Some people today say that companies -
and particularly multinational corporations - rule the world.
lt's pretty hard to believe that any kind of human organisation
could tame the vast natural barriers of South America.
But one company believed it could.
By constructing a 1.5 billion dollar gas pipeline from Bolivia
right across the South American continent to the Atlantic coast of Brazil.
By running gas along the longest pipeline in the world
4,000 miles from the tip of Patagonia to the Argentine capital Buenos Aires.
Such schemes exempIify the vauIting ambition of modern capitaIism,
but they're onIy possibIe because of one invention -
the joint stock company.
lf the 1 6th century had seen a revolution in money and credit,
and the 1 7th had witnessed the birth of the bond market,
then the next step in the story of the ascent of money
was the rise of the joint stock limited liability company.
But the ability of the company to transform our lives
would depend on another innovation...
The stock market.
The price that people are prepared to pay for a company's shares in the market
tells you how much money they think it'll make in the future.
But as we have discovered in recent months of financial turmoil,
stock markets can also be shock markets.
The future is aIways uncertain.
But we human beings are prone to over-optimism.
When prices here on the New York Stock Exchange surge upwards in synch,
it's as if investors are gripped by a kind of coIIective euphoria -
what the former chairman of the FederaI Reserve, AIan Greenspan,
once famousIy caIIed ''irrationaI exuberance''.
So stock markets reaIIy can be Iike soap bubbIes.
We never quite know when they're gonna burst.
The exuberance was especially irrational and the burst especially painful
for the company that proposed those vast projects in Latin America.
Enron became the biggest corporate fraud in modern American history.
But Enron was very far from the only corporate scam
since shares were first bought and sold 400 years ago.
And the shady practices it epitomised live on.
lndeed, they've been a key cause of the financial crisis we're living through now.
Cooked books? Stock prices rigged?
Been there. Done that.
For centuries.
Nothing illustrates more clearly than the history of stock market bubbles
how hard human beings find it to learn from history.
STOCK MARKET HUBBUB
Hidden away among the many splendours of Venice
is a small clue to one of the most astonishing tales of adventure
in all financial history.
''To the honour and memory of John Law of Edinburgh,
''most distinguished controIIer of the treasury of the Kings of the French.''
This is the finaI resting pIace of the man who invented the stock market bubbIe.
An ambitious Scot, a convicted murderer,
a compuIsive gambIer and a fIawed financiaI genius,
he not onIy caused the first true boom and bust in asset prices,
he aIso indirectIy caused the French RevoIution.
There was a time when John Law owned a quarter of what is now the United States,
only to lose it all in history's first great crash.
From Edinburgh to Amsterdam to Paris, all the way here to New Orleans,
and finally to Venice, Law's story is a classic tale of boom and bust.
lt's also very much a story for our own times.
Hidden away here in the warehouse of the Louisiana State Museum
is the onIy known painting of John Law.
Here he is.
With that Iean and hungry Iook,
he reaIIy is, for aII the worId, a Scotsman on the make.
The path that led Law ''from obscurity to celebrity, to notoriety'' is a path
that many of the great stock market players have followed since.
Law was born here in Edinburgh in 1 67 1,
the son of a successful goldsmith and heir to the estate of Lauriston.
ln 1 694, while living in London,
Law killed a man in a duel over a woman
and was sentenced to death.
Somehow, Law managed to escape from prison and fled to Amsterdam.
He couldn't have picked a better town to lie low in.
By the 1 690s, Amsterdam was the world capital of financial innovation.
To help finance their war against Spain,
the Dutch had introduced one of the world's first national lotteries.
To protect their merchants from dodgy coinage,
they'd created the world's first central bank.
But the one that had the biggest impact on Law
was the single greatest Dutch invention of them all -
the company.
The story of the company had begun 1 00 years before Law's arrival
as Dutch traders spread out all over the world,
from Manhattan lsland to the Cape of Good Hope.
But it was Asia that became the primary target of Dutch commercial expansion.
Why?
The East Indies were so aIIuring because of these -
spices -
pepper, cIoves, nutmeg, ginger.
Europeans craved them to fIavour their food, but aIso to preserve it.
TraditionaIIy, they'd come overIand by the Spice Road.
But the Dutch pIan was to fetch them the Ionger, but quicker way, by sea.
