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Accounting Peer Review Gets More Scrutiny
The New York Times, 11/25/01 An Alternate Reality The New York Times, 11/25/01 Will New York Be Told, Once Again, to Drop Dead? The New York Times, 11/25/01 Dot-Com Is Dot-Gone, And the Dream With It The New York Times, 11/25/01 California Wary of Dynegy Bid to Buy Out Enron Energy: Both companies are p= rominent players in the state's power market. The move to combine their str= ength is raising some concerns. Los Angeles Times, 11/25/01 Enron's Troubles Could Spur Securities Reforms Los Angeles Times, 11/25/01 Enron Says It's Still in Talks With Possible Investors for Cash Bloomberg, 11/25/01 Enron Money Woes Raise Concerns Los Angeles Times, 11/25/01 Hooked On a Fast- Growth Habit; CEOs Reach for Double-Digit Results Despite= Downturn, and Some Are Making Costly Mistakes The Washington Post, 11/25/01 USA: Enron employees sue as pension savings evaporate. Reuters English News Service, 11/25/01 INDIA PRESS: Aditya Birla May Buy Enron's Dabhol Stake Dow Jones International News, 11/25/01 COMPANIES & FINANCE UK - Enron seeks survival pact to aid Dynegy's $9bn res= cue. Financial Times, 11/24/01 EQUITY MARKETS - Power companies pack more punches - WALL STREET. Financial Times, 11/24/01 WORLD STOCK MARKETS - Wall St loses shine off its blue chip rise. Financial Times, 11/24/01 Wait Until Dark The New York Times, 11/24/01 Heartened by Holiday Shopping, Shares Rise in Quiet Day The New York Times, 11/24/01 Dynegy Scrambles to Save Enron Deal Energy: Shares of the acquisition targe= t have fallen 45% since the merger was announced. Analysts say the companie= s might renegotiate. Los Angeles Times, 11/24/01 Lawsuit Slows MSN Broadband Roll-Out Internet: The action by partner Enron = hurts sales during important holiday season, analysts say. The service has = reached only 33 of the 45 targeted markets. Los Angeles Times, 11/24/01 Review could alter terms of Enron sale to Dynegy Chicago Tribune, 11/24/01 Business & Finance: Enron's dizzy fall from grace threatens disruption in U= S energy markets - Shares in the US's biggest electricity trader, Enron, ar= e down from dollars 90 to dollars 5 and it is under federal investigation. = How did it all go so wrong? Co Irish Times, 11/24/01 Enron price slides amid fear for rescue bid The Times of London, 11/24/01 Market Report: Investors fret over Barclays' exposure to troubled Enron The Independent - London, 11/24/01 Dynegy could renegotiate Enron bid --- Target stock sags to less than half = of offer's value The Toronto Star, 11/24/01 Enron's stock slump could mean deal is renegotiated: Shares off 45% National Post, 11/24/01 Dynegy may renegotiate deal Firms to finish examining Enron's books The Globe and Mail, 11/24/01 INVESTORS RETURN STUFFED AND READY TO BUY; BLUE CHIPS TURN IN A STRONG DAY,= REVERSING PROFIT-TAKING SESSIONS San Jose Mercury News, 11/24/01 DYNEGY, ADVISERS PORE OVER ENRON DETAILS; DEAL San Jose Mercury News, 11/24/01 WORKERS, NEST EGGS DEVASTATED Portland Oregonian, 11/24/01 Analysis: Travails of the Enron Corporation NPR: Weekend Edition - Saturday, 11/24/01 Dynegy's Right to Enron Pipeline May Be Disputed, Barron's Says Bloomberg, 11/24/01 Deal still on as Enron shares drop 6% Houston Chronicle, 11/24/01 Money and Business/Financial Desk; Section 3 INVESTING: DIARY Accounting Peer Review Gets More Scrutiny Compiled by Jeff Sommer 11/25/2001 The New York Times Page 8, Column 1 c. 2001 New York Times Company The accounting industry's watchdog group is examining the industry's ''peer= review'' process in light of enormous accounting problems at the Enron Cor= poration.=20 The group, called the Public Oversight Board, will meet next week to consid= er whether reviews of audits being conducted by accounting firms adequately= safeguard the public interest, according to its chairman, Charles Bowsher.= The session comes after revelations by Enron that it had overstated earnin= gs by nearly $600 million over four years and that it had inflated sharehol= der equity by $1.2 billion because of ''an accounting error.'' Arthur Andersen has been Enron's outside auditor for more than a decade, an= d its work has been submitted periodically to Deloitte & Touche for ''peer = reviewing.'' One such review is being conducted now.=20 Representative John Dingell, a Michigan Democrat, said in a letter to Mr. B= owsher that no Big Five accounting firm had ever issued a negative report a= fter a peer review. Mr. Bowsher told Bloomberg News that the Oversight Boar= d would ask: ''How can you have peer reviews and still have these kinds of = failures?'' Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Editorial Desk; Section 4 Reckonings An Alternate Reality By PAUL KRUGMAN 11/25/2001 The New York Times Page 11, Column 1 c. 2001 New York Times Company Most Americans get their news from TV. And what they see is heartwarming --= a picture of a nation behaving well in a time of crisis. Indeed, the vast = majority of Americans have been both resolute and generous.=20 But that's not the whole story, and the images TV doesn't show are anything= but heartwarming. A full picture would show politicians and businessmen be= having badly, with this bad behavior made possible -- and made worse -- by = the fact that these days selfishness comes tightly wrapped in the flag. If = you pay attention to the whole picture, you start to feel that you are livi= ng in a different reality from the one on TV. The alternate reality isn't deeply hidden. It's available to anyone with a = modem, and some of it makes it into quality newspapers. Often you can find = the best reporting on what's really going on in the business section, becau= se business reporters and commentators are not expected to view the world t= hrough rose-colored glasses.=20 From an economist's point of view, the most revealing indicator of what's r= eally happening is the post-Sept. 11 fondness of politicians for ''lump-sum= transfers.'' That's economese for payments that aren't contingent on the r= ecipient's actions, and which therefore give no incentive for changed behav= ior. That's good if the transfer is meant to help someone in need, without = reducing his motivation to work. It's bad if the alleged purpose of the tra= nsfer is to get the recipient to do something useful, like invest or hire m= ore workers.=20 So it tells you something when Congress votes $15 billion in aid and loan g= uarantees for airline companies but not a penny for laid-off airline worker= s. It tells you even more when the House passes a ''stimulus'' bill that co= ntains almost nothing for the unemployed but includes $25 billion in retroa= ctive corporate tax cuts -- that is, pure lump-sum transfers to corporation= s, most of them highly profitable.=20 Most political reporting about the stimulus debate describes it as a confli= ct of ideologies. But ideology has nothing to do with it. No economic doctr= ine I'm aware of, right or left, says that an $800 million lump-sum transfe= r to General Motors will lead to more investment when the company is alread= y sitting on $8 billion in cash.=20 As Jonathan Chait points out, there used to be some question about the true= motives of people like Dick Armey and Tom DeLay. Did they really believe i= n free markets, or did they just want to take from the poor and give to the= rich? Now we know.=20 Of course, it's not all about lump-sum transfers. Since Sept. 11 there has = also been a sustained effort, under cover of the national emergency, to ope= n public lands to oil companies and logging interests. Administration offic= ials claim that it's all for the sake of national security, but when you di= scover that they also intend to reverse rules excluding snowmobiles from Ye= llowstone, the truth becomes clear.=20 So what's the real state of the nation? On TV this looks like World War II.