oldschool CxC

Monday, October 23, 2006

In this week in news (10/22-10/28)

Enrons skilling gets 24 yr, 4 mo, of home prison till they call him in

Enron's collapse in the fall of 2001 wiped out more than $60 billion in market capitalization and ruined the retirement savings accounts of thousands of former employees.

7 Comments:

Blogger Sony said...

I never understand that bit about destroying pensions. If the value was fake from day 1, why was it "lost"? If I give you a fake gold oz., did I rob you of $500?

5:10 PM  
Blogger REkz said...

If you work at a company, and your contract guarantees a pension of a certain $ amount, and then the company renegs on it's agreement to fulfill that, it's destroying people's lives.

Is it really that hard to understand?

Pensions are generally a 'virtual' benefit until an employee tries to collect. Few employees would think to (or would be able to) verify the existence of that benefit prior to using it.

9:59 AM  
Blogger Sony said...

It must be hard to understand because you completely missed it, Ari. You described a Defined Benefit Plan, not a Defined Contribution Plan. Defined Benefit PLans hardly exist in the private world anymore and have basically destroyed GM, Ford and other's balance sheets.

Enron Employees had Defined Contribution Plans, like a 401k, which means they and, if it wishes, the company contribute a defined amount ($2500, $10,000, etc) into the plan in a given year. Generally the employee has a menu of investment options. If those employees elected to invest in Enron, or Ford, or GM and then the stock tanked, that was a bad call.

If you read today's LA Times, you would've known better:

Anne Beliveaux, 64, who worked at Enron for 18 years, said she lost more than half a million dollars in retirement funds.

"Never in my wildest dreams did I think I'd be facing what I'm facing now, and that is: no retirement," she said. "It was all in Enron stock."
...
Sera said she lost money when Enron collapsed, but she blamed it on "shortsighted investment decisions I made. I don't blame Jeff Skilling…. It was my choice to put all my eggs in one basket."


The cited employees clearly verified that they poured their pension plans into Enron stock. It kept rising and they kept pouring money in, but the stock was never worth as much as they paid.

That is your free education for the day, so you can sound less stupid next time you say "Is it really that hard to understand?
"

10:24 AM  
Blogger REkz said...

I still don't see why your point was valid. "If the value was fake from day 1" b/c the company was submitting it's #'s to all kinds of verification and no-one reported it was untrue. The investors were misled.
Just b/c they didn't diversify doesn't mean that "blatant fraud not countered by any govt action until it's too late" is something everyone should plan for in their retirement.

Also, isn't a Defined Benefit Plan different from a Pension plan? I might be confused there.

For instance, w/Calif Teachers, when a teacher retires, they are guaranteed a specific $ amount from a pension fund based on # of years.

Crashing the stock is still ruining people's lives. Frankly, I still don't blame the workers -- b/c if they hadn't been bamboozled, they'd have $$$ in their hands.

A stock pension plan where employees control where their contributions go is a tad different. The company hasn't exactly renegged on the employees -- the exec's screwed them with a different technique.

When you say, "If those employees elected to invest in Enron, or Ford, or GM and then the stock tanked, that was a bad call", I find it interesting -- blaming the investors who work at the co when their stock tanks due to deliberate executive fraud.

You don't see blame going the other way & the employees as victims?

Huh! Interesting.

3:40 PM  
Blogger Erik said...

Enron stock went up due to deliberate executive fraud, then back down when that fraud was revealed. So the investors didn't lose anything, they were conned into buying something worthless.

The BS is when they say they "lost" $350K or whatever, if they are calculating based on some high stock price. They lost their original investment (plus an opportunity to invest and perhaps lose it elsewhere).

5:55 PM  
Blogger Sony said...

Erik's right. Suppose stock was trading at $100 per share, but the assets and earnings were only worth about $15 (A.D., I know you can't do it that way, but its an example). So what did the shareholder lose? $100 or $15? And what about the employee who retired, diversified and sold the shares at $100. Did the retiring employee dupe the buyer?

Of course the execs are at fault for pumping up the value under false illegal pretences. That's why they are in jail, and rightly so. But the employees are not entitled to recover the value of something that was never there and never theirs.

As for the other point, pensions come in 2 categories: defined benefit & defined contribution. Public service unions all have defined benefit (e.g., you get paid 80% of your last salary for the rest of your life). The private sector has almost entirely moved to defined contribution (e.g., we will contribute $10,000 for you to a 401k every year you work here).

If the company is healthy, or can just raise taxes indefinitely, Defined Benefit is way more employee-friendly because it offers a fixed dollar amount every year until you die. But, defined benefit plans bankrupts companies and employees don’t get paid. Its frequently an illusory promise to employees. If GM or Ford go down it will be because of their pension obligations.

Defined Contribution are portable and belong to employees so they take it to another job, they keep it if the company goes broke, etc. On the downside, without a bull market, it won’t add up to the same retirement as defined benefit. Plus, the employee has investment risk and makes decisions and may screw up. And if you live a really long time, you will run out of money. Defined Contribution is not a substitute, but only an enhancement, of overall retirement planning.

11:31 AM  
Blogger A. said...

one day, maybe, they will say that ('they should have known better') about the fiat dollar

12:15 AM  

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