geert on Sat, 16 Feb 2002 03:55:02 +0100 (CET)

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[Nettime-bold] from the dotcom observatory

hi all,

it's been a busy period, here at the observatory. Where to start? The Enron
case has turned into a mega/meta dotcom bust of yet unknown proportions.
>From early on, during dotcommania, it was becoming clear what crucial,
manipulative role auditing / consultancy / accounting firms such as Andersen
were playing. With the VC they were the most pushing and hyped up types and
had an incredible strategic knowledge, going from one company, preparing for
their IPO, to the next. However, calls to regulate (let alone criple) this
industry were not heard al that much once the tech wreck set in. Apparently
the dotbombs were too tiny, and not significant enough. It had to take major
bankrupcy scandals in other sectors in order to give people a general wakeup
call about the speculative nature of contemporary capitalist accounting
practices. In Australia for instance there are three (or more) cases all
pointing in the direction of fraudulant auditing: the collaps of the second
biggest insurance firm HiH, the telco One.Tel and Ansett airlines. But it
was only the Enron case in the USA which has drawn the attention of the
global news media to the accounting issue. In this edition there are only a
few ENRON pieces. I am trying to keep up with all the ENRON-related material
but it's hard. The rest of this issue is dealing with various dotcom
reconstructions and shifts in ideologies. Don't forget to read the piece of
Kevin Kelly, one of the most aggresive pushers of dotcom schemes, now
turning religious (which he always was, anyway). It's a classic case for
psycho analysts, comparable to former communistists and others, like
Milosevic, so skilled in the denial of the their own role in history.

1. This Time it's Different-Dotcom Documentary on ABC (Australia)
2. PBS Dot Con Documentary
3. Kevin Kelly: The Web Runs on Love, Not Greed
4. Global Crossing hits the Iceberg
5. Ditherati, January 30, 2002
6.Drudge Report on Global Crossing Bankrupcy

7. Richard L. Berke: Greed, Pain, Excesses (NYT)
8. David Shaw: Media Missed Clues to Enron's Troubles (LAT)
9. Evolution, Enron-style by Amol Sarva (


This Time it's Different
Dotcom Documentary on ABC (Australia)

It became like capitalism on steroids." An insider recalls the days of
dotcom euphoria when the world just couldn't get enough of companies that
held so much promise but did so little business.
A year on from the height of dotcom delirium, it's time to assess what drove
the boom and subsequent - some say inevitable - bust. Four Corners asks how
fortunes and nest eggs were lost and what lessons can be extracted from the

Business reporter Ticky Fullerton tells the story of the dotcoms by
retracing the wild journey of Spike, a creative Australian outfit whose
internal credo was "We're Spike, you're not!"

Led by the mercurial Chris O'Hanlon, Spike rode the hype and exuberance of
the boom before crashing back to earth. It was one of many operations in
which paper millions were made overnight and vanished just as quickly.

"The whole investment premise for Internet stocks was pay through the
nose.and don't worry about it because there will be a bigger idiot than you
who will actually pay a higher price than you did," says one analyst.

Another insider paints a word picture of boardroom meetings with mining
executives chasing a piece of the action: "There would be the
rubescent-faced, advanced waistlined, resplendent silk-tied mining veterans
who of course were only too capable of extolling the virtues of the boom at
large, but invariably when the questions became more specific they deferred
to an individual almost in the shadows, who invariably was thinner, more
pallid and much more young who would be their IT geek."


2. PBS Dot Con Documentary
Shown recently in the US, "Dot Con" on the PBS TV channels.

"For the last year and a half, both government regulators and private
 have been investigating whether the go-go markets of recent years were
steeped not
 just in excessive speculation but fraud, whether investment bankers and
 houses concealed conflicts of interest and deliberately manipulated stock
 Did the biggest names on Wall Street violate the public trust?"

    Dot Con
      Original airdate: January 24, 2002
      Written and Produced by
      Martin Smith

      Saran Silver

      NARRATOR: Buried in the debris of September 11th are the case files of
a wide-ranging investigation by the Securities and Exchange Commission
involving some of the biggest banks on Wall Street. Now those cases are
being reassembled and pursued. Tonight on FRONTLINE, the story of a scandal,
an investigation delayed but not destroyed.

      There's hope on Wall Street that the worst is over, that last year's
market collapse and the September 11th attacks are history, that in the new
year, investors will forget the past, regain their faith and come back

      But a shadow still hangs over Wall Street. For the last year and a
half, both government regulators and private attorneys have been
investigating whether the go-go markets of recent years were steeped not
just in excessive speculation but fraud, whether investment bankers and
brokerage houses concealed conflicts of interest and deliberately
manipulated stock prices. Did the biggest names on Wall Street violate the
public trust?

      MEL WEISS, Attorney: CS First Boston, Goldman Sachs, Morgan Stanley,
Merrill Lynch- I mean, these are the biggest players. And that's what makes
this so shocking, that it could infect even institutions of that size. These
are revered institutions in Wall Street.

      ARTHUR LEVITT, Former Chairman, SEC: A bubble environment brings out
the basest qualities of all the players. The kinds of guidelines that
monitor corporate behavior tend to be more flexible at a time of excess, and
it feeds upon itself.

        NEWSCASTER: This was generally a good day for investors-

      NARRATOR: Just a couple of years ago, Americans sat mesmerized as the
investment bank's stock analysts went on television and touted stock after
stock after stock.

        HENRY BLODGET, CIBC Oppenheimer: AOL, Yahoo,

        ANTHONY NOTO, Goldman Sachs: EToys has really created a very strong
brand awareness-

      NARRATOR: It was Wall Street's version of a telethon.

        SASHA SALAMA, CNNfn: shot up today-

        BILL TUCKER, CNNfn: Looks like we're on track to hit a billion
shares today.

        PETER JENNINGS, ABC News: Internet stocks drove a powerful surge on
Wall Street today. The Dow-

      NARRATOR: At the heart of it was the mad scramble by bankers and
venture capitalists to take hundreds of unprofitable young Internet
companies public.

        JAY HOAG, Technology Crossover Ventures: But I think the long
opportunity really is to bring the customer interface to your doorstep.

        BETSY STARK, ABC News: Some say the Internet is so revolutionary
that the usual roles for valuing a stock, such as revenues and earnings, no
longer apply.

      NARRATOR: Over and over again, scenes like this one would play out at
the dot-coms. On the day their company's stock went public, employees would
watch the value of their stock options soar, making paper millionaires out
of many of them. Between 1990 and mid-2000, more than 4,700 new companies
debuted on America's stock exchanges.

      MIKE LEE, Venture Capitalist: The conclusion we came to, rightly or
wrongly so, was that the Internet was going to fundamentally change the way
business was run across the board, in every sector of business.

      LISE BUYER, Former Stock Analyst: Everybody thought they could get
rich quick, everybody across, from retail investor to investment bank. We
had this period where money was growing on trees, which is totally cool
while it's going on.

        ELOAN EXECUTIVE: We are now up to 34! The daily volume 3.7 million
shares. We are almost a $2 billion company!

      NARRATOR: This company, ELoan, opened at $14 a share and closed at
$37, a first-day gain of 164 percent. As investors clamored for more,
bankers - who make a hefty 7 percent fee on all the new public offerings
they underwrite - eagerly trolled for new Internet companies.

      MICHAEL BARACH, Former CEO, The day that we moved
into our offices, we started getting calls from investment bankers inquiring
as to what our thoughts were on raising additional capital or going public.
This is before we had furniture. Literally, we had boxes for our desks, and
we were sitting on the floor.

      NARRATOR: Michael Barach was CEO of

      MICHAEL BARACH: There was that level of buzz in the overall public
markets at the time. And you laugh about it. You're sitting there with your
box going, "Should I buy furniture, or should I talk to the investment
banker about going public?"