= But though our cause is just, for 99.9 percent of Americans this war, wage= d by a small cadre of highly trained professionals, is a spectator event. A= nd the home front looks not like wartime but like a postwar aftermath, in w= hich the normal instincts of a nation at war -- to rally round the flag and= place trust in our leaders -- are all too easily exploited.=20 Indeed, current events bear an almost eerie resemblance to the period just = after World War I. John Ashcroft is re-enacting the Palmer raids, which swe= pt up thousands of immigrants suspected of radicalism; the vast majority tu= rned out to be innocent of any wrongdoing, and some turned out to be U.S. c= itizens. Executives at Enron seem to have been channeling the spirit of Cha= rles Ponzi. And the push to open public lands to private exploitation sound= s like Teapot Dome, which also involved oil drilling on public land. Presum= ably this time there have been no outright bribes, but the giveaways to cor= porations are actually much larger.=20 What this country needs is a return to normalcy. And I don't mean the selec= tive normalcy the Bush administration wants, in which everyone goes shoppin= g but the media continue to report only inspiring stories and war news. It'= s time to give the American people the whole picture. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Money and Business/Financial Desk; Section 3 MARKET WATCH Will New York Be Told, Once Again, to Drop Dead? By ALEX BERENSON 11/25/2001 The New York Times Page 1, Column 2 c. 2001 New York Times Company NEARLY 11 weeks after the worst terrorist attack in history, New York is di= scovering just how much the rest of the United States cares about the natio= n's business and financial center.=20 Not much. Early hopes that the nation would rally to help the city overcome the devas= tating economic impact of Sept. 11 appear to have been misplaced. Not only = is Gov. George E. Pataki's ill-advised pitch for $54 billion in federal aid= all but dead, apparently the city will struggle to get the $20 billion tha= t President Bush promised.=20 Yes, many of the city's economic problems are self-inflicted. With a munici= pal work force of 250,000, New York employs one-seventh as many people as t= he federal government, excluding the armed forces. To support that bureaucr= acy, the city has the highest taxes of any local government in America. Dev= elopment is absurdly difficult, even outside Manhattan. Roads and bridges a= re a mess.=20 But all of that was true before Sept. 11, and New York somehow made do. In = fact, a record number of new jobs were created here in 2000, according to S= teven Malanga, senior fellow at the Manhattan Institute, a conservative pol= icy group. ''In the last seven or eight years, the city's economy has rebou= nded in a way that's very encouraging,'' he said.=20 The attacks changed all that. By discouraging people from coming to crowded= places like Times Square, terrorism strikes at the heart of New York, said= Mitchell Moss, director of the Taub Urban Research Center at New York Univ= ersity. ''New York's economy is built on interaction,'' he said. The indust= ries that have suffered most severely are New York's most important employe= rs: tourism, media, advertising and financial services, which was due for c= uts even before the attacks.=20 Last month, the city lost 79,000 jobs, a record. The slowdown has blown a h= ole in city and state budgets, which are precariously balanced at the best = of times. The Citizens Budget Commission, a nonpartisan fiscal watchdog org= anization, predicts that the city will face a budget deficit of $4 billion = next year.=20 Mayor Rudolph W. Giuliani has asked city agencies to cut their budgets by 1= 5 percent. More cuts are coming. Libraries will close earlier. Parks will b= e dirtier. And city workers, who had been asking for big raises, will have = to accept layoffs or pay cuts.=20 Even so, the city cannot get out of this hole alone. With taxes already too= high, it cannot reach much deeper into its citizens' pockets. And there ar= e limits to how much it can cut services. A little federal help would go a = long way toward righting the city's budget gap and restoring confidence in = New York.=20 Mr. Moss suggests the federal government take two steps to show its commitm= ent to the city. First, it should help create a hub in Lower Manhattan that= would connect transit lines from New Jersey and Long Island with the subwa= y. Second, it should support ''security zones'' where high-profile securiti= es firms and media companies could congregate if they wished.=20 For now, at least, it appears that Washington will let New York sink or swi= m on its own. That decision is foolish for both economic and symbolic reaso= ns.=20 If New York cannot right itself, the securities firms that are among its mo= st important employers are as likely to move jobs to London or Hong Kong as= Chicago or Atlanta. And if New York's streets grow dirty and its crime rat= e soars, other countries may question Washington's promises of aid to those= that try to deter terrorism. Will a government that does not bother to aid= its largest city in the wake of the worst terror attack in history really = do much for Islamabad or Cairo?=20 ''What do we have a federal government for if it's not to give aid to state= and local governments, at the level people live and get most of their gove= rnment services?'' asks James A. Parrot, an economist at the Fiscal Policy = Institute, a labor-backed research organization.=20 It is worse than unseemly that lawmakers are offering to pass a tax bill th= at will give billions of dollars to companies like Enron and I.B.M. while r= efusing to send New York money that that city has already been promised. It= is (whisper this word) unpatriotic. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Style Desk; Section 9 Dot-Com Is Dot-Gone, And the Dream With It By JOHN SCHWARTZ 11/25/2001 The New York Times Page 1, Column 2 c. 2001 New York Times Company MARK LEIBOVICH recalled the day in 1999 when he showed up early for an appo= intment at a Washington dot-com. Mr. Leibovich, a reporter for The Washingt= on Post, was there to interview the company's executives. ''I got there jus= t in time to see the C.E.O. himself wheeling a foosball table into the lobb= y'' to give the impression that the high-tech firm possessed the desired qu= antum of wackiness that its Silicon Valley counterparts are famous for.=20 That is so over, and so much more over, even, than before. The popular obse= ssion with the dot-com revolution, fading for more than a year, seems to ha= ve simply winked out since mid-September, as firemen and warriors have beco= me the new heroes, and e-commerce's whiz kids are consigned to the cultural= boneyard. Not much more than a year ago, boosters of the New Economy and their true b= elievers in the press were claiming to have changed all the rules. Not just= in tech-fetish magazines like Wired, but in self-styled cultural arbiters = like New York magazine, which declared the 1990's the ''e-Decade.'' In a 19= 99 cover story, the essayist Michael Wolff -- himself a failed dot-com exec= utive -- announced a brave new world. ''There is, at the elusive center of = the e-experience, the fantasy that we might become free of economic laws,''= he wrote. ''All it takes to make otherworldly riches is the will and desir= e.'' It wasn't enough to make money. They had to make history.=20 Now they themselves are history. Each day, the old idols seem to fade furth= er into the dim past, barely recollected in a country where the languages o= f ''revolution'' and ''warfare'' are no longer just business metaphors. Thi= s is the next step after the bursting of the dot-com economic bubble -- the= bursting of the cultural bubble, the end of the nerd as a crossover hit, o= f the I.P.O. zillionaire as role model to college students.=20 The changing of the guard can be seen in little things. Like Henry Blodget,= the industry analyst who became famous for predicting early that Amazon.co= m would reach $400 a share, announcing that he is taking a buyout and leavi= ng Merrill Lynch at the grand old age of 35.