Enron Fallout

JIM LEHRER: Our Enron updates come from New York Times business columnist Gretchen Morgenson. Gretchen Morgenson, welcome.

GRETCHEN MORGENSON: Thank you, Jim.

JIM LEHRER: Today's developments first. Late today, Arthur Andersen fired its lead auditor on the Enron account. What was the reason given?

GRETCHEN MORGENSON: He had apparently called a meeting with the other folks who were on the Enron account and asked for an expedited effort to get rid of documents. Now this was on October 23 according to Andersen, which was shortly after the SEC notified the accounting firm that they wanted information from them.

JIM LEHRER: Now, is this a rare occurrence? Is this a no-no in the auditing business, in the accounting business?

GRETCHEN MORGENSON: Well, it certainly sounds like it. Now Andersen is saying that this was against its policies. We will, of course, hear from the partner himself, I'm sure, but the fact of the matter is it certainly doesn't smell right, doesn't pass the smell test. If the nation's securities regulators want information, why do you then rush to the shredder?

JIM LEHRER: Is there any word on what kinds of documents were actually shredded?

GRETCHEN MORGENSON: There isn't. There is very little detail. But you can only assume that these are documents that are damning in some way. They certainly wouldn't be likely to shred things that look innocent or that back up the accounting that the company did.

JIM LEHRER: All right. Now the other development today was the New York Stock Exchange's decision to delist... Did I get the term right? Is that what it's called?

GRETCHEN MORGENSON: Yes. That's right.

JIM LEHRER: Delist Enron. Why was that done?

GRETCHEN MORGENSON: Well, it really is a moot point. The company is in bankruptcy. These things typically take a while to unravel as far as the New York Stock Exchange is concerned, but the Exchange has certain levels of share... Number of shareholders, revenues, income earned that a company must meet in order to be traded on the Exchange. Obviously Enron no longer meets those standards, and it was only a matter of time after the bankruptcy filing that they would be delisted.

JIM LEHRER: Now didn't another company kind of take over its trading function today? Did that have anything to do with this?

GRETCHEN MORGENSON: No. That was very interesting, though, Jim. UBS, a large financial services firm which was the old Union Bank of Switzerland, agreed to take over Enron's so- called vaunted trading operation for zero amount of cash. So here is this operation that was supposedly so powerful, so profitable and they couldn't get anybody to pay a dime for it.

JIM LEHRER: So UBS, if it, in fact, makes any money, that money goes to... into the bankruptcy court to pay off creditors, right? Is that correct?

GRETCHEN MORGENSON: I believe a portion of it would, yes.

JIM LEHRER: But as a practical matter, does Enron even exist anymore as we sit here tonight?

GRETCHEN MORGENSON: Well, it does. Certainly there are people who are still employed there. I believe that they've only let go maybe 5,000 people. They had 20,000 employees. So as far as those workers are concerned, it still exists. The pipeline, I guess, is in the process of being sold. It is now in the bankruptcy courts, which, as you know, is a long and arduous process.

JIM LEHRER: Now, the other big development was last night. A memo was released by a House Committee. It was a memo written by a vice president of Enron to the Chairman, Kenneth Lay. She said among other things-- I had this in the News Summary but just to refresh everybody's memory-- "I am incredibly nervous that we will implode in a wave of accounting scandals." Now that was an important warning, was it not?

GRETCHEN MORGENSON: It was absolutely a huge red flag, and it apparently was either sent or written in the August period. That's important for a couple of reasons. The company's president, Jeffrey Skilling, left the firm on August 14, claiming to want to spend more time with his family. This normally sends up huge warning signals to investors if an executive at that level just sort of disappears. This memo was either being drafted or had been submitted right around that time. At the same time, Ken Lay, the chairman of the company, was reassuring Wall Street analysts that there was nothing wrong, that Mr. Skilling's departure had nothing to do with any accounting problems, any potential charges to earnings. And so to have this memo now surface that was at the same time that Mr. Lay was reassuring the world at large that everything was fine is certainly damaging.

JIM LEHRER: Damaging legally? Damaging in what way?

GRETCHEN MORGENSON: Well, damaging to his credibility because you have to say, "Why didn't you do something about it?" Now, they did hire a law firm to go and do some due diligence, but there's some question as to whether or not the law firm was told to be as aggressive as it should have been to get to the bottom of the matter. So it just calls into question Mr. Lay's claims to have been ignorant of any matters that were then contributor to the debacle and to the bankruptcy filing.

JIM LEHRER: Now in a more overview way, Gretchen, this document was made public by a House Committee, and they've got all kinds of documents. Is this what we're in for, these kinds of things are happening, the storm is going to be built even more so than it already has?

GRETCHEN MORGENSON: I think so. Unfortunately, this story has a lot of legs, Jim, and I think the reason why it's got staying power is because there's a sense among people in my profession who follow these companies that there are other situations out there where there is questionable accounting being approved by pliant accounting firms that have misled investors for a very long time. And with that suspicion sort of lurking or hanging over our heads, every sort of new wrinkle in the Enron story is going to have broader implications.

JIM LEHRER: Because the numbers are the underpinning of the confidence that must be there for people to participate in markets right?

GRETCHEN MORGENSON: Well, and as you know, we have had many, many newcomers to the stock markets in the 1990s that never were invested in stocks before. So people with their 401(k)s, their retirement savings in stocks, it is crucial that we have integrity in the accounting profession and in the stock market in general. So that is why this story has legs.

JIM LEHRER: Are we very close yet to a simple, real explanation as to how a company worth $100 billion could fall so far so quickly?

GRETCHEN MORGENSON: We are not. But we do know that the accounting for their business was almost certainly, if not outright fraudulent, misled everyone to the degree that they were a profitable company, to the degree that the revenues even were $100 billion. This is now all in question. And so when you realize that maybe they really weren't making $101 billion last year, then you can see that it could really crater quickly. And when you add on to it the amount of debt that they had amassed recently, that adds into the mix.

JIM LEHRER: And then, as you say, people now are going to say, "wait a minute, there are other companies out there that say they're worth $50 billion or $1 billion and maybe they're not."

GRETCHEN MORGENSON: Exactly.

JIM LEHRER: The dominos, the people are worried about the dominos.

GRETCHEN MORGENSON: That's right. Unfortunately, I think they have reason to be.

JIM LEHRER: On that wonderful, upbeat note, we'll leave it. Gretchen, thank you very much.

GRETCHEN MORGENSON: You're welcome.