      BRIAN NESMITH, CEO, CacheFlow: Going public at that time, in my mind,
is probably almost exactly the same as if I was raising a first or a second
round of venture capital. There's a lot of unproven elements.

      NARRATOR: Brian NeSmith was head of an Internet technology company
called CacheFlow.

      BRIAN NESMITH: I haven't proven that we can be profitable. I haven't
proven that I can really grow the revenue. I don't have all the members of
the management team. The product may even still have some technology issues
that we have to validate. And effectively, the way I started to think of it
is, we had millions of investors that started acting like venture
capitalists, and they're not necessarily very smart ones. They don't do the
due diligence. They don't do the fundamental work.

      LISE BUYER, Former Stock Analyst: There were so many deals that went
through during, you know, '99 and 2000. And the hardest part - for both
sides, for bankers and analysts - the hardest part was that a lot of
companies that looked like there was no there there, were getting out into
the marketplace and going to the moon.

      NARRATOR: It could be as simple as adding a ".com" to your name while
making a few Internet-sized promises.

        SETH WERNER, As we like to say, one day we will touch
every mortgage in America.

      NARRATOR: When Seth Werner changed the name of his First Mortgage
Network to and went on the Net, the estimated market value
jumped from $100 to $800 million.

      SETH WERNER, Former CEO, We went around to all of the
underwriters, the largest underwriters in the country, the most prestigious
by anybody's count. Every one of them was suggesting that this was a
wonderful time to take a company like ours public.

      NARRATOR: Helping taking companies public is one of the most
profitable businesses investment banks have. And naturally, we wanted to
talk to the investment bankers about the process. We called and we wrote
lettersd, but Goldman Sachs, Credit Suisse First Boston, Bear Stearns,
Merrill Lynch and Morgan Stanley all said that they didn't want to talk.

        [Morgan Stanley television commercial]

        ANNOUNCER: Trust. We are not born with-

      NARRATOR: These institutions have been asking us to trust them for a
long time.

        ANNOUNCER: Trust must be earned. Trust must be proven.

      NARRATOR: But what has been obscured behind the veil of advertising
rhetoric and images is how the nature of their business has changed.

        ANNOUNCER: And that is why we measure success one investor at a

      JOE NOCERA, "Fortune" Magazine: When did things change? I can tell you
the exact day it changed. The world changed on May 1, 1975, May Day, because
that was that the day commissions were deregulated.

      NARRATOR: Joe Nocera is an editor and writer at Fortune magazine.

      JOE NOCERA: As commissions went down, suddenly, you had to find some
other way to make money for the house.

      NARRATOR: These institutions, once primarily thought of as brokerage
houses, used to make their big profits by offering advice to clients on what
stocks to buy or sell and then charging commissions on those transactions.
But when deregulation forced commission rates to drop, they began to rely
more on the money they made from investment banking. In the '80s, it was
mergers and acquisitions.

      Then in 1995, along came the Netscape initial public offering, or IPO.
The company was less than 18 months old, had little revenue and no profits.
Its debut would change everything.

      JOE NOCERA: In 1995, Netscape goes public. It's the first big- it-
nobody expects what happens at Netscape. It's the first big pop stock. It
was just, "Whoa!" You know, "What was that all about?" And suddenly, if
you're an investment bank, you realize that this is something that can be
taken advantage of.

      BILL HAMBRECHT, CEO, WR Hambrecht & Co., Investment Banker: It was
very hard to justify the price of it on any rational economic benchmarks
that you usually use.

      NARRATOR: Bill Hambrecht was the one investment banker who did talk to
FRONTLINE. He's an industry veteran who specializes in technology companies
and was one of the bankers who took Netscape public.

      BILL HAMBRECHT: There was this perception that, "Oh, boy. I've got to
get into these early-stage Internet companies" because the first wave of
early-stage Internet companies, starting with Netscape, did very well for

      NARRATOR: After Netscape, hundreds of new startups suddenly sprouted
up in California's Silicon Valley, companies like Yahoo, Ebay and Excite.
New companies are usually never profitable. But they usually aren't offered
to the public until they are.

      KARA SWISHER, "Wall Street Journal": Most companies in Silicon Valley
used to take, you know, six or seven years of losses to finally go - to get
to profitability, and then a little bit longer to go public. So there was-
you know, there was a more measured quality of moving these companies into
the public space.

      NARRATOR: Kara Swisher writes a column for The Wall Street Journal and
served as a consultant to FRONTLINE on this project.

      KARA SWISHER: Presumably, the people that are in the public markets,
they're buying fully-baked companies. And these weren't even- these weren't
even in the oven for 10 minutes, these kind of things. They were not even
close to being baked, and they were offering them up as cooked.

      NARRATOR: In Silicon Valley, the investment banks have long relied on
a group of venture capitalists, or VCs, to find and nurture the companies
the banks would then bring public. After Netscape, a new class of more
aggressive venture firms appeared. Jay Hoag founded Technology Crossover
Ventures in 1995.

      JAY HOAG, Technology Crossover Ventures: I think what Netscape
triggered was a sense that you didn't have to be profitable to go public.
But if you were growing fast enough, at some point in the future, you would-
you know, you would grow into profitability. And you know, it unleashed a
lot of different things, including huge numbers of IPOs, a really big up
cycle in venture funding, and to some extent, some bad ideas.

      NARRATOR: During the tech bubble, Hoag's firm, TCV, put up impressive
returns, posting over 100 percent gains in their portfolios for several
years running, one of the best investing records in Silicon Valley. In mid
2000, TCV was able to attract 1.6 billion investor dollars to form the
largest technology venture capital fund in U.S. history. But unlike
traditional venture firms that invest early in companies and bring them up
slowly, TCV invested in many companies just months before their IPOs.

      We asked Jay Hoag and his partner, Rick Kimball, if they now think it
was appropriate to rush such young companies to market.

      JAY HOAG: All these businesses that are losing money have to be
financed. You have to go get money somewhere. At that point in time, what
the market was saying was you should go get basically almost free capital,
and in the process, go public. So as a board member, the decision would be
very tough to not push a company toward an IPO.

      NARRATOR: The problem was that many of the people who bought
TCV-backed companies in the public markets - or as the insiders call it, the
"aftermarket" - lost big.

      KARA SWISHER: There was a banker taking a company public, a pretty
prominent banker. And he sent me the prospectus for the company. And the
company had no revenues. There was no money coming in. Like, they had no
customers. And they were taking it public. And he said, "What do you think?"
And I said, "I'm looking out my window, and there is a grandmother on the
street with a- with a purse. And I bet if I go mugged her, we could go do it
together right now, because that's what you're doing. You're mugging the

      MARTIN SMITH, FRONTLINE: Do you believe there was inappropriate
transference of risk to the public?

      RICK KIMBALL, Technology Crossover Ventures: You know, I- we can't-
words like "inappropriate," I- you know, I don't feel in a position to make
a value judgment about what is, quote, "appropriate," versus what is- is

        [Credit Suisse First Boston television commercial]

        CABBIE: Where to, sir?

        PASSENGER: Airport.

      NARRATOR: New companies kept going public, whether it was appropriate
or not.

        PASSENGER: An IPO would really put us on the map.

      NARRATOR: The process began with calling the bankers.

        PASSENGER: There are no trade-offs. Are we going to make it?

        CABBIE: Don't worry. We'll get you there.

      MICHAEL BARACH, Former CEO, What you do is, you
invite the bankers who've expressed interested in to talk to you at a board
meeting. And they- they pitch their services. It's called a "bake-off." And
so in- I believe it was June, we had a board meeting where we had a number
of investments bankers who came in and pitched our board.

