The case of Enron & Credit Suisse First Boston (CSFB)

Nice overview story--Walter Derzko-your NewBizDev Host
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(from S I L I C O N V A L L E Y . C O M http://www.siliconvalley.com )
D A N   G I L L M O R   O N   T E C H N O L O G Y
Monday Jan. 28, 2002


Only in a week when the Enron scandal escalated in tone and
 substance, dominating the financial news, would a $100
 million penalty paid by a major investment bank make
 scarcely a ripple.

 But the Enron story and the sanctions against Credit
 Suisse First Boston share some common threads. Both were
 an outgrowth of a troubling, yet ultimately valuable, era
 in American business.

 The brazenness has shaken sensible people's faith in the
 brand of capitalism practiced in America today. The
 economic and social dislocations have been deeply
 unsettling. But there's no denying the value -- the
 positive part of this tidal shift, the melding of
 information technology as a central and useful part of our
 lives.

 Enron continues to amaze. It was a financial house of
 cards, perhaps an outright scam. Maybe it was no more
 egregious than the worst of the dot-com companies that
 erupted in the late 1990s.

 But Enron's, ahem, creativity made it special. It bought
 political influence to change laws and rules, without
 which help it never would have risen in the first place.
 It created a financial structure that went beyond mere
 opacity to outright deception, using every trick in the
 book to hide its true condition and dodge taxes. It found
 compliant auditors, and here we are.

 Yet all of that, however disturbing, would have been just
 another story of corporate sleaze had it not been for
 Enron's spectacular betrayal of employees and unsuspecting
 shareholders, along with its orgy of document shredding.
 People on the street understand this in a visceral way.
 Many of the politicians in Washington who took Enron's
 legal bribes -- sorry, campaign contributions -- want this
 story to go away. It won't.

 Meanwhile, a story that should have been better-noticed is
 sinking almost without a trace. Credit Suisse First Boston
 paid a nine-figure settlement, including fines, to make
 some serious misdeeds go away.

 CSFB, you'll recall, was one of the investment banks that
 collected gazillions in fees during the tech bubble. It
 took companies public right and left, including some
 serious dogs that had no business going public at the
 prices they commanded.

 But in those days the public -- in part conditioned by
 glowing reports from so-called ``analysts'' who flogged
 anything that moved on behalf of their investment-banking
 employers -- was willing to buy almost anything. That
 meant the opening-day price would almost always surge.

 CSFB, not content with its already huge fees, allocated
 shares in initial public offerings to some hedge funds on
 the condition that they kick back outrageously large
 commissions on their trades, according to documents filed
 with the settlement. Given the firm's earnings, the $100
 million settlement was surely a good investment -- and,
 relatively speaking, barely a slap on the wrist. Is it
 cynical to expect similar deals with other investment
 banks still under investigation? No, sadly, it's
 realistic.

 If you read the filings in the CSFB case, you may be
 struck by some losers who aren't even mentioned, as far as
 I can tell. They're the small-fry investors who bought
 these stocks from the insiders and favored IPO clients.

 Let's face it. Individual investors got greedy. They knew
 the dot-com music would stop. The ones who paid attention
 to reality knew they were hunting for greater fools. The
 fact that they let themselves be herded like lambs to a
 slaughter is partly their own fault.

 We'd be making a mistake to focus solely on the slippery
 and dishonest acts of recent years, however.

 CSFB, for all its greed, helped create an industry that
 will survive beyond the bubble. Information technology
 continues to insinuate itself into almost everything we
 touch and do. The costs of that transformation are huge,
 but so are the long-run benefits.

 Even Enron, in its sleaze, reflected the shift toward
 replacing brawn with brains. It used technology in what,
 absent the sleaze, was not a terrible idea -- to create a
 more efficient marketplace in energy.

 Technology, properly applied, should make all markets more
 efficient. Technology's price-performance curve, the
 continuing marvel of our times, ultimately adds
 intelligence to devices and processes. In the end, that
 should mean lower costs and higher value.

 Much of the wrongdoing of the recent era will never be
 punished. In a society where money rules, we tend to
 settle on a few scapegoats and let the other villains
 skate.

 Let's be optimistic, though. Maybe the Enron and CSFB
 cases will be the catalyst we need for a true return to
 basic principles. If people in power heed the lessons,
 they'll repair the variety of holes that have been torn in
 the fabric of the market economy during the previous two
 decades.

 But even if they don't, we've set in motion some
 unstoppable trends. In the end, Enron and CSFB will be
 forgotten vestiges of a transcendently greedy time.
 They'll also have been part of a grand transformation.

 -----

Dan Gillmor's column appears each Sunday, Wednesday and
 Saturday. Visit Dan's online column, eJournal
 (www.siliconvalley.com/dangillmor). E-mail
 [log in to unmask]; phone (408) 920-5016; fax (408)
 920-5917.
   http://www.siliconvalley.com/dangillmor
   mailto:[log in to unmask]


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