It's impossible to cheat an honest man

Predictably, the Enron scandal generated more heat than light. A large company with scores of investors went bust, wiping out the savings of little guys and giving big companies who loaned to Enron a scare. The affaire Enron provided a convenient cudgel for populist politicians, who held the company up as an example of cowboy capitalism. Their analysis of the collapse blamed the greed of Enron's upper management, claiming that executives like Ken Lay, Andrew Fastow and Jeffrey Skilling had lied to investors about the financial health of the company and the numerous "special purpose entities" used to conceal a dwindling cash flow. The result of all the fallout was the massive (and massively expensive) Sarbanes–Oxley act, which attempts to smoke out "corporate criminals" by generating massive amounts of paperwork.

This analysis makes for a tidy narrative. It has all we want in a story: the (now lost) state of grace, the evil villains, the clear-cut crime and the well-deserved punishment. However, as this fascinating article by Malcolm Gladwell explains, this narrative is totally wrong and the conclusions it draws - about investors as well as executives - is completely misleading.

All the information about Enron's side deals, its "special purpose entities," its cashflow and its liabilities was right there, in black and white. In fact, the Wall Street Journal reporter who broke the story of Enron's dwindling cash flow derived all his information from publicly-available filings that any investor could request. There was no real deception- and no heroic digging for the truth. The signs that something was horribly wrong were all there for anybody to see - if they wanted to see it.

Every once in a while, scandals like Bre-X and Enron come along. And we all pretend to be shocked, shocked when the inevitable happens. But who is fooling who? The investors who lost their shirts were looking to make a quick buck without understanding anything about the company they invested in and their curiosity was drowned under a spirit of boosterism and avarice. Their investing behaviour resembled taking a flyer on the ponies rather than a business activity.

"You can't cheat an honest man; never give a sucker an even break, or smarten up a chump."