      BRIAN NESMITH, CEO, CacheFlow: You're looking at past reputation. What
position do they have in the investment community? What- how much are they
willing to stand behind what they're doing in this environment? And a lot of
it, too, is it's a name for you.

      LISE BUYER, Former Stock Analyst: If it's a good, solid company with
solid backers, you know, CSFB and Morgan Stanley and Goldman Sachs, they'll
all want to take them public.

      SETH WERNER, Former CEO, The top companies in the
running for our consideration were Lehman Brothers, Merrill Lynch, Morgan
Stanley, Goldman Sachs and CS First Boston.

      NARRATOR: Once a bank is selected, the bankers take the company on a
two-week whirlwind tour, visiting the big mutual funds and other big-money
investors, making their pitches, lining up buyers for the IPO. It's called a
"road show."

      BRIAN NESMITH: The road show is just a repetitious repeat of the
message that you're trying to help investors understand about the product.
The bankers then take you out. And it's done as a very condensed event. It's
anywhere from a two to a three-week process. We started in New York, then,
you know, Boston, Philadelphia, Washington, Chicago, Minneapolis, Houston,
Dallas, San Francisco, Los Angeles.

      DAVID SIMINOFF, The Capital Group: And the poor company for two weeks
is in meetings from 6:00 in the morning until 7:00 at night, back to back,
you know, doing meetings with all these various institutional investors,
pitching their story.

      NARRATOR: David Siminoff is a money manager for The Capital Group,
which oversees the American Funds, one of the largest mutual fund families
in the world.

      DAVID SIMINOFF: So what happens is a sales trader will call and say,
you know, "I have an IPO that you ought to look at. And they're coming
around," you know, April 7th. And they're going to be in San Francisco. Can
you sit down and meet with them an hour and hear their story?"

      MICHAEL BARACH: You could put me in front of a human being or a
mannequin or a gorilla, [laughs] I was going to go through the same pitch.
Of course, I had to be responsive to their questions, but I'm just there to
sell. You know, pull the string and I'm selling.

      BRIAN NESMITH: In the end, what CacheFlow wanted to get out of the IPO
was a half dozen institutional investors that believe - believe in what
you're doing, believe in the company, believe in the management team - and
are not only going to be purchasing the IPO but are going to be long-term
accumulators of the stock.

        WILLOW BAY, CNN "Moneyline": In tonight's "Moneyline Movers,"
CacheFlow up 102 and three eighths in its stock market debut. The networking
equipment maker enjoyed one of the best opening days ever, the stock trading
at five times its offering price.

      NARRATOR: CacheFlow was a huge hit. And theirs remains one of the top
10 biggest first-day pops of all time.

        BRUCE FRANCIS, "Digital Jam": Akamai is Hawaiian for "cool," but

      NARRATOR: Hot IPOs became a staple of the technology telethon.

        BRUCE FRANCIS: Shares of the web technology company soared more than
450 percent-

        CNN REPORTER: -the stock that stole the show today. It is called

      NARRATOR: The pops gave the companies publicity but not much more.

        CNN REPORTER: -came public today, selling shares to the public. And
take a look at what this stock did, up 482 percent or so!

      JOE NOCERA, "Fortune" Magazine: If the investment banks had been doing
their job the way they were supposed to be doing, if they really had the
best interests of their companies at heart, you would have never seen the
situation where stocks- where IPOs go up 200, 300, 400 percent on the first
day. I mean, that is a crime.

        STEVE YOUNG, "Digital Jam,": is the latest beneficiary
of the Internet stock craze. Shares of the Internet commerce company debuted
at $16. They closed at $69, a rise of over 330 percent.

      JOE NOCERA: The famous case is, which I believe went up
over 500 percent on the first day. And it was, like, "Oh, my God. Look at
that! Look at that!"

        CNN REPORTER: Earthweb was up 379 percent and, which
only traded one day, gained 606 percent on the week!

      JOE NOCERA: What is the reason you have an IPO? It's to put money in
the coffers of the company. That's the reason you do it. When you have a
situation where it's going up 300 percent on the first day, that's 300
percent that the company is not getting.

        WILLOW BAY, CNN "Moneyline": The of drugstores went
public today in the latest smashing Net debut. nearly tripled
in price.

      NARRATOR: Individual investors did not benefit much from these big
pops, either. That's because almost all of the IPO shares had already been
allocated to big mutual and hedge fund investors during the road show.

        CNN REPORTER: Shares of the online pharmacy exploded on their debut
trading day-

      NARRATOR: Then, when the stocks skyrocketed, the institutional
managers sold immediately. It was called "flipping."

      DAVID SIMINOFF: In a four-year period, I saw over 500 IPOs. We
probably owned 200 or 250 of them for 10 minutes, many of them for 10
minutes, you know, where they would- at $8 or $10 a share, you thought,
"O.K., I can understand how this can compound at 20 percent a year if they
hit their target." But when the first print of the IPO was $95, it was very
easy to sell.

      KARA SWISHER, "Wall Street Journal": You get them for $15 dollars, and
they go up to a $126, and you sell them. And of course, everybody wanted
them because it was a sure thing. There was no way you could lose money
because every time one of these companies went public, they- they shot up
by, you know, 500, 600, 700 percent. So really there was no way to lose

      [ Take a closer look at the IPO game]

      BRIAN NESMITH, CEO, CacheFlow: The great majority of the people that
we saw on the road show bought the stock at the IPO and flipped it that same
day or flipped it within a couple weeks.

      NARRATOR: Silicon Valley's undisputed king of IPOs was banker Frank
Quattrone. His star rose while at Morgan Stanley, where in 1995 he made IPO
history when he took Netscape public. He was one of the first Wall Street
bankers to set up an office in Silicon Valley, and he made big impression.

      KARA SWISHER: He was sort of this larger-than-life figure in the
Valley who had some huge successes and was considered sort outrageous and
opinionated and aggressive and sort of swashbuckling. He has that
swashbuckling reputation.

      SUSAN PULLIAM, "Wall Street Journal":: I think he really identified
much more with the Silicon Valley entrepreneur than his investment banking
cohorts back in New York.

etc. please go to
if you would like to read more.


3. Kevin Kelly: The Web Runs on Love, Not Greed

(this article appeared in the Wall Street Journal on January 4, 2002)

Right on cue, the demise of the dot-com revolution has prompted skepticism
of the Internet and all that it promised. An honest evaluation would have to
admit it has been a very bad year for hip startup companies, hi-tech
investors, and hundred of thousands of workers in the technology field.
Three trillion dollars lost on Nasdaq, 500 failed dot-coms, and half a
million hi-tech jobs gone. Even consumers in the street are underwhelmed by
look-alike gizmos and bandwidth that never came. The hundreds of ways in
which the Internet would "change everything" appear to have melted away, or
to have not happened at all. As the end of the year approaches a collective
New Year's resolution is surfacing: "Next year, next time, we won't believe
the hype."

This revised view of the Internet, as sensible as it is, is a misguided as
the previous view that the Internet could only go up. The Internet is less a
creation dictated by economics than it is a miracle and a gift.

Netscape's legendary IPO in 1995 launched the web in the mind of the public.
That jumpstart happened not much more than 2,000 days ago. In the 2,000 days
since then, we have collectively created more than 3 billion public web
pages. We've established twenty million web sites. Each year we send about
3.5 trillion email messages. If we could return back time a mere 6 years ago
and ask anyone, even a geek, whether we could create 3 billion interactive,
graphically rich, hyperlinked text pages on every subject known to humans,
they would have frankly told you it was impossible. I would have told you it
was impossible. Send 3 trillion emails? Where is the time even to push the
send button? Who is going to pay for the creation of 3 billion web pages,
each one which must be designed and coded and hosted? The economics of this
don't work out. In 2,000 days? It's impossible. Yet, here at the end of a
very bad year, this web is alive and still growing. It looks like a miracle.

