andrew Fastow
• Grew up in New Providence, NJ
• Father buyer for grocery/drug store, mother sold real
  estate.
• B.A. in Chinese and Economics, Tufts. M.B.A. Kellog
  School of Business, Northwestern University.
• Job History: Continental Bank. 1990 Director, Enron
  Gas Services, responsibility for raising “off-balance-
  sheet money”. 1996 Head, Enron Capital Management
New York Times, Oct 3, 2002
Sherron Watkins
• B.A. Accounting w/honors University of
  Texas-Austin.
• Job History: 1988 Accountant, Arthur
  Andersen. 1993 Director, Enron Gas
  Services. Served in various positions 1993-
  2001 including Vice President.
 Enron: Brief History
• 1980s one of the largest pipeline companies in
  North America. Moving natural gas from the
  gulf coast across the U.S.
• 1990s expanded to include finance operations
  for natural gas.
• Mid 1990s, started selling and trading electrical
  power. Battling across the country to
  deregulate entrenched electric utilities.
• Late 1990s took on internet/
  telecommunications and “broadband”.
Natural gas pipe line in east Texas during 1960‟s.
Enron Stock 1999-2003
         Enron Cast of Characters:
             Their Stock Sales
Name             Position            Shares Sold    Gross Proceeds
Ken Lay         Chairman Enron co.    4,002,259     $184,494,426
Jeff Skilling   CEO, Enron Corp.      1,307,678      $70,687,199
Andy Fastow     CFO                     687,445      $33,675,004
Robert Belfer   Bd. Of Directors      2,065,137     $111,941,200
Lou Pai         CEO, Enron Energy     3,912,205     $270,276,065
25 others       Executives            8,814,233     $519,405,578

                      Totals:        20,788,957    $1,190,479,472
“the scale and scope of the
corporate management
transgressions of the late 1990s
now coming to light, exceed
anything the U.S. has witnessed
since the years preceding the
Great Depression.”

The Wall Street Journal
Enron Stock Price
• http://excite.com/
CEO LAY, LAWYERS, ACCOUNTANTS
     SHOULD BE HELD LIABLE

 Enron Corp.'s former chief Ken
 Lay, its lawyers and accountants
 should all be held liable for claims
 against the bankrupt energy giant
 a bankruptcy court examiner said
 in a report filed on Monday.
 -Reuters News Service Nov. 25, 2003
Regulating Electricity in California
     1999-2000 Energy Crisis:
        Real or Contrived?
• 1990s CA first state to deregulate
  electricity. Goal: reduce rate payer bills by
  10%. Deregulated wholesale energy market
  kept price caps on retail side. Barred
  utilities from long term fixed price contracts
  forced them to buy in the spot market.
       1999-2000 Energy Crisis:
          Real or Contrived?
• Enron spent millions on supporting deregulation.
  Promised to deliver power more efficiently.
  Actually manipulated market to raise price.
• Enron:
  – Created false congestion on power lines.
  – Transferred energy in and out of CA to avoid price
    caps.
  – Charged for services never actually provided.
Enron: The Silver Peak Incident
• May 24th 1999, Timothy Belden, Enron
  Electricity Trader.
  – Tried to send 2,900 megawatts of power over a
    15 megawatt line to cause congestion.
    Normally would have received an electronic
    response which would have paid Enron to take
    its power off the line. On this day he got a
    phone call from the California‟s Independent
    System Operator.
Later Government Investigations
           Revealed
• CA used less energy in July 2000 than in
  the previous year.
• Demand in January 2001 was 10% lower
  than in the previous year.
• Power usage in blackout days was lower
  than in previous years.
• CA had built 170 new generation and co-
  generation facilities in the 1990s.
Historical Relations between Big
Business and Big Government
• Federal government awards large contracts
  and sets policies that can yield huge profits
  for big business
• Big business has huge resources that can be
  used to support and elect political
  candidates of their choice
• “The Revolving Door”
  (business gov. business)
President Dwight D. Eisenhower's
Farewell Speech to the Nation, 1961
Military Industrial Complex Speech
January 17, 1961          This conjunction of an immense military
                   establishment and a large arms industry is new in
                   the American experience. The total influence --
                   economic, political, even spiritual -- is felt in every
                   city, every State house, every office of the Federal
                   government. We recognize the imperative need for
                   this development. Yet we must not fail to
                   comprehend its grave implications. Our toil,
                   resources and livelihood are all involved; so is the
                   very structure of our society.
                          In the councils of government, we must guard
                   against the acquisition of unwarranted influence,
                   whether sought or unsought, by the military-
                   industrial complex. The potential for the disastrous
                   rise of misplaced power exists and will persist.
Corporate Fraud and the “New
Economy”: The Neoliberal
Paradox.
By Jim Crotty, CPE Economist
From The Popular Economist The Newsletter
for the Center for Popular Economics Fall
2002.
Liberal Definitions
• Free or Open
• One who is liberal (open minded or not
  strict) in the observance of orthodox,
  traditional or established forms or ways
  – Webster‟s Dictionary
Neoliberal System =


