Have We Learned Nothing?

Does this feel like Enron d é j à vu ?
On the subject of mark-to-market, Enron was castigated, and rightfully so, for using this method of accounting to make up its numbers. But allowing financial institutions to pretend that mortgage-backed securities haven't declined in value isn't any better. In essence, you have the government saying, "It's OK! Make up your numbers with our blessing!" And then it's funny looking at the rating agencies: They had Enron rated investment-grade until four days before its collapse, and Congress held hearings about the problems with the ratings agencies. Here we are—however many years later— and the rating agencies stamped their AAA ratings on these financial instruments and then they blew up, and now Congress again held hearings on the problems with the rating agencies. Does that qualify as progress? It's déjà vu in a very scary way.

How do you compare the scale of what's happening now to Enron?
A good ruler is Enron's market capitalization at its peak—around $65 billion. If you compare that to losses that will be taken on mortgage-related securities, some say it might be in the trillions. It's just a totally different order of magnitude. With Enron, the employees lost their jobs, and investors lost money. A lot of people were relatively unscathed, but this is going to hit everybody. There are going to be layoffs, and the economy is going to shrink, I don't see how we avoid having higher taxes eventually. It's everybody's problem.

© 2008