In our disappointment of grand riches, we have failed to see the miracle on
our desks. Ten years ago, it was easy to dismiss visions of a wondrous
screen in our homes that would provide the whole world in its magical
window. The idea of a universal information port was considered
uneconomical, and too futuristic to be real in our lifetimes. Yet at any
hour of today, most readers of this paper have access to the full text of
the Encyclopedia Britannica, precise map directions to anywhere in the
country, stock quotes in real time, local weather forecasts with radar
pictures, immediate sports scores from your hometown, any kind of music you
could desire, answers to medical questions, hobbyists who know more than you
do, tickets to just about anything, 24/7 e-mail, news from a hundred
newspapers, and so on. Much of this is for free. This abundance simply
overwhelms what was promised by the most optimistic guru.

Why don't we see this miracle? Because large amounts of money can obscure
larger evidence. So much money flew around dot-coms, that it hid the main
event on the web, which is the exchange of gifts. While the most popular 50
websites are crassly commercial, most of the 3 billion web pages in the
world are not. Only thirty percent of the pages of the web are built by
companies and corporations like The rest is built on love, such as or The answer to the mystery of why
people would make 3 billion web pages in 2,000 days is simple: sharing.
While everyone was riveted by the drama of companies such as, we
overlooked the steady growth of enthusiast sites and governmental depots
such as Usenet and, to name some larger ones.

As the Internet continues to expand in volume and diversity without
interruption, only a relatively small percent of its total mass will be
money-making. The rest will be created and maintained out of passion,
enthusiasm, a sense of civic obligation, or simply on the faith that it may
later provide some economic use. High-profile portal sites like Yahoo and
AOL will continue to consolidate and demand our attention (and maybe make
some money), while millions of smaller sites and hundreds of millions of
users do the heavy work of creating content that is used and linked. These
will be paid entirely in the gift economy.

Will we ever appreciate this web woven out of love and greed for the
fabulous miracle it is? Perhaps as more of the world wins access to it, and
more of our books, and movies, and history are added, we will come to see it
as a dream come true, a collective dream created by people like you and me,
sharing what they love. Who would have guessed that at the end of a
harrowing year, the heart of this gift and miracle already beats?

Upcoming Book: ASIAN GRACE, all images, no words, from Taschen, spring 2002.
Newest Project: Long Bets, ask me about it.
Official Website:
Current Passion: All Species Inventory
Previous Book: NEW RULES FOR THE NEW ECONOMY, in 9 languages.
Old Book: OUT OF CONTROL, free text at
First Love: WHOLE EARTH CATALOG: Editor/Publisher
Former Passion: Editor, WIRED magazine


4. Global Crossing hits the Iceberg

M E D I A  U N S P U N
What the Press Is Reporting and Why

Friday, February 1, 2002

* Global Crossing Hits the Iceberg

Media Unspun likes a challenge, so we're going to talk about Global
Crossing's big bankruptcy mess without comparing it to Enron. This
message will self-destruct in five seconds.

The telecom filed Chapter 11 on Monday, then two Asian companies
swapped $750 million for a big stake in it (we're not the only ones
who like a challenge). Business Week argued that the investment won't
be enough to save Global Crossing, citing discount-demanding clients,
not enough corporate customers, stock in the 30-cent range, and --
oh yeah -- bankruptcy proceedings.

There was more fun in Friday's Wall Street Journal. Lucent says Global
Crossing owes it at least $123 million, not the $31 mil listed in the
bankruptcy filing. (Would Lucent even notice a few extra missing
million?) Also, New York legislators asked for a state investigation
into Global Crossing's recent lockdown, when the company prevented
its workers from selling company shares in their 401(k) plans. That's
legal, but, like listening to the A*Teens, maybe it shouldn't be.

The AP reported that a former Global Crossing VP warned the company's
top lawyer that GC was fudging its financial results. Global Crossing's
response: not true, and the VP tried to blackmail us. Speaking of white-
collar crime, a few outlets noted that Global Crossing's founder, Gary
Winnick, used to work for securities fraudster Michael Milken.

A December article in Business 2.0, when not slamming GC's business
model, chronicled Winnick's dodgy spending decisions: He once had three
CEOs on the payroll, reportedly bought a Bel Air estate for $40 million
and gave one departing exec a severance deal that included a $20,000/month
Manhattan apartment. Kind of brings new meaning to the phrase "I gave at
the office."

Global Crossing's bankruptcy brought new attention to its political
connections. The conservative Washington Times reported that the chairman
of the Democratic National Committee made millions off GC stock, Winnick
donated money to help build Clinton's presidential library, and, if you
make it to the last two paragraphs, GC gave a ton of money to Republicans.
The Drudge Report focused on Global Crossing's Clinton ties (shock!). The
definitive article on GC's bipartisan palm-greasing came from Thursday's
L.A. Times.

Finally, guess who Global Crossing's auditor was? That's right, Arthur
Andersen. There's no evidence they cooked the books, but if we were
Arthur Andersen, we'd change our name. - Jen Muehlbauer

A Port in the Storm for Global Crossing?

Lucent Says Global Crossing Owes More Than Is Listed in Court Filing,,SB1012536434520077440,00.html
(Paid subscription required.)

Embarrassment for Andersen after Global Crossing files for Chapter 11

Global Flameout,1640,36166,FF.html

VP warned Global Crossing about accounting practices (AP)

DNC chief profited from bankrupt firm

Intrigue Surrounds $400 Million Government Award To Global Crossing

Global Crossing Became a Top Contributor Fast

The Mother Jones 400


5.  D I T H E R A T I


     "In a perfect world, everyone would read our educational
     brochures before they ran into a scam, but they don't."

         Securities and Exchange Commission Harvey Pitt, on how
         the whole Enron debacle was put together as an educational
         exercise, Wired News, 30 January 2002,1367,50125,00.html

- - -recommendation - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
- -

     Skip the SEC brochures and give Howard Schilit's "Financial
     Shenanigans" a read:


6.Drudge Report on Global Crossing Bankrupcy



 PROFIT, TURNED $100,000 INTO $18,000,000


 ENRON-stung GOPers are discreetly eyeing the collapse of GLOBAL CROSSING
 [which on Monday became the 4th largest bankruptcy in history] and its
 Chairman Gary Winnick, a top Democrat donor who helped DNC head Terry
 McAuliffe turn a $100,000 stock investment -- into $18,000,000!


 McAuliffe arranged for Winnick to play golf with President Clinton in
 1999 after his cash windfall. Winnick then gave a million dollars to help
 build Clinton's presidential library.

 A top White House source noted to the DRUDGE REPORT, with irony, the
 direct McAuliffe connection with Winnick and GLOBAL CROSSING.

 "McAuliffe is a guy who made millions and millions and millions off this
 GLOBAL CROSSING stock? And the company goes bankrupt. And he has the
 gonads to criticize anyone on ENRON!" blasted the Bush insider who asked
 not to be identified.

 "What did Winnick get for his money? Let's have congressional hearings!
 Stockholders should demand it! Will Mr. Clinton give back the money?"

 McAuliffe, in his role as chairman of the Democratic National Committee,
 has been a vocal opponent of the ENRON collapse, telling CNN this
 weekend: "The people out there who are hurt the most are the small
 people, and once again the wealthy special interests got to take their
 money off the table, and that's what we need to investigate."

 "The Bush administration is running fiscal policy the way folks at ENRON
 ran their company," McAuliffe has said.