And that pungent aroma was the smeII of money to be made.
This painting shows the return of one of the first Dutch fleets from the East.
The inscription reads, ''Four ships sailed to go and get the spices towards Bantam
''and also established trading posts.
''And came back richly laden to the poles of Amsterdam.
''Departed 1 st May 1 598.
''Returned 1 9th July 1 599. ''
The Asian spice trade was so profitable
that just one return trip could pay for the construction costs
of a ship like this.
But so prolonged was the journey round the Cape of Good Hope to the East
and so hazardous that merchants had to pool their resources and their risk.
The result was around six fledgling East lndia enterprises.
In 1602, at the instigation of the Dutch government,
these various companies came together
to form the United Dutch East India Chartered Company,
or Vereenigde Oost-Indische Compagnie for short.
And this is its originaI charter,
which speIIs out that the company was to enjoy a monopoIy on aII trade
from the Cape of Good Hope aII the way east to the Straits of MageIIan.
Pretty much haIf the worId.
The structure of the new entity was novel.
The capital of the company was divided unequally
between all the major Dutch cities.
Citizens were invited to participate in the new venture by investing.
lt was the form of this investment that was the real novelty.
This rather wonderfuI painting is of the famiIy of one of the founders
of the Dutch East India Company, Dirck Bas.
For 6,000 guiIders, he and 16 other so-caIIed ''participants'',
became the firm's managing directors, the bewindhebber.
After 1606, however, anyone who put his money into the East India Company
received an ''aktie'' - IiteraIIy an ''action'',
or as we wouId say, ''a piece of the action'' -
a share in the company's future profits.
And here it is, the worId's very first share certificate,
issued by the worId's very first muItinationaI company.
AImost exactIy four centuries ago.
Three years later, Bas and his fellow directors declared
that any shareholders who wanted their cash back could not have it refunded,
but would have to sell their shares to another investor.
Overnight, a market for the company's shares was born -
the worId's first true stock market.
This invention was to change the face of finance for ever,
because it created a mechanism whereby the price of shares was determined
by the laws of supply and demand, sellers and buyers.
And as the renegade Scotsman John Law couldn't help but notice,
the trading of these company stocks
was making the world's first shareholders very rich indeed.
By 1 61 0, the world's first joint stock company, the Dutch East lndia Company,
was ready to conquer the world.
lt had a new charter, new shareholders and a burgeoning trade in these shares.
But it had to fight to survive,
literally.
Having established a string of factories and warehouses across South Asia
from Java to lndia, the company had to struggle to keep the Spaniards
and their English competitors at bay.
With 40 warships and a private army of 1 0,000 soldiers,
the directors of the East lndia Company were the original corporate raiders.
For the Dutch East India Company,
firepower and foreign trade went hand in hand.
But the key to the company's success wasn't just its cannons
Iike these ones aboard The Batavia, the pride of its fIeet.
Like aII big companies, it was abIe to combine economies of scaIe
with reduced transaction costs
and what economists caII ''network externaIities'' -
the abiIity to pooI information between muItipIe empIoyees and agents.
The Batavia was part man-of-war, part muItinationaI corporation.
The big networked company was simply more efficient.
That was why, by the 1 620s,
it had established a virtual monopoly on spice exports from Asia to Europe.
The world's first multinational was making its shareholders enormously wealthy.
I'm Iooking here at the originaI sharehoIders' register
of the Dutch East India Company,
and IiteraIIy every name in here was a winner.
If you'd put 1 ,000 guiIders into the company at its very inception,
by 1 736, your investment wouId have been worth 7,000.
Over its entire Iifetime, the company paid an average annuaI dividend of 16.5%.
VirtuaIIy aII its profits were paid back to the sharehoIders.
Dirck Bas's original shareholding of 6,000 guilders
had been transformed into a 500,000 guilder fortune.
To John Law, lying low in Amsterdam having escaped the gallows in London,
the workings of the Dutch East lndia Company came as a revelation.
Law was living off his winnings at the gambling table.
But he was fascinated by the relationships between the company,
with its splendid offices in the Hoogstraat, the nearby stock exchange,
where dealers busily traded the company shares, and the Bank of Amsterdam.
Yet this Dutch financial system struck Law as not quite complete.
