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Insuring Share Values of Workers in Enron
Mike Bindner and I have had a private exchange that may be of interest
to those concerned with how to protect the equity stakes of workers in
future Enron-type situations. It comes from a proposal in my paper,
"The Federal Reserve Discount Window" that was published by the Journal
on Employee Ownership Law and Finance,
http://www.cesj.org/homestead/reforms/moneycredit/discountwindow.html.
It calls for Federally-provided portfolio insurance to cover a major
portion (maybe 75%-90%) of the fair market value of employer shares at
the time they were sold or contributed to an ESOP, KSOP, IRA, etc. This
would add another oversight authority with a stake in careful scrutiny
of companies issuing these shares, reducing future Enrons and giving the
insurer the right to sue corporate executives, members of the board of
directors and independent auditors for fraud or gross negligence or
abusive insider trading. The premiums would vary by risk categories
among covered employer companies. Who pays the premiums could be a
proper subject of collective bargaining.
Mike gave me permission to share our exchange below.
--- Begin Message ---
As long as you state that I agree with you on valuing stock for insurance
purposes at some percentage of the initial acquisition value.
Mike
In a message dated Tue, 15 Jan 2002 12:35:27 PM Eastern Standard Time, Norman
Kurland <thirdway@cesj.org> writes:
>
>
> Mike,
>
> I have proposed guaranteeing 75%-90% of the initial "fair market value"
> of the shares at the time they were purchased or contributed to the ESOP,
> CHA or other capital homestead vehicle. This would be hedge against
> the downside risk, no matter what the cause. It would not guarantee
> against an increase in value. The problem with using book value is
> that, with its debt, Enron today has no book value.
>
> In handling the corruption and abuse of insider information, the employees
> have a good class action suit to recover most of the bailout money from
> insider trading abuses. They could also recover damages from Andersen
> for gross negligence in auditing Enron books over the years. I also
> expect that Enron executives and Andersen auditors will also be subject
> to criminal fines and possible jail sentences.
>
> But the soundest principles for analyzing and avoiding future Enrons
> are "transparency" and "accountability", two goals of good governance that
> can best be addressed by democratizing corporate ownership through the
> Capital Homestead Act. Then shareholders and the unions and associations
> that represent them, through their representatives on corporate boards
> of directors, will have direct access to the books, governance and investment
> decisions, membership on audit committees, control over executive salaries
> and benefits, etc. Furthermore, they will have standing before
> the courts in shareholder derivative suits. And in the nation of
> owners envisioned under the Capital Homestead Act, voters will become more
> sophisticated about finance and other governance issues and will force
> government to enact reasonable regulatory control to minimize corporate
> violations of the common good.
>
> Regarding whether rank-and-file employees deserved their losses, it
> is unlikely most of those damaged by the wrongful behavior of the top
>executives
> and their negligent auditors knew what was going on. In fact, CEO
> Lay lied to them in fraudulent messages that things were about to improve.
>
> Enron is a wakeup call to question fundamental flaws in the Wall Street
> model of capitalism. This economic disaster should be a rallying
> call for COG and those committed to social justice to mobilize behind the
> "Just Third Way."
>
> Would you have any objection to my posting our exchange on COG's web
> site?
>
> Norm Kurland
>
> Center for Economic and Social Justice
>
>
>
>
>
> Mbindnerdc@aol.com wrote:
> Norm,
>
> I agree, though the question remains to what extent? Enron employees
> decry the loss of value from the inflated top price of their shares.
> I would not cover so much. In a world where we already had portfolio
> insurance, I would limit recoverability to the book value rather than the
> market value of the shares - or at most to the market value before Enron
> started hiding liabilities to inflate their stock price.
>
> This leads to an interesting question - how shocking was it to the employees
> that Enron had been cooking their books. Was it a tightly held secret
> or did the rank and file know what was going on. This may sound cold,
> but if they were in on the scam they deserve what they got.
>
> I wonder.
>
> Mike
>
> In a message dated Mon, 14 Jan 2002 7:57:28 PM Eastern Standard
> Time, thirdway@cesj.org writes:
>
> > This article from NYTimes.com
>
> > has been sent to you by thirdway@cesj.org.
>
> >
>
> >
>
> > I thought you'd find this interesting. We should be pushing
> for Federal portfolio insurance to ensure better Federal oversight and
> to cover at least part of the original value of employer shares.
>
> >
>
> > Norm
>
> >
>
> > thirdway@cesj.org
>
> >
>
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>
> >
>
> >
>
> > Andersengate
>
> >
>
> > January 14, 2002
>
> >
>
> > By WILLIAM SAFIRE
>
> >
>
> >
>
> >
>
> >
>
> > WASHINGTON -- Fed Chairman Arthur Burns, worried that the
>
> > impending collapse of Penn Central would roil the capital
>
> > markets, suggested that the Pentagon arrange a loan to
>
> > prevent bankruptcy. George Shultz, then the Nixon budget
>
> > director, argued that government intervention would send
>
> > the wrong message about risk-reward to our economic system.