 But with shares of GLOBAL CROSSING closing at just 30 cents on Monday,
 and trading suspended after the Chapter 11 deal was announced, McAuliffe
 faded from view.

 For McAuliffe, GLOBAL CROSSING turned out to be a bonanza. The stock had
 soared in the late 90s, when Winnick once bragged that he was the
 "richest man in Los Angeles." McAuliffe operated out of an office in
 downtown Washington that belonged to Winnick -- to help the mogul "work
 on deals."

 McAuliffe told the NYT TIMES's Jeff Gerth in late '99 that his initial
 $100,000 investment grew to be worth about $18 million, and he made
 millions more trading GLOBAL's stock and options after it went public in

 Top GOP insiders were also gloating over GLOBAL CROSSING ties to other
 ENRON obsessives.

 A major fundraising dinner for Senator Tom Daschle was bought and paid

 Winnick gave thousands of dollars to top ENRON cop Rep. Henry Waxman
 during the last election, according to public records.

 But as everything blurs, and blurs again in the bankruptcy cycles of the
 fresh century, and in a twist that will ensure GOP operatives do not ride
 GLOBAL CROSSING all the way into shore: Former President George Bush once
 made a smart move by accepting stock in a start-up company instead of his
 usual speaking fee when he addressed an audience in Tokyo.

 Bush agreed to take shares in -- GLOBAL CROSSING LTD. in lieu of an $
 80,000 fee!

 McAuliffe's Winnick reportedly suggested that Bush take his fee in stock
 instead of cash, and Bush agreed. The Bush stock, at its high, was worth
 over $ 14 million.

 It is not known if he is still holding the scraps.



7. Richard L. Berke: Greed, Pain, Excesses (NYT)
January 27, 2002



 WASHINGTON -- ONCE they express their requisite sympathy for stockholders
 and investors in Enron, many Democrats are downright giddy over the
 company's implosion. Not since Watergate and Richard M. Nixon's cozying
 up to corporate bigwigs wielding bags of money, they say, has their party
 had such an ideal vehicle to arouse the citizenry and skewer a Republican
 president as favoring monied interests.

 "It's Teapot Dome," said Jim Hightower, the former Texas agriculture
 commissioner who has built a career on speaking for the disenfranchised.
 "It's a perfect populist crusade." Though, unlike the Harding
 administration scandal, no one in this administration is known to have
 acted illegally regarding Enron.

 Stanley B. Greenberg, who helped devise a populist theme for Al Gore in
 the 2000 presidential campaign, said the Democrats' rallying cry in the
 November elections should be: "The greed is real. The pain is real. The
 excesses are real."

 And the reality is that the issue could be potent for the Democrats,
 though some are wary of rushing headlong into making Enron a political
 issue and caution that the company spread its bounty to both parties. Yet
 Enron was far more generous to Republicans and has closer ties with
 Republican officials in government.

 Republicans are especially vulnerable because Enron reinforces the
 long-held perception that their's is the party of big business and the
 rich. The White House is already a target because the administration is
 stocked with officials formerly involved with the oil industry in Texas.
 Even religious conservatives, a powerful constituency for the Republican
 Party, are grousing that their president is showing more fealty to
 corporate titans than Christian leaders.

 Adding to the image of a party more attuned to corporate interests than
 ordinary Americans was the recent election of Marc Racicot as Republican
 Party chairman. He refused to sever his ties to a law firm that has
 lobbied extensively for Enron and other companies. The latest New York
 Times/CBS News Poll, published today, underscores the image of a White
 House run by the upper crust. It reports that 61 percent of Americans say
 big business has too much influence in the administration. And 50 percent
 said the administration's policies favor the rich; only 14 percent said
 they favor the middle class.

 Democrats may have the best opportunity to capitalize on Enron if they do
 not retreat to the simplistic anti-big business slogans of decades past.
 Nearly a century ago, President Theodore Roosevelt scored by demonizing
 the Standard Oil Company as representing the evils of the newly sprouting
 corporate giants -- and shattering it into 34 pieces.

 While the age of trustbusting is long gone, Democrats could portray Enron
 as symbolizing the evils of a new corporate economy fostered by giant
 stock purchases and multinational companies. They can expand their
 argument and point to other disastrous business collapses, like Kmart, as
 evidence that corporations are running roughshod over working people. "If
 they're smart, the Democrats' strategy should be to make Bush into
 another shifty-eyed J. R. Ewing," said Kevin Phillips, the political
 analyst who wrote "The Politics of Rich and Poor." "If they dig deep
 enough, they can strike gold: that this guy has been up to his neck in
 every facet of the oil business in Texas, and it often hasn't reflected
 well in his judgment."

 But turning Enron into a big-business-versus-the-little-people bonanza
 for the Democrats could be more knotty than it seems -- and not just
 because Enron spread its largess to Democrats as well.

 For one thing, Democrats can no longer fully disassociate themselves from
 industry. President Clinton courted big business -- and it was his White
 House that presided over an era of prosperity for corporate America.

 There is also a history of populist crusades falling flat. Most recently,
 voters were not altogether convinced in the 2000 campaign when Mr. Gore
 ridiculed the Bush tax cut proposal as "a form of class warfare on behalf
 of billionaires."

 In the 1980's, the Democrats' drive to make villains of junk bond trading
 firms backfired, as did President Harry S. Truman's brazen seizure of big
 steel companies in 1952. "Standing up for the little guy will always be
 part of Democratic Party politics," said Senator Evan Bayh of Indiana,
 chairman of the centrist Democratic Leadership Council. "But we suffer
 from the stereotype of resenting people who have been successful even if
 they have done nothing wrong. We don't want to play into that

 There is no question that Enron can help Democrats stir up the party
 faithful, just like Whitewater galvanized hard-core conservatives. The
 question is whether the Democrats can broaden the appeal of the issue.

 To do so, they cannot merely repeat the party's mantra that Republicans
 favor the rich, but would have to take the argument to the next step: not
 only that Republicans are responding to corporate interests, but that
 they are doing so at the expense of ordinary citizens. Even some
 religious conservatives have accused the administration of overlooking
 their interests in favor of big business. Many were furious when, at the
 Republican Party's winter meeting in Austin, Tex., this month, the party
 installed Lewis Eisenberg, an abortion rights activist who has
 contributed to Democrats, to head the party's drive to raise money. Mr.
 Eisenberg's appeal: he's close to business and knows how to get big

 "It was a terrible appointment," said Gary Bauer, a conservative who ran
 for the Republican presidential nomination in 2000. "Couldn't they find a
 chief fund-raiser who actually agreed with the party's platform?"

 On the other side of the political spectrum, Mr. Hightower said it would
 not be sufficient for Democrats to assure voters that "we're on your
 side." He said the party needed to take its argument several steps
 forward. "We need to wrap up not just the corruption of money in politics
 but the actual damage to people and pensions and the disrespect for
 workers and the flim-flam of the new economy," he said.

 Recognizing that such populist appeals could succeed, Mr. Bush, in a
 striking change of tone, said last week he was outraged by the conduct of
 Enron, and noted that his own mother-in-law had lost more than $8,000 in
 Enron shares.

 AS part of their offensive, Republicans are seeking to shift the
 spotlight to Democrats who took Enron donations, and they portray the
 Enron debacle as a business scandal with no partisan bounds. In fact,
 White House officials are questioning why regulators in the Clinton
 administration did not pick up on the transgressions at Enron.

 Dismissing the Democrats as trying to politicize the Enron collapse, Dan
 Bartlett, the White House communications director, said, "The American
 people are savvy enough to understand the difference between political
 rhetoric and fact -- and the fact is that the administration did not make
 any attempts to help Enron."