To Law's financiaIIy supercharged mind, the Dutch were missing a trick, or two.
For one thing, it seemed compIeteIy nuts
to restrict the number of East India Company shares
when the markets were so cIearIy enamoured of them.
Law was also puzzled by the conservatism of the Bank of Amsterdam.
lt had created an internal system which allowed merchants to settle their accounts
by direct cashless transfers,
but it hadn't issued any real banknotes to the public.
The idea was aIready taking shape of a breathtaking modification
of the institutions that Law had first encountered here in Amsterdam.
OnIy combine the properties of a monopoIy trading company and a pubIic bank
and the sky reaIIy wouId be the Iimit.
Law was preparing to unIeash a whoIe new system of finance
on an unsuspecting nation.
ln 1 7 1 6, John Law arrived in Paris.
He had identified France as the ideal laboratory
for what would be the biggest experiment in the history of the stock market.
But why did the French give him his chance?
The answer is that France's fiscal problems were exceptionally desperate.
The country was saddled with enormous public debts
as a result of the wars of Louis XlV.
When the Sun King died in 1 7 1 5,
the Duke of Orleans, who was acting as Regent for the under-age king Louis XV,
faced a country on the brink of its third bankruptcy in less than a century.
lt was the perfect opportunity for Law,
the maverick self-taught economist who'd developed his theories
somewhere between the casino and the stock market.
Law's ambition was to revive economic confidence in France
by estabIishing a bank on the Dutch modeI,
but with the difference that this bank wouId issue paper money
Iike this 100 Iivres note.
As money was invested in the bank,
the government's huge debt wouId be consoIidated.
But at the same time, and this was the reaIIy important part of Law's system,
paper money wouId revive French trade, and with it French economic power.
The Royal Government gained doubly.
Consolidation simply meant that its onerous debts
were magically transformed into shares in Law's bank.
At the same time, the monarch gained the ability
to print as much money as he liked.
As Law wrote - ''l maintain that an absolute prince who knows how to govern
''can extend his credit further and find needed funds at a lower interest rate
''than a prince who is limited in his authority.
''ln credit, supreme power must reside in only one person. ''
That absoIute power was in the hands of the Duke of OrIeans
who Iived here in the PaIais RoyaI,
just a short step from Law's apartment in the PIace Vendome.
It was to him that Law now unfoIded his scheme.
The prize was nothing Iess than the revivaI of French power
through financiaI engineering.
But that was onIy haIf of Law's ingenious pIan.
As Law wrote,
''The bank is not the only, nor the grandest of my ideas.
''l will produce a work which will surprise Europe
''by changes more powerful than were produced by the discovery of the lndies. ''
The second part of Law's idea
was that a huge monopoIy trading company shouId be estabIished,
the Compagnie d'Occident, the Company of the West.
As he put it, the whoIe nation wouId become a body of traders
and Law himseIf, named here as the company's chief director,
wouId be at its head.
The focus for this wildly ambitious scheme would be in America,
where the French laid claim to a vast tract of land
either side of the Mississippi - Louisiana.
The Regent gave Law's company, what was to become the Mississippi Company,
a monopoly on trade with the new colony.
Frenchmen, regardless of rank, were encouraged to buy shares in the company.
Law's name headed the list of directors.
In modern parIance, what these documents teII us
is that Law was attempting a refIation. And why not?
France in 1 7 16 was in a depression
and Law's banknotes heIped stimuIate a recovery.
At the same time, what he was doing
was effectiveIy transforming a burdensome and badIy managed pubIic debt
into shares in what was a privatised tax-gathering and trade company.
WeII, what was not to Iike about that?
ln a fever of mass speculation,
the Mississippi Company's share price soared,
from the original price of 500 livres to 5,000 on September 4th.
By December 1 7 1 9, it had reached 1 0,000.
And this is where it aII happened.
This was where Law's share issuing office was Iocated, the Rue Quincampoix.
You can imagine the scenes of frenzy here
as haIf of Paris descended on this narrow aIIeyway
aII desperate for a piece of the action.
The higher the share price went, the more they wanted to buy.
It was a cIassic stock market feedback Ioop.
lt was in these heady times that the word ''millionaire'' was first coined.
Yes, millionaires, like entrepreneurs, were invented in France.