>
> >
>
> >
>
> > The dispute was resolved when Bryce Harlow, the sage
>
> > speechwriter- adviser, entered the Oval Office and said to
>
> > President Nixon: "The board of Penn Central, in its
>
> > infinite wisdom, has just hired your old law firm to help
>
> > you decide. Mr. President, you can't touch this with a
>
> > ten-foot pole."
>
> >
>
> > Nixon took the advice not to meddle. The huge company went
>
> > bankrupt - and the markets quietly absorbed the shock. No
>
> > scandal touched the White House (until later).
>
> >
>
> > We had another non-intervention in the Enron collapse.
>
> > Kenneth Lay, chairman of the nation's seventh-largest
>
> > company and a longtime political contributor, called a
>
> > couple of Bush cabinet secretaries to reveal his rapid
>
> > unraveling. He was surely hoping for some government
>
> > succor. The Bush Treasury and Commerce secretaries, without
>
> > even consulting the president, decided not to mix in
>
> >
>
> > Then Robert Rubin, now a head of Citigroup, called a high
>
> > official at Treasury. It was consistent for the man who, as
>
> > Clinton Treasury secretary, arranged the bailout of Mexico
>
> > to ask for government help in shoring up the credit rating
>
> > of a customer that owed his bank $800 million.
>
> >
>
> > Again, nothing was done by the Bush administration to
>
> > intervene. Enron went down the drain - but the capital
>
> > markets survived. Many investors and employees learned the
>
> > hard way that capitalism is a risky business, but if the
>
> > taxpayer were to assume all such risk there would be no
>
> > market punishment for any management inefficiency or
>
> > corruption.
>
> >
>
> > As a card-carrying scandalmonger, I am moved to ask:
>
> > Where's the scandal? Democratic Representative Henry
>
> > Waxman, after eight years with his eyes tightly shut,
>
> > apparently thinks it scandalous that Bush's men - at the
>
> > first call from Mr. Lay - did not promptly step in to save
>
> > the company from the consequences of the greed or
>
> > predations of its managers. Bush is thus damned for what he
>
> > did not do.
>
> >
>
> > But at the same time, other scandalmongers are damning Bush
>
> > for what he may possibly have done - such as getting
>
> > briefed by anybody on his staff and thereby "knowing," or
>
> > by having taken political contributions from today's
>
> > villain back when Lay was a Houston hero.
>
> >
>
> > The dozen or so investigations may turn up something to
>
> > embarrass the White House, especially if Bush pulls another
>
> > "executive privilege" when Congress wants facts. But the
>
> > scandal I see in this corporate debacle is non- political;
>
> > it's professional.
>
> >
>
> > This affair shows the accounting profession all too often
>
> > to be in bed with the oldest profession. Accounting
>
> > standards have been frequently prostituted by the new Uriah
>
> > Heeps: these are executives in ever-merging firms afraid to
>
> > challenge their clients' phony numbers and secret
>
> > self-dealing because they might lose fees in the lucrative
>
> > consulting business they run on the side.
>
> >
>
> > These no-account accountants seem to forget that the "p" in
>
> > C.P.A. means "public." The Big Five are silent about
>
> > Andersengate because they are eager to become the Big Four
>
> > by carving up their competitor's carcass. That's why it's
>
> > harder to find a major bean-counter willing to condemn
>
> > publicly the failures of Arthur Andersen & Co. than to find
>
> > a top Muslim cleric willing to criticize Osama bin Laden.
>
> >
>
> > Although Andersen executives may try to cop a plea by
>
> > ratting on the client they so supinely and profitably
>
> > enabled, they must explain why, as the biggest bankruptcy
>
> > in history loomed, their supervisors were so eager to
>
> > remind those working on the Enron account to destroy
>
> > records.
>
> >
>
> > Self-dealing; asset-hiding; insider stock-dumping - all
>
> > these were supposedly beyond the ken of an audit committee
>
> > and legal counsel blindly reliant on the ethics and
>
> > standards of "professional" accountants. It's a scandal,
>
> > all right, and wrongdoers should pay in heavy civil damages
>
> > if not jail time.
>
> >
>
> > But based on what we now know, it's not a political
>
> > scandal. Bush's people, including former employees or
>
> > consultants of Enron, did right by refusing to bail a
>
> > campaign contributor out of its mess at public expense or
>
> > by misleading investors. Taxpayers should be grateful.
>
> >
>
> >
>http://www.nytimes.com/2002/01/14/opinion/14SAFI.html?ex=1012056138&ei=1&en=b19ad72b232e6860
>
> >
>
> >
>
> >
>
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--- End Message ---
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