 James Carville, the Democratic consultant, countered that the question is
 not whether the administration acted to save Enron. "It's not what they
 did when they went belly up," he said. "It's what they did when Enron had

 But, like many other Democrats, Mr. Carville is not free of Enron
 entanglements. He said he agreed to deliver a speech last October for the
 corporation for his usual big fee. The company went belly up, so he never
 could offer his words of wisdom. But chances are, his remarks would not
 have been about corporate greed.


8. David Shaw: Media Missed Clues to Enron's Troubles
January 26 2002


       Media Missed Clues to Enron's Troubles

       By DAVID SHAW

 A Fortune magazine survey called it the most innovative company in the
 country--for six straight years. The New York Times said it was "a model
 for the new American workplace." The Dallas Morning News described it as
 "one of the most envied and respected corporations in the United States."
 Business Week looked at one of its pioneering ventures and said, "The
 risk is remarkably small."

 That "low-risk" broadband venture by Enron Corp., the billion-dollar,
 Houston-based energy trader, wound up with a $102-million operating loss
 in the second quarter last year and was but a prelude to a complete
 corporate collapse, the biggest bankruptcy in U.S. history.

 For the most part, until the Enron collapse was well underway, the
 nation's news media--including the presumably sophisticated financial
 outlets--missed a number of early warning signs and failed to alert the
 public to the company's potentially precarious situation. "When something
 this big comes as this much of a shock, it suggests that something has
 been very wrong with the journalism," says Robert Lichter, co-director of
 the Washington-based Center for Media and Public Affairs.

 John Olson, an investment analyst in Houston, was one of the few in his
 field--and in his city--who was not on the Enron bandwagon. He says there
 were "signposts out there for people to see, but the company kept giving
 the media head-fakes and playing hardball."

 Olson, of the Sanders Morris Harris Group, says a number of former Enron
 employees and associates repeatedly warned him to "be careful. . . . The
 numbers aren't what they seem to be."

 Jim Chanos, president of Kynikos Associates in New York, began issuing
 similar warnings in the fall of 2000 after reading a column in the
 regional Texas edition of the Wall Street Journal warning that the
 extraordinarily high price/earnings ratio for Enron and two other Houston
 energy companies suggested that "investors . . . could be in for a jolt
 down the road."

 That column prompted Chanos to do his own research and to start selling
 short on the stock--in effect, betting it would decline--and to talk to
 two other journalists who wrote relatively brief, early stories raising
 questions about the company.

 Media Ignored the Red Flags

 The warning signs? There was a major, longtime discrepancy between
 Enron's profits and its cash flow. Its return on investment also was
 remarkably low for such a high-risk venture. Its financial statements
 were incomprehensible. Its top executives repeatedly were selling huge
 quantities of the company's stock. A surprisingly large number of senior
 executives were leaving--68 of them over an 18-month span.

 All these red flags, many financial experts and journalists now say,
 should have triggered intense media scrutiny. Instead, says the New York
 Post's Christopher Byron--a longtime financial writer who's worked for
 Forbes, New York magazine, Esquire and the New York Observer--"too much
 of the media were part of the cheerleading squad for Enron."

 Did Byron take a hard, early look at Enron?


 "I'm in New York and I saw Enron as just an out-of-town energy trading
 company--obviously a . . . mistake in judgment on my part," he now
 concedes, echoing comments made by many other journalists.

 Why did most of the national media--and the home-state Texas media, for
 that matter--miss the Enron story?

 "I think it was in part a product of the bull market of the '90s," says
 Jim Michaels, whose tenure as editor of Forbes magazine from 1961 to 1998
 featured many aggressive investigative stories on just such go-go
 companies as Enron.

 "Everyone was investing in the market, and the market was going up and
 up, and people didn't want to hear bad news," Michaels says. "I think
 there's been too much emphasis in recent years on these great success
 miracle stories, and too many reporters have gotten away from doing the
 hard, slogging reporting--looking at the footnotes in disclosure
 documents, wading through the dry-as-dust numbers and asking the tough
 questions about them that would have cast a great deal of doubt on the
 Enron 'miracle.' "

 But the media's failure concerning the Enron story was "part of a total
 failure by everyone, a complete breakdown in the system, in all the
 checks and balances," says Frank Lalli, editor of Money magazine from
 1989 to 1998. "It was a failure by the Wall Street analysts who just went
 along for the ride, and by the auditors who were collecting so much money
 they couldn't walk away from it, and by the government agencies who are
 supposed to monitor these companies."

 Relying on the Analysts

 Like investors, many financial reporters rely heavily on stock analysts.
 But analysts often have an inherent conflict of interest. Companies such
 as Enron have considerable leverage over them, saying (implicitly, if not
 explicitly), "We support the analysts who support our stock," meaning
 they'll give their lucrative investment banking business to those firms
 whose analysts issue strong "buy" recommendations for their stock.

 That's why analysts get paid so much, says Gordon Howald, an energy
 analyst for Credit Lyonnais. "It's not because they write nice reports
 with glossy covers. It's because they help generate fees for their firms
 by taking a very, very optimistic view of a stock, even if they don't
 necessarily believe it."

 On Oct. 24, more than a week after Enron admitted a $618-million
 quarterly loss and a $1.2-billion drop in equity, 13 of the 16 analysts
 who rated Enron still recommended that investors buy the stock and only
 one recommended selling.

 Some reporters did ask tough questions of Enron and its analysts, and
 some did study disclosure statements and other documents, "but when the
 guys running the company are telling flat-out lies to you . . . and when
 the filings are fraudulent," Lalli says, "I think it's a tall order for
 somebody to expect the press to come in and take this very complicated
 company apart.

 "The press doesn't have subpoena power, and without that, the only way
 you can do the story is if you have someone on the inside, a
 whistle-blower who can tell you what happened and walk you through it."

 Ultimately, that's what helped the Wall Street Journal "blow the story
 open," in the words of Joseph Nocera, executive editor of Fortune.

 The Journal came relatively late to the story too, though. Enron was
 formed in 1985 and was a billion-dollar company by the end of the 1990s.
 Except for that one skeptical Texas column in September 2000, the paper
 didn't begin to thoroughly examine Enron's business practices in print
 until the last five months of last year. By then, Enron had been a
 highflier and a fast faller, with its stock price at less than half its

 "You can always say you should have done more, sooner," says Paul
 Steiger, managing editor of the Journal. But when a company's lawyers and
 accountants are playing hiding games with their Securities and Exchange
 Commission disclosures, "it's very hard to crack," Steiger says.

 Once the paper's reporters began looking hard at Enron, "the Journal
 lapped the field," says Michael Hiltzik, a veteran business reporter at
 the Los Angeles Times.

 The Journal's breakthrough did not begin with a whistle-blower but with a

 To Rebecca Smith, who covers the energy industry for the Journal, the
 resignation in August of Enron chief executive Jeffrey Skilling was "the
 point of no return."

 She and several Journal colleagues had long been uneasy about Enron's
 rapid growth, high stock price, opaque accounting procedures and
 swaggering leadership. But when Skilling suddenly announced he was
 resigning for "personal reasons" just six months after taking the job he
 had coveted for years, Smith decided, "Something clearly was going on.

 "His quitting made absolutely no sense, and we know that when we say
 that," she added, "it really means that it does make sense but we just
 don't know enough yet to figure it out.

 "That's when I started to look seriously at Enron's 'black box'

 Wondering Where the Money Comes From

 Many other journalists also had long been dubious about Enron's meteoric
 rise. A few--very few--had even written about their concerns. Five months
 before Skilling's departure, for example, Bethany McLean wrote a story
 for Fortune magazine headlined "Is Enron Overpriced?" The story asked
 bluntly, "How exactly does Enron make its money?" and it essentially
 concluded that no one--not Wall Street analysts, not investors, not
 journalists--really knew because the company's business practices were
 "largely impenetrable . . . mind-numbingly complex . . . deeply
 frustrating . . . mysterious."