And by January 1 720, John Law was the richest of them all.
Louis XlV had said ''L'etat, c'est moi'' - ''l am the state. ''
Now the renegade Scotsman, John Law, was able to say,
''L'economie, c'est moi'' -
''l am the economy. ''
Ensconced in his paIatiaI suite, here in the PIace Vendome,
that's the Ritz HoteI over there,
Law had achieved a greater concentration of financiaI power in his hands
than any individuaI in aII French history.
As ControIIer-GeneraI of French Finances, he was IiteraIIy in charge of
the coIIection of aII France's indirect taxes,
the entire French nationaI debt,
the 26 mints that produced the country's goId and siIver coinage,
the Company of the Indies - better known as the Mississippi Company -
which had a monopoIy on the import of tobacco,
aII of France's trade with Africa and Asia,
oh, and the Louisiana coIony,
which covered around a quarter of what is today the United States.
ln his own right, Law also owned the Mazarin Palace,
more than a third of the buildings around the Place Vendome,
more than 1 2 country estates,
several plantations in Louisiana,
and a hundred million livres of shares in the Mississippi Company.
Not bad going for a man who, when he'd first come here 12 years before,
had been identified as a joueur - a professionaI gambIer and a possibIe spy.
By January 1 720, Law's triumph seemed complete.
A Scots murderer was, in effect, Prime Minister of France.
Law's problem was that he had no clear idea where to stop.
On the contrary, he had a strong personal interest in printing more money,
which his own bank controlled, to drive up the price of his own company's shares.
FortunateIy for Law, both his bank and his company
were now operating out of the very same buiIding,
the Mazarin PaIace, which he himseIf happened to own.
So aII he had to do in order to drive up the company's share price
was to take a waIk down the corridor from the office where the shares were issued,
to the office where the money was printed.
You couId say that Law had become the uItimate insider trader.
At root, Law's system was what we nowadays call a Ponzi scheme,
after the legendary ltalian-American conman, Charles Ponzi.
To pay out the generous returns it's promised to the first lot of suckers,
a Ponzi scheme needs to take in more money from the next lot of suckers.
ln John Law's scheme, the acquisitions of other companies
and the generous dividends Law paid
were financed not from company profits,
but simply by selling new shares.
Like aII Ponzi schemes, however, the effect of Law's system
was to generate an unsustainabIe bubbIe.
Law had refIated the French economy
with a combination of paper money and pubIic confidence.
Now, unfortunateIy, his bubbIe was about to go pop.
By the beginning of 1 720,
France was in the grip of a mania - the Mississippi Bubble.
But the man responsible, the renegade Scots murderer and gambler, John Law,
who'd risen to become master of the entire French economy,
was about to discover an inviolable law of finance...
Trees don't grow to the sky.
According to Law's PR campaign,
the huge profits he was projecting would come from the French colony of Louisiana,
which he painted as a veritable Garden of Eden,
inhabited by friendly noble savages
willing to exchange a cornucopia of exotic goods.
These would flow to France through a new city
at the mouth of the Mississippi, New Orleans,
named to flatter the always susceptible French Regent, the Duke of Orleans.
All the colony lacked was settlers.
Grasping that Frenchmen were more interested in stock market speculation
than the hard graft of colonisation,
Law launched a recruitment drive in the Franco-German borderlands.
Several thousand bold Germans signed up and set sail to the promised land.
They ended up here.
This was the unfortunate immigrants' first gIimpse of Louisiana,
an insect-infested swamp.
Within a year, 80% of them had died of starvation
or tropicaI diseases Iike yeIIow fever.
SadIy for Law, the Mississippi Company's principaI asset,
its monopoIy on trade with Louisiana, Iooked Iike being more or Iess worthIess.
As the inscription on this Dutch cartoon put it,
''This is the wondrous Mississippi land made famous by her share dealings,
''which through deceit and devious conduct has squandered countless treasures.
''However men regard the shares, it is wind and smoke and nothing more. ''
To Law, economic success was all about confidence.
But this was a confidence trick.
THUNDER RUMBLES
ln Paris, the first rumours began to circulate
that all was not well with Law's system.
The share price of the Mississippi Company began to slide.
ln a desperate bid to avert meltdown, Law called on the Duke of Orleans
to cut the official share price from 9,000 livres to 5,000.