New Free Market System
1997-2000
• Stock Market Boom based on Fraud
  –   Enron
  –   WorldCom
  –   IBM
  –   ImClone
  –   Quest
  –   Accounting Firms (Arthur Anderson)
  –   Brokerage Firms (Merril Lynch, Smith)
      Barney)
What’s Wrong:
• Few bad apples vs. Whole barrel?
• Greed of few or structural changes?
• Which makes greed more destructive and
  destabilizing than before?
The Changes:
• Nat. Gov. regulated Domestic Business
  vs. International Corp. with free reign.
• Global rate of growth of goods and
  services declined in the 1980s and 1990s.
• Impossible for most large non-financial
  (NFCs) to achieve adequate profit most of
  the time.
The Changes: (cont.)
• Modern financial markets pressure NFCs
  to achieve ever-rising profits.
• Ownership of U.S. corps. changing from
  “patient” individual stock holders to
  “impatient” institutional investors.
• Corps. that fail to raise stock prices
  became vulnerable to hostile takeovers.
  Therefore, managers had to raise stock
  price or lose their jobs.
The Changes: (cont)
• Spreading use of stock options for management
  (right to buy company stock). Subsequent price
  increases generate capital gains for managers.
• SEC failure to regulate because of corporate
  political contributions.
• Hostile takeovers loaded NFCs with a trillion
  dollars of additional debt.
• Corporate cash flow diverted from productive
  investments to financial markets.
What‟s Going On?
• The Problem:
  – Major stock brokerage firms gave incorrect and
    misleading recommendations to investor
    customers for companies whose accounts they
    managed.

  – Salomon, Smith Barney; Merril Lynch; Credit
    Suisse First Boston
Video Tape


Corporate Fraud in America
The Proposed Solution
• Congressional action. The Sarbanes-Oxley
  Corporate Reform Act (7/02). Creates the
  Public Company Accounting Oversight
  Board.
• Non-Profit Corp. overseen by the SEC.
• Duties: Register public accounting firms,
  set standards, conduct investigations, can
  impose sanctions.
Webster, Herdman & Pitt
• John Biggs, Head of TIAA-CREF (College
  Investment Fund) first considered for Chair of
  Oversight Board. Pressure from lobbyists to nix
  his nomination (fear or over-activism).
• Webster appointed as Chair on Oct 25 th.
  Tells Pitt and Herdman (before appt.) that he
  headed audit committee for U.S. Technologies,
  whose CEO had been accused of fraud. Further
  irregularities involving Webster are discovered.
Markets Efficient If:
1. Identical products
2. Large number of buyers and sellers
3. B.&S. have perfect (accurate) information
4. No barriers to firms entering or leaving the
   market
5. Satisfactory government infrastructure
   Laws (and enforcement of laws) to prevent
     fraud
   Stable Monetary System
Corporate Fraud: Accounting and
Brokerage Firms
• Arthur Andersen
• Merrill Lynch
• Salomon Smith Barney
          Boiler Room:
A room staffed with telemarketers who
use illegal or high-pressure sales tactics to
sell stock, commodities, currency, or land,
for example.
Foreign Currency Fraud
• “With more than 1,000 victims, from small
  investors to large banks, the losses are in the
  millions.”
          – NYT, 11/20/03

• “When the F.B.I. placed an undercover agent in
  the foreign exchange world, posing as a bad guy
  with money looking for bad things to do, he had
  more criminal schemes thrown at him than he
  could imagine.”
          – James Comey. U.S. Attorney
• Mr. Comey: “similar rigged trading involving
  bank traders has been defrauding banks for as long
  as 20 years. That history and the fact that so many
  individuals could apparently pull off the rigged
  trading and get caught only after an F.B. I. agent
  became involved may serve as warning: the
  largely unregulated foreign exchange market, with
  trading volume of $1 trillion a day, is vulnerable,
  and banks‟ internal controls may not be strict
  enough.”
Mutual Fund Fraud
• Janus, Strong, Bank of America and Bank
  One charged with allowing big institutional
  clients to trade their funds after the market
  close.
        – Motley Fool Newsletter 11/21/03
Honesty in the U.S.A.
• Jessica Lynch
• Nate Haasis
Honesty in the U.S.A.
• Nate Haasis, Quarterback for Springfield
  Southeast High School (Illinois), set High School
  conference passing record after coaches rigged the
  pass to break the record.
• Haasis wrote to High School Football conference
  asking them to take the record back. “I didn‟t feel
  right having it.” “It‟s for past and present football
  players, I felt disrespectful when I had the record
  the way I got it.”
• A friend said “Haasis didn‟t want to be
  remembered for a 30-yard „given‟ pass; he wanted
  to be remember for the yards that he actually
  earned.”
SEC
• Chairman, Harvey Pitt, resigned 11/5/02
• Robert Herdman, Chief Accountant,
  resigned 11/8/02
• Chairman of New Accounting Oversight
  Board, William Webster, resigned 11/12/02.
“Webster Resigns as Head of
Board to Oversee Audits”
    New Panel is in Turmoil

    Move Plunges U.S. Response to
    Scandal at Corporations Further into
    Disarray.

    NYT 11/13/02
The Securities and Exchange
Commission (SEC)
• Primary Mission: Protect investors and
  maintain the integrity of security
  markets.
Rebecca Mark on Enron jet. She was named vice
        chairman of the Enron board.

				
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