 "I'm pretty sophisticated," says Newsweek's Allan Sloan, who has long
 specialized in writing business stories that slice through the
 gobbledygook of balance sheets, "but I don't think I would have seen what
 was wrong with their numbers unless someone hit me over the head and
 pointed it out it to me."

 Not only were the company's financial statements opaque, but Skilling,
 former Chief Financial Officer Andrew Fastow, and founder and Chairman
 Kenneth L. Lay--who resigned this week--all were notorious for
 stonewalling or giving misleading answers to reporters' questions.

 Skilling called McLean unethical and hung up when she questioned him, and
 Lay and Fastow tried to persuade her editors that the company had no
 problems. Nocera, the Fortune editor, says he was "in the room when
 McLean asked Fastow point-blank" about two of the company's subsidiary
 partnerships that later became controversial, "and he said he couldn't
 talk about that for 'competitive reasons.'

 "It was a non-answer, given with a smile. And that was as far as he was
 going to go, and it was as far as we could go at that time."

 Other journalists had the same experience when Skilling resigned. He and
 Lay would not go beyond citing "personal reasons." (Skilling did
 subsequently concede that the sharp decline in Enron's stock price, from
 a high of $90 in August 2000 to $42.15 the day before he quit, played a
 significant role in his decision.)

 "We felt that unless he was really sick . . . there was something fishy,
 and we did some reporting and we talked to both of them, on and off the
 record . . . but we couldn't get any more," says Steve Shepard, editor in
 chief of Business Week magazine.

 James Cramer, co-host of CNBC's "America Now," wrote in his column at on the day Skilling left: "If Enron isn't
 disclosing what the reasons for the resignation are, we have to presume
 that it is something so horrendous and horrible that we can't own the
 stock. I know I won't touch it."

 Peter Eavis, senior columnist for the Web site, had raised questions
 about Enron's financial status three months before Skilling quit and
 again a month before he resigned.

 Most critics of the media say that if other reporters weren't already
 alerted to potential problems at Enron, they certainly should have put on
 their gumshoes after Skilling left.

 "He was the architect of all their major strategies, and we should have
 been a lot more vigilant when he left so soon," Shepard says. The editors
 of the two biggest newspapers in Texas, the Dallas Morning News and
 Enron's hometown Houston Chronicle, say they, in particular, should have
 pursued the Enron story much more aggressively.

 But less than a month after Skilling's resignation, terrorists attacked
 the United States, and that story quickly seized the attention--and the
 resources--of most news organizations.

 The Wall Street Journal is primarily a business newspaper, though, and
 while its staff devoted enormous time and effort to the terrorist attacks
 on the World Trade Center and the Pentagon, Journal reporters vigorously
 pursued Enron too.

 Smith and John Emshwiller, a respected investigative reporter at the
 Journal, began digging. Two months later, when Enron reported a
 $1.01-billion after-tax charge, resulting in the $618-million
 third-quarter loss, Smith and Emshwiller already had in their possession
 internal Enron documents concerning limited partnerships that had been
 run by the company's chief financial officer. That, they wrote in the
 next day's paper, "raises anew vexing conflict-of-interest questions."

 The day their story ran, Enron stock dropped 10%, to $32 a share.

 Most other mainstream news media did not immediately follow up on either
 the Enron disclosures or the Journal story. The Los Angeles Times, for
 example, which had aggressively covered the controversies surrounding
 Enron during California's energy crisis earlier last year, didn't publish
 a story on Enron's third-quarter loss until two days after it was
 reported, and even then gave it only four sentences as the second item in
 a markets roundup.

 The New York Times, widely regarded as having the best business section
 of any general-interest newspaper, wound up crediting the Journal when it
 began to accelerate its own Enron coverage last fall.

 Smith and Emshwiller continued to report and to write and to push Enron
 executives to say more than they customarily had--and Enron's stock price
 continued to drop. It fell for 10 straight days, closing at $11.16--a
 plunge of 65%--before rallying briefly and then nose-diving into
 oblivion; it was 26 cents a share Dec. 2, when the company filed for
 Chapter 11 bankruptcy protection.

 Even that cataclysmic event--the collapse of the seventh-largest company
 in the country in an already shaky economy--wasn't big news in most of
 the mainstream media. It merited only two sentences on the ABC, CBS and
 NBC evening news shows and didn't make Page 1 in the Washington Post,
 Boston Globe, Philadelphia Inquirer, USA Today, Denver Post or Detroit
 Free Press, among many others. (It did make Page 1 of the New York Times,
 Los Angeles Times, Dallas Morning News and Houston Chronicle, though,
 among others.)

 The financial press jumped on the bankruptcy story, but it wasn't until
 early this year that Enron became a Page 1 story. The widespread coverage
 began after Enron's accounting firm, Andersen, admitted destroying
 documents and it was revealed that the company had more than 3,500
 partnerships, several hundred of them in offshore operations. The federal
 government began investigating, Enron insiders began talking, internal
 documents began leaking and most of the mainstream media picked up on the
 story as a political scandal.

 "Journalists love politics, and they tend to see the world in terms of
 politics," says Lichter of the Center for Media and Public Affairs.

 Indeed, several major newspapers--the Wall Street Journal, New York
 Times, Los Angeles Times and Washington Post--printed stories about
 Enron's contributions to, influence on and/or connections with the Bush
 administration long before the company's financial problems became news.

 "Major newspapers are just not going to devote the resources to a
 business scandal that they'll devote to a political scandal," Fortune's
 Nocera says.



Evolution, Enron-style
Not all fast-mutating organisms flourish. Some go extinct.
By Amol Sarva
Feb. 13, 2002 There is a '90s way of doing business that new economy
companies "get," and old economy companies create committees to study. It
has much to do with flat hierarchies, innovation, casual clothes and
foosball tables. It's the theme that ran through every issue of the Industry
Standard, every Silicon Valley mission statement and every recent book by
"pop" strategy gurus like metaphor-spinner Geoffrey A. Moore or Wired editor
Kevin Kelly. And it is exactly this cluster of ideas that is at the heart of
"Survival Is Not Enough: Zooming, Evolution, and the Future of Your
Company," a new book by Seth Godin, Fast Company editor and self-proclaimed
"agent of change."

The twist of Godin's approach is his choice of master narrative: an
evolutionary approach to business. On one level, this is just another vapid
gimmick connecting a sexy metaphor to the same old recycled management fads:
Unleash your company's "mDNA" to make it "zoom"! A clearance-counter library
of variations exists on this theme, from "business judo" to "chessmaster
strategy." But on another level, Godin's topic gestures at a genuinely
interesting idea.

The underlying observation of "Survival" is that Darwinian evolution by
natural selection is a theory of change for all complex systems -- not only
in organic systems but in any system with finite resources and reproducing
individuals. What biology has learned by studying the struggle for survival
can inform us as we think about the struggle of products for market share,
firms for talent, countries for a tax base or start-ups for venture capital.
Natural selection is more than a mere metaphor for the dynamics of business.
It is actually at work in economic systems, and there are likely to be
common tendencies between ecosystems and markets for strategists to exploit.
Darwinism has a long history of application outside biology -- from Herbert
Spencer's Social Darwinism to Richard Dawkins' attempt to identify the
"genetic" nature of cultural change. The use of evolutionary ideas to
understand business is inevitable.