This was when the limits of royal absolutism,
the foundation of Law's system, suddenly became apparent.
Within weeks, the share price was in freefall.
Angry crowds gathered outside Law's bank.
Stones were thrown, windows broken.
By December, the shares had lost more than 90% of their value.
This French map from 1 730 gives an absoIuteIy wonderfuI visuaI representation
of the worId's first stock market bubbIe.
Here at the top is the goddess Fortuna,
pouring down goodies from her horn of pIenty.
Here are the happy investors receiving their shares
in the Mississippi Company from fIying cherubs.
But down beIow, there are some other cherubs chopping up the shares
beside a shattered printing press.
And there are two more cherubs bIowing bubbIes.
To the right, there are four very unhappy Iooking men,
one of whom is preparing to commit suicide by faIIing on his sword.
As if pricked by a sword, the Mississippi Bubble had now burst.
lt was at this moment that Law, vilified by the French people, fled the country.
He never saw his wife and daughter again.
He spent the rest of his life in Venice,
dividing his time between writing long, self-justifying letters
and gambling.
He died in 1 729.
ln France, however, his devastating legacy lived on.
Law's bubbIe and bust fataIIy set back France's financiaI deveIopment,
putting Frenchmen off paper money and stock markets for more than a generation.
The French monarchy's fiscaI crisis went unresoIved
and for the rest of the reign of Louis XV and Louis XVI,
the crown Iived from hand to mouth.
Eventually, France was driven by royal bankruptcy to revolution.
The Mississippi Bubble of 1 7 1 9 was the first stock market bubble in history.
But it's been by no means the largest.
When we think of stock market bubbles, we think of this.
The nightmare that haunts the world of finance,
which has returned to haunt us in the last few months,
is that there could ever be a bust to match the Great Wall Street Crash,
which began on October 24th 1 929, Black Thursday.
Over the next three years, the US stock market declined a staggering 86%,
reaching its nadir in June 1 932.
What was worse, this asset price deflation
was accompanied by the worst depression in all history.
ln the United States, output collapsed by nearly a third.
Unemployment reached a quarter of the civilian labour force.
Why did the 1 929 crash happen?
Why, indeed, does any crash happen?
This remains one of the most hotly debated questions in financial history.
There are all kinds of technical explanations for stock market crashes.
But at root, it's all about herd psychology.
ln a bull market, that's when share prices are rising,
even the smartest investors can succumb
to what the former chairman of the American Federal Reserve,
Alan Greenspan, famously called ''irrational exuberance''.
But when the herd changes direction,
sometimes in reaction to nothing more than a change in the wind,
their mood can also change from euphoria to gloom.
The herd stampedes.
One cow gets scared,
and that fear just transIates to the whoIe herd and they aII take off.
And the rest of them don't know why they're scared.
They just feeI that fear and they run.
Fear overwheIms aII rationaI thinking.
UntiI it's over.
ln market jargon, the buyers have turned into sellers, the bulls into bears.
Despite the zooIogicaI imagery,
the point is that markets are mirrors of the human psyche.
Like homo sapiens, they are prone to mood swings,
from greed to fear.
They can suffer from depression.
And sometimes they can experience compIete breakdowns.
That happens rather more often
than some financiaI theories wouId Iead you to expect,
but not so often that we're ever quite ready for the next breakdown.
lf movements in financial markets
were statistically distributed like human heights,
there would hardly be any crashes.
Most months would be clustered around the average,
with only a tiny number witnessing extreme ups or downs.
Let's face it, not many of us are below four feet in height or above eight feet.
This is the cIassic beII-shaped curve,
where things are distributed according to their frequency -
the most commonIy occurring cIustered here around the middIe
and the reIativeIy rare dwarves and giants out here at the extremes.
That's why it's quite a steep curve,
because most human heights are quite cIose to the average.
But if you do the same thing for financiaI markets,
for daiIy moves in the stock market,
you end up with something that Iooks more Iike this,
with reIativeIy fewer smaII movements
and reIativeIy more big movements down or up.
And these are what the statisticians mean when they taIk about Iong or fat taiIs.
lf stock market movements were distributed like human heights,
a drop of 1 0% would happen only once every 500 years.
