February 14, 2003
Clueless or criminal?

I've given my share of beatings to Kenny Boy Lay for his role in the Enron implosion. One of the main reasons why people like me have believed in Lay's culpability was his steady selloff of Enron stock in 2001, even while telling employees that it was never a better time to buy. What else could this be but sheer criminality?

Well, it could be utter, pathetic cluelessness, as this NYT article suggests. Ken Lay was selling off Enron stock because it was pretty much the only liquid asset he had, and he was in past his neck:

• When the falling stock price left him with too little collateral for his loans, he took several steps to delay selling Enron shares, like selling other investments and persuading a bank to accept an illiquid investment as collateral.

• That summer, Mr. Lay converted more than 200,000 Enron options into stock, but did not sell the shares. A result was a tax liability of several million dollars for an investment that proved worthless.

• That July 31, Mr. Lay stopped daily sales of Enron shares begun the year before under a Securities and Exchange Commission program for corporate insiders. A financial adviser said Mr. Lay believed the stock price was too low.

• In late September, before the crisis hit, Mr. Lay used a $10 million incentive payment to pay down some bank loans, essentially using cash to forestall the further forced sale of Enron shares.

• About the same time, Mr. Lay began to sell and even abandon private equity investments that required him to post additional cash — money he could have raised by selling Enron shares.

All told, experts said, the records indicate that Mr. Lay believed what he said when he told employees the stock was a good buy in August 2001.

"That trading pattern is consistent with Ken Lay sincerely believing that Enron stock had reached a trough and had nowhere to go but up," said Kevin J. Murphy, who specializes in executive compensation at the Marshall School of Business of the University of Southern California.

How did he get himself into this position in the first place? His portfolio had way too much Enron stock:

The records show that in 1997, Enron shares made up more than 90 percent of his liquid assets. Even his largest illiquid asset — a family partnership, in which he owned an interest then valued at $47.9 million — was largely invested in Enron.

His advisers said they pressed Mr. Lay to diversify, and in late 1999, he did so, largely with borrowed money.

Virtually all of Mr. Lay's marketable investments were pledged as collateral to back margin loans from institutions like PaineWebber, First Union and Compass Bank, a regional bank. He had multiple lines of credit at Bank of America, including a $40 million line for him and his wife, $10 million for a family partnership and $11.7 million to allow him to buy 2.5 percent of what became the Houston Texans football team.

Throughout 2000, those credit lines underwrote the purchase of new investments. Following his strategists' advice, Mr. Lay placed millions with money managers, including Goldman, Sachs; Cypress Asset Management: the TCW Group; and Fayez Sarofim & Company in Houston. Millions more went to mutual funds and other public investments.

And as Enron's stock price fell, he was subjected to more and more margin calls. To raise the cash to pay them off, he sold more shares of Enron stock.

So Kenny Boy had neverending faith that each day would be the day that Enron's stock price would bounce back, and he and his company would be back in clover. I guess this will ultimately lead to the conclusion that he really was out of touch, and not actively malicious. I'm not sure that this is better for his reputation than a conviction would have been.

By the way, it sure would've been nice to have known some of this while Lay was advising Dick Cheney on energy policy, wouldn't it? Not that we'll ever know what Lay actually advised Cheney to do, other than to keep his head down while addressing the ball and to order the cabernet with the pheasant.

Via Kevin Whited.

Posted by Charles Kuffner on February 14, 2003 to Enronarama | TrackBack

There is a fallacy in this reasoning - that if he was clueless he wasn't corrupt. He could have been both fully aware that he was running a house of cards, and of the belief he could continue to maintain it.

Posted by: Atrios on February 15, 2003 8:35 AM

i've been of the opinion for a while now that lay was clueless, not malicious. of course, given his his title and responsibility to the company, that would be criminally clueless, but i fear that is not a punishable offense.

fastow and skilling, on the other hand...

Posted by: erica on February 15, 2003 11:20 AM

Atrios, you're right, it could be both. If the feds ultimately don't try to make a criminal case against Kenny Boy, at least there's a plausible reason for it. As I said, I don't think this explanation does his reputation any favors.

Posted by: Charles Kuffner on February 15, 2003 12:22 PM