=20 Like the growing wave of books that focus not on the dot-com path to riches= but on the wild plunge into the abyss. Having failed to sell their dreams,= they are now attempting to sell their failure. A documentary of the rise a= nd fall of a Silicon Alley company was chronicled in ''Startup.Com'' by Seb= astian Nokes, released last winter. Books by former dot-com executives are = arriving in stores. Two of the first are ''A Very Public Offering: A Rebel'= s Story of Business Excess, Success, and Reckoning'' by Stephan Paternot, f= ounder of Theglobe.com, and ''Dot.bomb: My Days and Nights at an Internet G= oliath,'' by J. David Kuo. Another is coming soon: ''Boo Hoo,'' the chronic= le of the spectacular failure of Boo.com, the luxury fashion site that burn= ed through $185 million of its investors' cash and had an online life of ju= st six months, told by its profligate founders.=20 Did we mention that Mr. Blodget is writing a book?=20 For the most part, however, the flood of dot-com failure stories is being m= et with a national yawn. The tell-all books have bounced around the Amazon.= com rankings without making inroads into best-seller territory. And why not= ? Because former idols have feet of clay. In ''A Very Public Offering,'' a = book written as amateurishly as the company was run, did we need the image = of Mr. Paternot dancing the night away in plastic pants?=20 Ellen DeGeneres's new sitcom, ''The Ellen Show,'' is built around the notio= n of an executive returning to her hometown after the collapse of her dot-c= om, but the show sits at the miserable ranking of 93rd for the season -- be= hind ''Emeril,'' the celebrity chef comedy -- despite Ms. DeGeneres's own c= onsiderable appeal.=20 To Amitai Etzioni, a sociologist at George Washington University, the count= ry is experiencing an abrupt cultural shift away from the libertarian, indi= vidualistic values that were expressed in the celebration of the New Econom= y and toward more old-fashioned values in the wake of the terrorist attacks= , when government is not The Problem and people are not The Market. ''There= 's been a sea change,'' he said. The surge in charitable giving and blood d= onations after Sept. 11, he said, underscores ''the sense that you're willi= ng to give priority to the common good, to public safety and public health.= ''=20 Paulina Borsook, the author of ''Cyberselfish,'' a critical look at dot-com= values published last year, said: ''People really crave a reminder of huma= n bonds that have to do with sacrifice and fellowship and getting to know e= ach other over time. It's not about changing jobs every six months and gett= ing stock options.''=20 In the 90's, college students hoping to emulate Marc Andreessen of Netscape= and other geek stars migrated to Silicon Valley or New York's Silicon Alle= y with thin resumes and visions of Testarossas dancing in their heads. That= 's all changing, said Thomas T. Field, director of the Center for the Human= ities at the University of Maryland, Baltimore County. ''Many of the young = adults that I see coming to campus now say they want fulfilling jobs, not j= ust ways of earning money,'' he said. ''Sounds awfully familiar, when you c= ome from the 60's generation.''=20 Professor Field suggested that protests over globalism, and the sense of se= curity that flourished during the boom, made young people more willing to q= uestion the status quo and to take chances. During the I.P.O. frenzy, he sa= id, students could not wait to get out of school and begin earning. This ye= ar, many of his students have chosen to study abroad in China, Nepal, India= and Egypt.=20 The country is in dot-com denial, Ms. Borsook said, adding, ''No one wants = to admit that they were caught up in it,'' an attitude she calls ''I don't = want to think that I drank the Kool-Aid.''=20 Good riddance, said Thomas Frank, the author of ''One Market Under God: Ext= reme Capitalism, Market Populism and the End of Economic Democracy.'' The b= ook is a withering attack on the ideas underlying the selling of the New Ec= onomy, which he says co-opted hipness and the language of populism to serve= greed and gain. The book has come out in paperback with a new afterword. '= 'It's going to take some time for it to sink in,'' Mr. Frank said. ''The Do= w isn't going to go to 36,000, and the dot-coms aren't going to come back -= - and a lot of people lost a lot of money.''=20 Though dot-com executives might seem irrelevant these days, the technologie= s they sold, by and large, are not, pointed out Paul Saffo, an analyst at t= he Institute for the Future in Menlo Park, Calif. ''People haven't stopped = using the Internet,'' he said. ''The fact is that it is changing the world,= and it has changed the world.'' People now expect to be able to buy a book= or make an airline reservation in the middle of the night, ''and it's wash= ed into the rest of their lives.''=20 Kevin Kelly, who as a longtime editor of Wired magazine helped create the h= eroic ethos surrounding dot-com entrepreneurs, acknowledged ''it came tumbl= ing down with the towers.'' But Mr. Kelly insisted that these people would = rise again. The generation of tyro executives who crashed and burned ''got = better business education than they could if they had gotten a Harvard M.B.= A.,'' he said. ''They didn't set out to learn, but, boy, they are much smar= ter now.'' He predicts that the last decade has been the ''layup'' for a tr= ue cultural revolution to come -- he could not be specific, and his words m= ay strike many as more dot-com hyperbole.=20 It takes a special kind of gall for the same people who argued that the ''l= ong boom'' suspended the laws of economics, and even unraveled the cycles o= f history, to fall back now on analysis of historical cycles to support the= ir arguments.=20 But to believe any less goes against the American grain, argued Jason McCab= e Calacanis, the editor of the now-defunct Silicon Alley Reporter. The dot-= commer, seen today as a scam artist, will be reborn, he said, smarter and t= ougher, because he represents optimism itself. ''It's the belief that the f= uture -- the individual's future and the future of the economy -- are going= to be better in five years than they are today.''=20 But still. Take a look at the book ''Radical E'' by Glenn Rifkin and Joel K= urtzman, which offers ''Lessons on How to Rule the Web'' after the bust. It= extols companies that truly understand how to marry the World Wide Web to = business. ''After five tumultuous years of hype and hysteria,'' the authors= promise, ''the real advent of the Web and e-business is now.''=20 One of the book's chief examples of a company that does it right, Enron, ha= s been in the news a lot lately, though not because of astute exploitation = of e-commerce. No, Enron -- which trades energy via the Web -- has seen its= stock collapse 90 percent. Photos: The giants of e-commerce, who walked among us, are culturally extin= ct now with a war on. (Reuters)(pg. 1); NO SURE THING -- Ellen DeGeneres, l= eft, with Cloris Leachman, in a sitcom about a dot-commer who has moved bac= k home. The show ranks 93rd. (Monty Brinton/CBS)(pg. 4)=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business; Financial Desk California Wary of Dynegy Bid to Buy Out Enron Energy: Both companies are p= rominent players in the state's power market. The move to combine their str= ength is raising some concerns. NANCY RIVERA BROOKS TIMES STAFF WRITER 11/25/2001 Los Angeles Times Home Edition C-1 Copyright 2001 / The Times Mirror Company Dynegy Inc. of Houston has been hailed as a hero on Wall Street, as it ride= s to deliver cross-town rival Enron Corp. from its self-inflicted ills and = save energy markets from serious distress through its proposed $9-billion b= uyout of the world's largest energy trader.