But Godin does nothing to take us past the gimmicky metaphor approach to
evolution. The appeal of the evolutionary approach should be that it
provides a genuinely scientific framework for understanding market dynamics.
Godin's goofball "zoometry" (meant to be the study of business evolution) is
no such thing. He ends up offering a bunch of familiar prescriptions:
Embrace change, reward performance, take risks, compete ruthlessly. It's
nothing any freshly minted MBA wouldn't say. What he misses is much more
important: Nature is trickier than that. It's often bureaucratic and
resistant to change. It sometimes kills the fittest instead of rewarding
them. It usually avoids risky moves and often appears to be pushing
noncompetitive, cooperative behavior. Nature is a subtle thing.

If Godin's science is dubious, his timing is worse. This is the wrong moment
for yet another how-to guide to doing business on "Internet time." The new
economy is firmly in recession. The greatest dot-coms are limping. Major
sectors from manufacturing to transportation are reeling. And yet Godin is
still telling us to take lessons from Amazon, or learn from the tactics of
spammers. In boom time, everybody's a genius. But in a down-market, the
usual drivel won't do.

Consider, for example, the case of Enron. Godin doesn't discuss Enron
directly in "Survival," but his prescriptions for evolutionary business
success read like a list of everything Enron did right through the 1990s:
Shed physical assets, build intellectual capital, bring competition to the
workplace, encourage innovation, push bold strategies, pioneer new markets
and so on. On the new economy scorecard, Enron was a management marvel. In
retrospect, the recklessly aggressive strategy and obsessively competitive
structure were precisely the things that Enron did wrong. Problems were
piling up well in advance of the accounting scandals -- profits were down,
growth was sluggish, big bets were coming up losers and observers were
starting to get suspicious.

Does Godin's reading of evolution recommend a better way? Quite the
opposite. Godin goes on and on about change -- the kind of change Enron
specialized in. For Godin, change is constant, pervasive and a force of
obsolescence. Most companies, especially big ones, are bad at handling it
and have developed mechanisms that specifically resist it. Yet, nature shows
that you must embrace change. Survival depends on adaptation to the slightly
warmer climate, or the predator's better vision, or the sudden disappearance
of a key food item. Species change over generations because natural
selection prefers particular variations over others -- the lighter coat or
the better camouflage -- and these advantages are passed on by the
successful to their numerous offspring. Companies that don't follow this
drive risk extinction.

Enron was a paragon of Godin-esque values, particularly in respect to
"change." CEO Ken Lay responded aggressively to a changing regulatory
environment in gas delivery by merging into and then taking over a larger
rival. Lay and his McKinsey consultant, Jeff Skilling, radically redirected
the company into commodities trading. They invented a market for energy
supplies and came to dominate it. Then they increased the sophistication of
the derivatives contracts they traded, created new markets for commodities
from bandwidth to weather and brought it all online in a hurry --
relentlessly innovating ahead of the competition. They globalized,
undertaking projects from Europe to Brazil to India. And they diversified,
moving into water and pollution emissions.

Enron knew how to change because it was set up to encourage innovative
thinking. Godin rails against the usual culprits of corporate torpor:
committees, skeptics and bureaucracy. Well, Enron had none of that.
Initiatives were created through a decentralized approach where anyone could
contribute to the marketplace of ideas. An executive from the London office,
Louise Kitchen, won big for secretly developing EnronOnline from the bottom
up -- contra management's stated strategy -- and launching it into
blockbuster success. When one executive originally came to Skilling with the
idea for a bandwidth exchange that was facing opposition from his superiors,
Skilling told him simply to ignore the opposition and proceed covertly.

Enron kept a dizzying pace, shifting its business from pipelines to gas
trading to financial derivatives to fiber-optic bandwidth in just 10 years.

But suspicions about all that evolution began to rise -- especially about
Enron's $1.5 billion bet on bandwidth trading -- when Blockbuster pulled out
of a key partnership in March 2001. In July, the division's revenues were
revealed to be a pitiful $16 million and the entire bandwidth operation was
shuttered. Azurix, Enron's water business, had already been stumbling and
EnronOnline appeared merely to be cannibalizing its own offline cousin. The
Dabhol power project in India, over budget and past schedule, was limping.
And California's energy crisis had brought intense scrutiny on the practices
of Enron's core trading business. Investors were worried that its
fundamental strategy was struggling, and later they found out that it had

Godin's change-mongering not only makes for a reckless management style, it
also gets the biology wrong. Unlike Enron's transformations, the hallmark of
evolutionary change is that it is slow. It takes generations for minor
mutations to accumulate into a big change in the species. But Mother Nature
seems to prefer it that way. Big changes often yield deadly instability,
while refinements permit steady, meticulous improvement on a working design.
And by forcing each change to prove itself, selection makes sure to test
alternative paths to the big adaptations. Since individuals mutate one at a
time, there's also lower risk of losing the whole species. In the grips of
an "innovate or die" mantra, Enron regularly placed huge bets on major
projects -- India, bandwidth, water. But nature usually waits to see a
mutation start to stick in one place before spreading it too far around, not
because nature is cautious but because this is what works.

Godin himself applauds Amazon for its incremental approach of constantly
running small trials of new ideas on its Web site, and eliminating the ones
that don't work. But he misses the crucial difference between a new home
page at Amazon, and the type of change embraced by a company like Enron. The
former variety moves away from the core business in steps, with small bets
on many different approaches, yielding large-scale results after much

Of course, a competitive organization is the sum of its people. So Godin
recommends applying natural selection indoors as well: rewarding performers
for their contributions, punishing laggards, encouraging innovation and
constantly providing performance feedback. Some mix of these familiar themes
is in everything written on the topic, but Godin tweaks the "survival of the
fittest" elements. He thinks companies should regularly fire people for
performance (make them struggle for survival), and demand more innovation
from even the least-skilled workers (even janitors should be "knowledge

Again, Enron fits Godin's bill. Enron worked hard to cultivate the right
people and the right culture. It rewarded performance with big cash and
stock bonuses, providing luxuries like on-site concierge service and
massages. One executive called it "the best meritocracy in business." It
stocked the ranks with hundreds of Ivy League and Stanford MBAs in
entry-level positions, and then set them to compete against each other. The
Performance Review Committee lived to "rank and yank" -- constantly running
performance reviews, ranking everyone against their peers and firing the
bottom 15 percent. The result was a mercenary culture where traders locked
their desks to keep their colleagues from stealing their work and where
orders were ignored if they didn't match selfish interests. Even as Enron
worked to save itself last September, top traders were heading straight out
the door to competitors. Enron's injection of free market absolutism created
a Wild West culture of backstabbers.

Even nature is not so cruel. Examples of altruism and cooperative behavior
abound. Chimps and wild dogs share their food. Many kinds of animals give
predator alarm calls, even when this draws extra attention to the individual
making the warning. Even vampire bats share blood with less lucky hunters.
The traders at Enron didn't seem inclined to such behavior, nor were there
mechanisms to encourage it. Nature's function is far subtler that
"dog-eat-dog," an observation that requires digging deeper into biology than
Godin manages.

The danger of Godin's sloganeering, simplistic approach to applying
Darwinism in business is the complexity of the systems themselves.
"Survival" is little more than a compendium of the usual management clichés
recast in a Darwinian vocabulary. Converts to this form of Darwinism beware.
Well-meaning but naive interventions can lead to disastrous effects as
unforeseen impacts ripple through the system. As Enron implemented one
extremist approach after another, it grew to be a bizarre, unnatural place.
Ultimately, as much-touted new projects failed to deliver and growth began
to stagnate, a final lesson of Darwin's became evident: Nature doesn't work
by fixing its mistakes; it works by eliminating them.

      About the writer
      Amol Sarva is a member of the Stanford Philosophy Department, and is
working on a book called "Competing With Darwin: Surviving the Natural

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