And stock market crashes of 20% in a year would be unheard of,
rather like people just six inches tall.
Whereas in fact, there have been seven such crashes in the past century.
As it turned out, those who feared that the brief panic of October 1 987
would turn into the next great crash were proved wrong.
The market had one really bad month, then rallied.
But that bubble provided a golden opportunity for corporate crookery.
What John Law's Mississippi Company had been to the bubbIe
that Iaunched the 18th century,
so another company wouId be to the bubbIe that ended the 20th.
It was a company that promised its investors
weaIth beyond the dreams of avarice.
It was a company that cIaimed to have reinvented the entire financiaI system.
And it was a company that used its impeccabIe poIiticaI connections
to ride aII the way to the top of the buII market.
Named by Fortune Magazine as ''America's Most lnnovative Company''
for six consecutive years, that company was...
Enron.
Seven years after its collapse,
most of us have consigned Enron to the dustbin of financial history.
Yet it pioneered many of the dubious business practices
that continue to plague us today.
ln the three years up to August 2000,
shares of the Houston energy company had gone through the roof.
Once a small-time gas company in Nebraska,
Enron was now the fifth largest company in the United States,
with stated revenues of 1 1 1 billion dollars.
Enron was the darling of Wall Street.
Yet a little historical knowledge might have made Enron's investors think twice.
lndeed, the story of Enron was like a re-run of the Mississippi Bubble
280 years before.
John Law's plan had been to revolutionise French government finance.
Ken Lay, the chairman of Enron,
planned to revolutionise the global energy business.
For years, the industry had been dominated by huge utility companies,
which both produced the energy, pumped the gas and generated the electricity,
and sold it on to consumers.
Lay's big idea was to create a kind of energy bank,
which would act as the intermediary between suppliers and consumers.
His dream was to make Enron the greatest energy company in the world.
Caught up in the heady spirit of the times
was senior Enron executive, Sherron Watkins.
It was very eIectric.
You feIt Iike you couId... If you came up with a good idea,
Enron wouId give you the money and you couId go for it at a very young age.
Like John Law, Ken Lay had friends in high places.
He contributed generously to George HWBush's presidential campaign.
As President, Bush duly pushed through legislation
that deregulated the energy industry.
Riding a global wave of energy privatisation,
Enron snapped up assets all over the world.
ln Latin America alone, the company had interests in Colombia, Ecuador,
Peru and Bolivia, where they laid a huge pipeline across the continent to Brazil.
And thanks to the intervention of Ken Lay's personaI friend, George W Bush,
Enron was abIe to acquire a controIIing stake
in the Iargest naturaI gas pipeIine network in the worId,
here in Argentina.
Above all, however, Enron traded.
Not only in energy, but in virtually all the ancient elements
of earth, water, fire and air.
lt even traded in internet bandwidth.
Enron led a Wall Street surge unnervingly reminiscent of the Mississippi Bubble.
Despite his half-hearted warnings against ''irrational exuberance'',
this bull market was propelled upward
by the chairman of the US Federal Reserve, Alan Greenspan.
As in John Law's time, a stock market bubble could only happen
if money was abundant.
And by raising interest rates only once between February 1 995 and June 1 990,
Greenspan made sure that it was.
The rewards for investors were immense,
and aIso for the managers here at the company's Houston headquarters,
who were generousIy incentivised with share options.
In the space of just three years after 1997,
the Enron stock price rose by a factor of very nearIy five,
from beIow 20 doIIars a share to above 90.
It was the Mississippi Company aII over again.
Even a city used to extravagant oil-fired living had seen nothing like it.
This is where Ken Lay and his Enron executives used to live,
in River Oaks, Houston's most exclusive neighbourhood.
ln the final year of its existence, Enron paid its top 1 40 executives
an average of 5.3 million dollars each.
Luxury car sales went through the roof.
(Sherron Watkins) You got muItipIes of your annuaI base pay.
You were reaIIy Iess thought of if you got a percentage,
even if it was 75% of your annuaI base pay.
Oh, you were getting a percentage. You wanted muItipIes.
You wanted two times your annuaI base pay,
three times, four times your annuaI base pay, as a bonus.
And Lay, the pillar of society,
espoused the highest moral standards for his company.
(Ken Lay) Enron is a company that deaIs with everyone with absoIute integrity.