=20 But in California, Dynegy has a different image. Dynegy, co-owner of several Southern California power plants, has been the = quietest member of the "Big Five" group of energy producers commonly portra= yed as villains by California politicians and regulators. Gov. Gray Davis a= nd others have called Dynegy and its fellow energy suppliers "gougers" and = "pirates" who manipulated the market and charged too much for electricity, = precipitating California's blackout-studded energy crisis.=20 Partly because of the heightened political sensitivities to all things surr= ounding California's energy problems, the state is expected to play a centr= al role in the proposed merger between Dynegy and Enron, antitrust experts = and others say. The state's Attorney General's office already has begun scr= utinizing the proposed combination.=20 If it merges with Enron, another favorite Davis target, Dynegy would be a p= owerhouse in energy trading, electricity generation and natural gas transmi= ssion. And the combined firm would have a strong presence in California, wh= ich some find troubling.=20 "I would hope that the people who look at the antitrust implications would = consider this one carefully," said state Sen. Steve Peace (D-El Cajon), one= of the architects of California's failed foray into electricity deregulati= on, who became a fierce critic of power producers and resellers. "If anythi= ng, Dynegy would be in an even stronger position to be able to manipulate m= arkets than it was before."=20 Dynegy agreed on Nov. 9 to buy Enron through a stock swap valued at about $= 9 billion and to inject $2.5 billion into crumbling Enron provided by cash-= rich ChevronTexaco Corp., the San Francisco-based oil company that owns nea= rly 27% of Dynegy. But a continuing trickle of disturbing financial disclos= ures keep slamming Enron's stock price, indicating that investors have thei= r doubts that the deal will be completed as negotiated.=20 The Enron purchase would hurl Dynegy, which is about a quarter of Enron's s= ize, into the top ranks of energy merchants.=20 In California's energy world, Dynegy already is a key company. At every sig= nificant twist in the state energy crisis, Dynegy was there, although not a= s visibly as some of the other power-plant owners and electricity resellers= .=20 Enron and Reliant Energy Inc., also of Houston, and Duke Energy Corp. of Ch= arlotte, N.C., drew particular fire from politicians and consumer advocates= during the last 18 months as energy leaped higher. But Dynegy also was acc= used by the state's grid operator of reaping excessive profit through its e= lectricity bidding practices and, to a lesser extent, by holding back some = electricity from its Southern California power plants.=20 In addition, Dynegy signed long-term electricity contracts with the state t= hat have been singled out by critics for containing potentially lucrative c= lauses requiring that the state pay emissions costs and other costs.=20 The California Independent System Operator, which runs the long-distance po= wer transmission grid serving much of the state, has asked federal regulato= rs to ban Dynegy from selling power at market prices. Cal-ISO has made the = same request concerning the other major power plant owners: Duke, Reliant, = Atlanta-based Mirant Inc. and AES Corp. of Arlington, Va., which markets it= s power through an agreement with Williams Cos. of Tulsa, Okla.=20 "Dynegy has sort of slid by under the radar," said Doug Heller of the Found= ation for Taxpayer & Consumer Rights, a consumer activist group.=20 "Not only did Dynegy do very well, but particularly its trading and marketi= ng division did very well over the course of the last two years. It profite= d wildly."=20 For its part, Dynegy rejects accusations of market manipulation, saying it = has played a constructive role in the California marketplace, stepping forw= ard to be one of the first companies to sign long-term contracts with the s= tate when its need was greatest despite an electricity debt of $300 million= owed the company by the state and its utilities.=20 "Dynegy has acted ethically and responsibly in California," said Dynegy spo= kesman John Sousa. "The fundamental problem in California is that supply di= d not keep up with demand."=20 "Dynamic Energy"=20 Accused of Overcharging=20 Dynegy was created in 1984 as a natural gas trading operation known as Natu= ral Gas Clearinghouse to take advantage of the deregulation of natural gas = prices. Under Chief Executive Chuck Watson, the company has expanded into n= atural gas processing and distribution and electricity generation, changing= its name along the way to Dynegy, a word created by combining "dynamic" an= d "energy."=20 In California, Dynegy owns power plants capable of generating 2,800 megawat= ts of electricity through a partnership with NRG Energy Inc. of Minneapolis= . (A megawatt can supply about 750 average homes with electricity.)=20 The state's big investor-owned utilities were required to sell some of thei= r power plants by the landmark 1996 deregulation legislation. By the end of= 1998, the Dynegy/NRG partnership had purchased three large power plants in= Long Beach, El Segundo and San Diego and a collection of 17 small "peaker"= plants from Southern California Edison Co. and San Diego Gas & Electric Co= .=20 Under the arrangement between the partnership, NRG operates the power plant= s and Dynegy markets the electricity from them. It is Dynegy's bidding prac= tices in selling that power into state markets that put it, along with othe= r energy producers, on the wrong side of the state grid operator and federa= l energy regulators.=20 Among the allegations:=20 * In a report released in March, Cal-ISO accused energy producers and resel= lers, including Dynegy, of overcharging Californians by $6.7 billion betwee= n May 2000 and March 2001. Power suppliers have denied the allegations. The= report also found that Dynegy reaped about $32 million in "monopoly rents"= between May and November of last year, or profits beyond what a competitiv= e market would bear. That was the fourth-highest total for any company note= d in the report. Enron was ranked sixth, taking $27.9 million in such profi= ts.=20 * Cal-ISO said Dynegy maximized profits primarily through a practice known = as "economic withholding," or bidding electricity at prices so high that th= ey would be rejected, thereby pushing up the price charged for the remainin= g generation sold into the market. Dynegy also did some "physical withholdi= ng," Cal-ISO said, meaning that the company withheld electricity supplies t= o drive up the price.=20 * Dynegy was accused last April in hearings before state legislators of hoa= rding space on a key natural gas pipeline into California in 1998 and 1999,= causing natural gas prices to soar. Dynegy executives testified that the c= harge was untrue.=20 * When federal regulators ordered $125 million in potential refunds for the= first four months of the year, Dynegy's portion was the largest among the = power sellers named, representing slightly more than one third. Dynegy said= its prices were justified by high natural gas prices, emissions costs and = other factors.=20 Dynegy President Stephen Bergstrom said in April that the company was "unfa= irly and inaccurately accused of withholding power from the California mark= et."=20 "As we have repeatedly communicated to California policymakers and regulato= rs and to industry officials, we remain ready and willing to generate and s= ell power to any and all buyers at fair and reasonable prices when they are= able to provide appropriate assurances that they will fulfill their obliga= tion to pay for those purchases."=20 A recent report by the state Department of Water Resources backs up Dynegy'= s assertions that its prices have been in line with the rest of the market.