By Arnold Kling
If Mr Delong emails me, I will be quite happy to put him in touch with reputable and knowlegeable people, not paid to do so, who believe that Skilling and Lay, at the very least, may be innocent.
She is responding to an assertion by Brad DeLong.
I am not an expert on Enron. I saw the movie “The Smartest Boys in the Room,” which is a documentary that tries as hard as it can to make the Enron executives look bad.
My sense is that Enron’s off-balance sheet transactions involved using their stock as collateral. If the stock fell in price, they had to put up more collateral. Thus, it was as if they were writing put options on the stock. When you do that, you earn income as long as your stock stays high, but once it starts to fall you get killed.
If I am correct about the underlying source of financial instability, then my guess is that very few people understood what the risks were. I would bet that most stock analysts, and the Enron executives themselves, thought that Enron had figured out a new, clever way to earn income, when what they were really doing was picking up nickels in front of a steamroller (which is how a good friend of mine describes the economics of writing out-of-the-money options).
In the movie, Enron’s use of market-value accounting was presented as an ominous, conspiratorial act. In fact, market-value accounting is the most informative way to present information on financial assets and liabilities whose market values change daily.
Unless the prosecution has a better case than the movie scriptwriters depict, if I were on the jury they could never get a conviction.