We pIay by aII of the ruIes, we stand by our word,
we mean what we say, we say what we mean.
The only problem was that, like John Law's system,
the Enron system was an elaborate fraud.
PHONE RINGS
ln this tape, an Enron trader
is discussing with the El Paso Electric Company
how to hold California's consumers to ransom
by closing power stations to restrict the supply of electricity.
OK.
The results were not only the higher prices Enron wanted,
but also, despite there being plenty of power available,
repeated blackouts for consumers.
Enron's money was stolen in more ways than one.
The company's stated assets were vastly inflated.
But its key financial innovation was to remove its debts from the balance sheet
and hide them in so-called ''special purpose entities'',
dubious names like Chewco and Raptor.
Each quarter, the company's executives had to use more smoke and more mirrors
to make actual losses look like bumper profits.
lt couldn't last.
When you cook the books and then you try to hide it,
you're toast.
When they sensed the game would soon be up,
Lay and his cronies started to unload
hundreds of millions of dollars worth of shares,
while at the same time reassuring the public
that the share price would continue to soar.
Like John Law's desperate attempts
to stem the freefall of Mississippi Company shares,
all Ken Lay's reassurances were in vain.
On November 1 5th 2001, Alan Greenspan, head of the US Federal Reserve,
received the Enron Prize for Distinguished Public Service,
adding his name to a roll of honour
that included Mikhail Gorbachev and Nelson Mandela.
Greenspan deserved it, because without his monetary policies in the late '90s,
the Enron bubble, and the dotcom bubble that coincided with it,
would surely have been impossible.
Just two weeks after the award ceremony, Enron filed for bankruptcy.
The company owed billions.
But just how many billions?
When Enron decIared bankruptcy, December 2001 ,
they met with their creditors to say,
''Erm, guys, I know on our baIance sheet,
''we have reported 13 biIIion doIIars of Iong-term debt.
''Our true Iong-term debt picture is 38 biIIion doIIars.
''There's 25 biIIion doIIars in off-baIance-sheet debt''.
(NiaII Ferguson) Did those numbers come as a shock to you?
You knew there were probIems, but not on that scaIe.
Yes, I mean, I think we were aII fIabbergasted.
The day before 4,500 employees at Enron's HQ were given their marching orders,
a final round of bonus cheques were issued to grateful executives.
ln May 2006, Ken Lay was convicted on all six counts of securities and wire fraud.
His sidekick, Jeffrey Skilling, was sentenced to 24 years in prison.
Lay died before sentencing, while on holiday in Aspen, Colorado.
Yet the fraudulent practices that propelled Enron's rise and fall
didn't die with Ken Lay.
On the contrary, the habit of hiding debt off-balance-sheet
that Enron pioneered subsequently spread throughout the Western financial system.
The unravelling of this dodgy accounting
has been a key component of the current crisis.
In many respects, I think the Enron probIem was in a Petri dish
and the germ has spread throughout the financiaI markets.
Some of which comes from Enron traders and finance foIks
that are gainfuIIy empIoyed at banks and energy trading houses.
So that rot is everywhere in the financiaI markets.
The joint stock Iimited IiabiIity company truIy is a miracuIous institution.
And yet throughout financiaI history,
there have aIways been a few crooked companies,
just as there have occasionaIIy been irrationaI markets.
Indeed, the two go hand in hand,
because it's preciseIy when the buIIs are stampeding most enthusiasticaIIy
that peopIe are most IikeIy to get taken for the proverbiaI ride.
THUNDER RUMBLES
As we've seen in the past year,
the path of financial markets can never be as smooth as we would like.
Since the current credit crunch began,
some stock markets around the world have fallen by as much as 50%.
So long as human expectations of the future veer
from the over-optimistic to the over-pessimistic, from greed to fear,
stock prices will tend to trace a line
not unlike the jagged and irregular peaks of the Andes.
As an investor, you just have to hope
that when you have to come down from the summit of euphoria,
it'll be on a nice, smooth ski-slope, and not over a sheer cliff.
But is there nothing we can do to protect ourselves
from real and metaphorical falls?
As we'll see in the next episode of The Ascent Of Money,
finance is as much about risk as it is about return.
And the big question is,
are you insured?
Or are you hedged?