= =20 During the first three months of this year, after sky-high prices pushed Ed= ison and PG&E so close to insolvency that the state had to step in and buy = power for their customers, Dynegy sold power to the DWR at an average price= of $239.63 per megawatt-hour for electricity. That was slightly below the = average of $268.90 per megawatt-hour charged by all sellers.=20 Dynegy portrays itself as a minor player in the California market, represen= ting about 4% of the state's generation.=20 But Cal-ISO, in asking federal regulators to revoke Dynegy's authority to s= ell power at market rates, said "Dynegy has profited systematically from th= e exercise of market power to the significant harm of California's electric= consumers and economy." A decision is pending.=20 Officials reviewing the Dynegy-Enron merger will closely review the compani= es' operations in California.=20 Although Enron owns no power plants in California, it is believed to have l= ong-term contracts with some generators, although spokesman Eric Thode refu= sed to detail them.=20 In addition, Enron has a hand in 25% of the energy trades around the nation= , with a significant portion of that in California. Thode would not detail = California operations, citing company policy.=20 Finally, Enron controls an undetermined amount of natural gas, which is use= d to generate about one-third of the state's electricity, through its trans= western pipeline, which crosses into California, and through natural gas ma= rketing and trading arrangements.=20 It is those largely unregulated energy trading operations that have many en= ergy watchdogs worried. They say that middlemen such as Enron and Dynegy ca= n drive up the price of power by reselling it at higher prices each time.= =20 A lawsuit filed in May against the Big Five generators by Lt. Gov. Cruz Bus= tamante, acting as a private citizen, described it this way: "The Dynegy tr= ading floor, working with the trading floors operated by Williams, Mirant, = Reliant and Duke Energy is one of the principal tools the defendants used t= o inflate the price of electricity within their respective markets, as well= as throughout the state of California."=20 "These defendants engaged in trading of electricity futures, forwards, opti= ons and other risk products that had the effect of manipulating and inflati= ng the price of electricity within their respective markets," the suit char= ged.=20 "These defendants engaged in 'megawatt laundering,' in which they made trad= es with the primary purpose of inflating the costs of electricity within th= eir respective markets."=20 State Is Examining Proposed Merger=20 California Atty. Gen. Bill Lockyer has begun examining what effects such a = merger would have on California, spokeswoman Sandra Michioku said. The Fede= ral Trade Commission and the Federal Energy Regulatory Commission also will= scrutinize the merger in a process that Dynegy and Enron expect will take = no more than nine months.=20 Senate Energy Committee Chairwoman Debra Bowen (D-Marina del Rey) said she = plans to urge FERC to look beyond traditional measurements of how much the = companies own in the market to examine "inputs" into the market such as gas= pipeline capacity controlled by the companies and gas trading by Dynegy an= d Enron.=20 "It really raises many questions about how the market works," Bowen said.= =20 Opposition by California could be a severe hindrance to the merger, said Ga= rret Rasmussen, a lawyer with Patton Boggs in Washington, D.C., and formerl= y a Federal Trade Commission antitrust investigator.=20 The state, if it chooses, could play as pivotal a role as it has in negotia= tions over the antitrust settlement between the federal government and Micr= osoft Corp., he said.=20 "While this administration has been quite tolerant of mergers ... an action= by the California attorney general could have a significant chance of succ= ess," Rasmussen said.=20 Merger Might Reopen Contract Negotiation=20 The proposed merger might give California leverage to renegotiate its power= contract with Dynegy, which contains the unusual provision that the state = would pay for any emission costs that the company incurred, said V. John Wh= ite, director of the Center for Energy Efficiency & Renewable Technologies = in Sacramento. Dynegy's large San Diego plant lacks crucial pollution contr= ol equipment, he said.=20 "The California attorney general needs to carefully examine Dynegy's enviro= nmental stewardship activities and renegotiate that provision in the long-t= erm contract," White said. "Dynegy has a Texas, the-least-we-can-do attitud= e as far as the environment is concerned."=20 David Freemen, the former Los Angeles Department of Water & Power general m= anager who helped negotiate Dynegy's and other long-term contracts, said th= at while opportunities to renegotiate may present themselves, the agreement= s, now maligned as too expensive, were key to stabilizing the electricity m= arket. Freeman praised Dynegy for its part in that process.=20 "There's a difference between companies that bargained hard with us and rea= ched agreement--like Dynegy, Calpine and Williams--and those that were reac= hing for the moon and we didn't reach agreement," Freeman said. "Dynegy kne= w that they wanted to do business in California, and do it in a businesslik= e manner." PHOTO: Enron chairman and chief executive Kenneth Lay, left, and to Chuck W= atson, chairman and chief executive of Dynegy, announce the companies' prop= osed merger during a news conference in Houston.; ; PHOTOGRAPHER: Associate= d Press=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business; Financial Desk JAMES FLANAGAN Enron's Troubles Could Spur Securities Reforms James Flanigan 11/25/2001 Los Angeles Times Home Edition C-1 Copyright 2001 / The Times Mirror Company Ultimately, the fall of Enron Corp., the onetime rising star of the energy = industry, may be remembered as a landmark in the annals of securities law a= nd shareholder rights.=20 The firm's practices are under investigation by the Securities and Exchange= Commission. Enron is the focus of numerous shareholder lawsuits that seek = to recover damages from the $60-billion plunge in the company's value in th= e last year. The Enron case could result in new securities laws, experts say. It also co= uld result in massive damage awards because of the extent of stockholder lo= sses. Shares sold at more than $84 apiece a year ago, and at $36 a month ag= o before the emergence of hidden losses sent the price reeling downward to = current levels below $5 a share. (The stock closed Friday at $4.71 on the N= ew York Stock Exchange.)=20 Significantly, two suits against Enron charge that the firm's top executive= s breached their fiduciary duty of loyalty and prudence by failing to infor= m Enron employees of dangers to the company's finances while those employee= s held Enron stock in their 401(k) retirement plans.=20 The firm's troubles raise fundamental questions of what a company owes shar= eholders in the management and understandable disclosure of its accounts.= =20 But Enron's predicament also goes to the heart of the U.S. financial system= , says former SEC Chairman Arthur Levitt. Enron "represents a lack of the k= ind of disclosure that is fundamental to maintaining confidence in U.S. pub= lic markets," Levitt says.=20 Enron, technically speaking, disclosed in annual reports and proxy statemen= ts for 1999 and 2000 the existence of partnerships that in some cases "acqu= ired debt and certain equity securities of certain Enron subsidiaries." But= it did not disclose the significance of the partnerships, nor did it conso= lidate their transactions in its reports to shareholders and the SEC.=20 Its references to the partnerships were in footnotes to financial statement= s, written in the arcane legal language typical of such documents. For exam= ple, disclosure of one partnership, LJM Cayman, read in part: "LJM received= 6.8 million shares of Enron common stock, subject to certain restrictions = and Enron received a note receivable and certain financial instruments hedg= ing an investment held by Enron."=20 Enron entered into at least 33 partnerships, attracting investments from pe= nsion funds and other investors in return for pledges of Enron stock at a g= uaranteed value. One partnership held 12 million Enron shares, which at one= point were worth more than $1 billion.=20 Yet until this year, Enron treated the partnerships as insignificant to its= overall business, and so they were not required to be included in its over= all accounts.=20 By treating its partnerships as non-consolidated subsidiaries, Enron could = report lower debt burdens than it actually had, thus strengthening its cred= it and enabling itself to grow into the largest energy trader in the world.= =20 Enron became a pioneer of energy trading, a way of using financial techniqu= es of trading forward commitments in natural gas and electricity to establi= sh future prices on long-term supply contracts. As the business boomed, Enr= on's revenue soared, from $20 billion in 1997 to $100 billion in 2000. Thro= ugh three quarters of this year, the firm was on course to exceed $200 bill= ion in revenue.=20 But in October, Enron announced that it had lost more than $600 million in = the third quarter and that it needed to reduce shareholder equity by more t= han $1 billion due to transactions with one of its partnerships.=20 Then on Nov. 8, Enron restated its accounts back to 1997, acknowledging tha= t some of its partnerships should have been included in company accounts al= l along. The restatement resulted in a reduction of reported profit by more= than $500 million. Enron's board of directors and auditors had ordered the= restatement, the firm said.=20 The stock price fell further, lawsuits ensued and Enron sought refuge in a = merger with Dynegy Inc. Enron's financial position and stock price have wea= kened since the merger announcement Nov. 9., so the Dynegy deal may go thro= ugh at a reduced price, says analyst Stanley Foster Reed, who runs MergerCe= ntral.com, an online information service.=20 But the question remains of how such a large, significant company could col= lapse with so little advance notice.=20 Enron was a prominent company, not least because of Chairman Kenneth Lay's = connections to the White House as formal energy advisor to the first Bush a= dministration and as informal advisor to the current Bush administration.= =20 The firm had more than 20,000 employees before recent layoffs, and it had m= illions of investors through the holdings of pension funds such as the Cali= fornia Public Employees' Retirement System, the college teachers retirement= plan TIAA-CREF and major mutual funds. Yet for all its prominence, Enron's= disclosures about its business were inadequate. "Disclosure" sounds like a= technical term, but it is the principle behind the laws passed in 1933 and= subsequent years to regulate securities markets and protect the public.=20 Companies issuing stock to raise financing from public investors are requir= ed to disclose accurate and complete information about their business and t= o have accounts certified by independent public accounting firms. The SEC, = created in 1933, could not stop a company from issuing stock, but it could = make it disclose all relevant facts about risks in its business.=20 The laws were written in the midst of the Great Depression, which followed = the 1929 stock market crash. They were designed to remedy abuses such as th= e case of Charles Mitchell, head of City National Bank (a predecessor firm = of today's Citgroup), who sold his own company's shares short--that is, he = bet on their price declining--just before the crash, without informing othe= r shareholders. Before securities laws, Mitchell had no legal requirement t= o disclose his activities; once the laws were passed, all top managers and = directors of public companies had such legal, fiduciary duty.=20 The Enron case probably will lead to new laws regulating investments in sub= sidiaries, experts say. The SEC staff has contemplated such regulations in = the past but never made them law.=20 And the fallout from Enron could lead to tighter restrictions on firms putt= ing their stock in employee retirement accounts. Also, it could lead to tig= hter regulations on statements by top managers on the condition of the busi= ness.=20 "This will be a case, with major issues of concealment from shareholders," = says San Francisco attorney Steven Siderman, who is preparing a class-actio= n lawsuit against Enron and Arthur Andersen, Enron's accounting firm.=20 Enron executives gave no indication of the company's troubles as late as Au= gust, when Jeffrey Skilling, president and chief executive for only six mon= ths, abruptly resigned. In response to questions of trouble in the company,= Skilling said, "There's nothing to disclose. The company's in great shape.= "=20 Lay, who stepped back into the top post, told employees in August that Enro= n's business was strong. "We've got a lot of great stuff going on and we're= not getting credit for it in the marketplace, but we will," Lay said.=20 However, both Lay and Skilling had been selling Enron stock for more than a= year at that point, Lay cashing out more than $140 million in stock option= s and Skilling more than $60 million in options.=20 Meanwhile, employee 401(k) accounts, heavily laden with Enron stock, were f= rozen this year because the firm changed account managers. Employees were s= tuck as the stock plummeted.=20 The principle behind securities laws is that management of a public company= , with so many employees, pensioners and other institutions depending on it= , is a public trust.=20 The charge in the lawsuits being filed against Enron is that the firm, its = executives and directors betrayed that trust.=20 Everyone is entitled to a fair trial, and Enron and its executives will sur= ely have many days in court in the months and years to come in which to def= end against the charge of betrayal of shareholders and employees.=20 The Enron case will be a landmark.=20 *=20 James Flanigan can be reached at jim.flanigan@latimes.com. GRAPHIC: Restated and Mostly Reduced, Los Angeles Times;=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Enron Says It's Still in Talks With Possible Investors for Cash 2001-11-25 17:36 (New York) Enron Says It's Still in Talks With Possible Investors for Cash Houston, Nov. 25 (Bloomberg) -- Enron Corp. said talks are continuing with potential investors for an infusion of as much as $1 billion, as the biggest energy trader tries to avoid a collapse of its planned purchase by Dynegy Inc. An investment would ease concern that Enron's weakened finances may prompt Dynegy to pull out of or renegotiate the terms of the transaction, which is valued at $23 billion in stock and assumed debt. Enron is seeking an additional $500 million to $1 billion in cash but wouldn't divulge details. ``We are not going to discuss the particulars of who we are talking to,'' said Enron spokeswoman Karen Denne. Shares of the Houston company fell by 48 percent in the past three trading sessions. At Friday's closing price of $4.71, the stock sells for less than half the $10.85 that Dynegy is slated to pay in the acquisition. That's a sign investors are skeptical the transaction will go through as planned. Enron is likely to have approached Kohlberg, Kravis Roberts & Co., the Blackstone Group and the Carlyle Group for a private equity investment, said industry analyst David Snow of PrivateEquityCentral.Net. The firms have declined to comment. On a conference call Nov. 14 Enron Chief Financial Officer Jeffrey McMahon said the company is in talks with several private investors and expects to receive $500 million to $1 billion from these sources. On Wednesday, Enron got a three-week reprieve from lenders on a $690 million note due this week, giving the company more time to restructure its finances. Dynegy Chief Executive Chuck Watson said he was ``encouraged'' by the commitment to extend the note payment, as well as the closing of a $450 million credit facility. He said Dynegy remained committed to the purchase. Enron already received $1.5 billion in cash Nov. 13 from ChevronTexaco Inc. as part of the Dynegy buyout agreement. In return, Dynegy will acquire preferred stock and other rights in an Enron unit that owns the Northern Natural Gas pipeline. Barron's reported over the weekend that Dynegy may have a difficult time walking away from the deal because its right to the pipeline might be challenged by J.P. Morgan Chase & Co. and Salomon Smith Barney Inc., who accepted the asset as collateral for $1 billion in loans to Enron. Dynegy spokesman John Sousa declined to comment on Enron's attempts to secure financing or whether more cash for Enron is a condition of keeping the merger alive. Enron's dealings with affiliated partnerships have led to a federal investigation of the company, which restated its earnings and saw its credit ratings cut. The company said in a Securities and Exchange filing a week ago that it has less than $2 billion in cash and credit lines left. --Mark Johnson in the Princeton newsroom (609) 750-4662 Business; Financial Desk Enron Money Woes Raise Concerns 11/25/2001 Los Angeles Times Home Edition C-5 Copyright 2001 / The Times Mirror Company How fitting that the sanctimonious Kenneth Lay, who arrogantly lectured Cal= ifornia's electricity consumers this past spring on the "realities" of the = deregulated 21st-century energy environment, has seen his company fall prey= to that very same arrogance ["A Visionary Fallen From Grace," James Flanig= an, Nov. 10].=20 While Californians allow themselves a wry smile over such news, the U.S. Ju= stice Department should be building a case to "escort" Lay and his cohort J= effrey Skilling to a prison cell for pocketing some $200 million from conve= rting stock options at prices vastly over-inflated by their "cooking the bo= oks" at Enron over the last five years. Noel Johnson=20 Glendale=20 *=20 California taxpayers are out of billions of dollars due to a failed concept= that deregulating the electric industry would save us money by bringing us= the "benefits" of a free market managed by private enterprise.=20 Enron, one of the free market energy companies which we were supposed to de= pend on to give us electricity at a reasonable cost, has apparently just "l= ost" $1.2 billion in equity along with an "unexpected" loss of $618 million= ["Enron in Takeover Talks With Dynegy," Nov. 8]. The implications are clea= r--Californians have been gouged and one of the companies receiving the new= found wealth has amazingly "lost" it.=20 Clearly, private industry is not the panacea. How about going back to a reg= ulated monopoly?=20 Stephen Rynas=20 Duarte Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Financial Hooked On a Fast- Growth Habit; CEOs Reach for Double-Digit Results Despite= Downturn, and Some Are Making Costly Mistakes Steven Pearlstein Washington Post Staff Writer 11/25/2001 The Washington Post FINAL H01 Copyright 2001, The Washington Post Co. All Rights Reserved At this point, they almost can't help themselves -- it's become an addictio= n for the top executives of Corporate America.=20 Delivering double-digit earnings growth year after year is no longer simply= what corporate re-engineers call a "stretch goal" for an organization, or = a rare achievement to be celebrated. It's become a mandate, a benchmark, a = test of corporate manhood, an expectation hard-wired into the corporate cul= ture -- a narcotic that company leaders reach for the way most people reach= for an aspirin. Never mind that the economy is contracting, or that prices are falling and = profit margins are getting squeezed, or that most industries are unlikely t= o grow more than 5 percent a year even after the recovery is here. The name= of the game these days is boosting the stock price, and the surest way to = do that is to promise -- and deliver -- double-digit profit growth to Wall = Street's cadre of analysts and money managers.=20 It's not just in the tech and telecom sectors, where the inflated growth ex= pectations first took root. The addiction to double-digit growth has spread= across the corporate landscape to firms in older, mature industries desper= ate for the "growth company" moniker that qualifies them for Wall Street's = highest reward: a stock price equal to 20, 30, even 40 times their expected= annual earnings.=20 In the 1990s, "we went through a period of extraordinary high growth in pro= fitability, and both managers and stock analysts have unthinkingly come to = the conclusion that that was the norm," said Michael Jensen, a professor of= finance at the Harvard Business School. "Top-level management came to beli= eve they could get a big company to grow 20, 30, 40 percent year after year= -- it was insanity. And in the process of trying to make that real, rather= than acknowledging it was a transitory phenomenon, more than a few wound u= p destroying shareholder value rather than enhancing it."=20 Jensen said that it is now common for Wall Street earnings expectations to = be the starting point for corporate budgeting and strategy-setting rather t= han the result of it. "Nothing could be more irresponsible," he said.=20 James Paulsen, chief investment strategist at Wells Capital Management in M= inneapolis, says this fascination with high growth rates peaked in 1999, at= the height of the stock market boom, when only 50 stocks in the Standard &= Poor's 500-stock index -- the hottest 50 growth companies -- actually went= up in value. In fact, these nifty 50 went up so much so that they lifted t= he overall market indexes with them. The other 450 stocks declined.=20 "At that point, investors were only paying for growth," Paulsen said. "Divi= dends, good cash flow, reliability -- they all meant nothing."=20 "If you were just growing at a stodgy 8 or 9 percent a year, you were negle= cted, ignored," said Jeremy Siegel, finance professor at the Wharton School= of Management at the University of Pennsylvania. "You couldn't get good va= luations."=20 In desperation, boring old electric utilities refashioned themselves into "= merchant energy companies," while highly profitable pork producers added ne= w product lines in order to be viewed as ready-to-eat food companies. And p= erfectly good retail companies threw millions of dollars into misguided Web= ventures.=20 With the dot-com bust and the broader stock market collapse over the past y= ear, many executives, investors and analysts claim to have learned their le= sson and reduced expectations for growth. But according to Siegel, Paulsen = and other experts, expectations remain unreasonably high by historical stan= dards. Many of those executives, investors and analysts believe business to= be in a temporary lull before the "norm" of double-digit growth reasserts = itself sometime next year.=20 "Most people's expectations are still way too optimistic," said Bill Miller= , the legendary manager of Legg Mason's Value Trust, a $12 billion mutual f= und.=20 David Nadler, chairman of Mercer Delta Consulting, says this "tyranny of gr= owth" continues to lead too many companies to expand too quickly, make ill-= advised acquisitions or diversify out of their areas of expertise. "The exp= erience on that is that their shareholders wind up paying dearly for those = mistakes," he said.=20 Indeed, many of the celebrated corporate crackups of the past year -- think= of Conseco Inc.'s costly foray into manufactured-home financing, Providian= Financial Corp.'s debacle with sub-prime credit card lending, Freightliner= LLC's truck glut and the record $50 billion write-off of acquisition costs= by JDS Uniphase Corp. -- came about as a result of companies trying to pus= h earnings growth to the limit.=20 Corporate executives certainly have plenty of incentive to play the growth = game, whether consciously or unconsciously. Most have multimillion-dollar c= ompensation packages that include bonuses, stock and stock options, all tie= d directly to growth in earnings and share price. And a rising stock price = gives them a valuable new currency -- currency that can be used to buy shor= t-term earnings growth through mergers and acquisitions and to offer valuab= le stock options when recruiting top management and technical talent.=20 The stock option has a particularly pernicious impact, according to David M= orrison, vice chairman of Mercer Management Consulting Inc. and co-author o= f "The Profit Zone." Options become more valuable as the price of the compa= ny stock rises above the point at which the options are issued. On the othe= r hand, if things go bad, it doesn't matter how much the price of the stock= goes below the "strike price" -- the value remains zero. As a result of th= is asymmetry between upside potential and downside risk, says Morrison, it = is common for executives to take bigger risks with their companies than the= y otherwise would have.=20 Ego also plays a role. Chief executives who deliver year after year of doub= le-digit earnings growth wind up being lionized in business books, on magaz= ine covers and on cable-TV news shows. They are invited to serve on other c= orporate boards and to speak at investor conferences organized by celebrity= analysts. Their boards of directors give them wide latitude in running the= company.=20 By contrast, CEOs who don't have a good growth story to tell, or can't deli= ver on it, risk finding themselves in early retirement.=20 Jeff Garten, dean of the Yale School of Management, recently interviewed 40= of the leading corporate chief executives for a new book, "The Mind of the= CEO." And more often than not, Garten said, the executives told him off th= e record that while they knew the expectations about earnings growth are of= ten unreasonable and unsustainable, they had no choice but to participate, = or risk being dismissed as someone who simply "doesn't get it."=20 "The system penalized anyone who didn't play the game," Garten said. As a r= esult, executives find themselves on a treadmill -- always in a desperate s= earch for ways to deliver the next increment of growth that will justify th= e unrealistic earnings expectations in which they themselves were complicit= .=20 Analyst William Steele said he has seen it time and again in the consumer p= roducts sector that he follows for Bank of America Securities Inc., as comp= anies that had always been "solid singles hitters" suddenly started swingin= g for the fences.=20 "What you've seen is companies making ill-advised acquisitions, abusing the= ir balance sheets [by taking on too much debt or issuing too much stock] an= d under-investing in their brands," said Steele.=20 Take the case of Freeport, Ill.-based Newell Co., which for more than 30 ye= ars had enjoyed steady earnings growth by buying up underperforming housewa= res companies and "Newellizing" them -- bringing in new management, cutting= costs, scrapping unprofitable products, consolidating distribution and win= ning more space on retail shelves. But by the late 1990s, after 75 acquisit= ions that included Calphalon cookware, Levelor window blinds and Rolodex ca= rd files, the number of good turnaround prospects had dwindled. And with gr= owth in sales of consumer products slowing to single digits, Newell executi= ves needed something that would keep them in double-digit territory.=20 That something, they thought, was Rubbermaid, for years one of the most res= pected companies among executives and investors, but one that had stumbled = badly beginning in 1996. It was far and away Newell's biggest acquisition, = bought with newly issued Newell stock valued at $5.8 billion, a 50 percent = premium over Rubbermaid's market price at the time.=20 The Rubbermaid deal closed in the spring of 1999, and Newell Rubbermaid's f= inancial performance has declined ever since, a reflection not only of the = slowing economy but of problems within the company itself. Total profits fo= r the combined firm are barely higher than they were before the acquisition= , and because of the debt taken on and new shares issued to finance the pur= chase, the best measures of financial performance -- earnings per share and= return on assets -- have both declined. After the company repeatedly faile= d to meet the quarterly sales and growth target it had promised Wall Street= , chief executive John J. McDonough was fired in October of last year.=20 Given that history, the current economic uncertainty and continued weakness= in quarterly earnings, one might think that Newell's new executive team wo= uld steer clear of making grand promises to Wall Street. But in June, after= barely six months on the job, the new chief executive, Joseph Galli Jr., t= old Wall Street analysts that a restructuring program he had instituted wou= ld allow the company to post a 15 percent earnings increase in 2002. At $26= , analysts say the stock price now reflects an expectation that Newell Rubb= ermaid will meet this double-digit growth target.=20 In an interview last week, William T. Alldredge, Newell's chief financial o= fficer, explained that the 15 percent growth target for next year was reaso= nable because the company's profits this year, against which next year's wi= ll be compared, are so depressed. Going forward, however, he acknowledged t= hat growth rates would be closer to 10 percent than 15 percent, and they wo= uld come from squeezing more profit out of existing brands rather than thro= ugh acquisitions.=20 "I'm not sure we see the enormous upside potential that we once did," said = Alldredge, who insisted, nonetheless, that Wall Street should continue to v= alue Newell Rubbermaid as a "growth company."=20 To this day, "old-fashioned" chief executives such as Warren Buffett remain= puzzled as to why executives still can't resist the urge to promise invest= ors any particular level of earnings growth, given all the uncertainties of= running a business. In the annual report to shareholders of his Berkshire = Hathaway Inc. in February, he noted that only a handful of companies have e= ver been able to sustain 15 percent earnings growth for more than a decade.= Such promises, he said, not only spread "unwarranted optimism" among inves= tors, he said, but "corrode" behavior by top executives -- in some cases be= havior so corrosive that it spills over into deceptive accounting. As it tu= rns out, the chief executives of Sunbeam, Xerox, Waste Management and Enron= all lost their jobs in recent years after major-league earnings overstatem= ents were uncovered during their watch.=20 (Buffett's Berkshire Hathaway is a significant investor in The Washington P= ost Co., which, like Berkshire, provides no earnings guidance to Wall Stree= t investors.)=20 James Johnson, the former chairman of Fannie Mae, has heard all these criti= cisms, and can even add a few of his own. But he said that for every compan= y that overpromised and overreached, there were others where the focus on e= arnings growth has led to breakthrough innovations, successful new corporat= e strategies and big gains in productivity.=20 "It's what makes American capitalism so unique -- and so successful," said = Johnson, whose ability to deliver on a promise of double-digit earnings gro= wth in every year but one led to a dramatic increase in Fannie Mae's stock = price during his tenure. It also made Johnson a very rich man.=20 "It's a tricky balance," said David Winters, president and chief investment= officer of Mutual Series Fund Inc., a New Jersey-based mutual fund. "You d= on't want companies to be sleepy, or set the bar so low that they can easil= y step over it. But you don't want companies that overpromise and underdeli= ver."=20 Certainly no chief executive took the goal of posting double-digit earnings= growth each year more seriously than John F. Welch Jr., who recently retir= ed as chairman of General Electric Co. On Jack Welch's watch, division mana= ge
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