The company had fabricated revenues. Wall Street, which had run
the stock price up, was fooled. Thousands of people lost their life
savings. Regulators scrambled to pick up the pieces while Congress
held hearings to determine what went wrong.
No, it's not Enron. The company in question was Equity Funding,
an insurance firm based in Los Angeles that went bust in 1973.
Flameouts have long been a feature of American business. In fact,
every few years, a new scandal seems to surface, often with the same
ingredients: corporate greed, gullible accountants, high-powered
connections, and broke investors.
But the latest such collapse is a particularly spectacular one.
The name "Enron" has already become shorthand for "disaster," a
symbol of what can go wrong when hubris spreads through an executive
suite and financial reports become a skim coat over wide cracks in
If nothing else, Enron's collapse will prompt a hard look at
accounting practices, retirement plans, and other key aspects of US
capitalism - as well as the enforcement powers of the Securities and
"When the seventh-largest corporation crashes and burns, the
wreckage is diverse and scatters in many directions," says Robert
Reischauer, president of the Urban Institute in Washington.
The degree to which Enron has fallen is summed up by the fact
that its stock may now be worth more as a souvenir than as a
certificate of ownership. Bob Kerstein, an accountant and financial
historian, is offering Enron stock certificates on his collector web
site, Scripophily.com, at $100 a pop. Or he was - right now he's
Thus a firm that once was seen as an economic pioneer is now
keeping company with Disney figurines and pillows crocheted with
sayings that purport to be witty.
"They will be great collectibles," says Mr. Kerstein of the Enron
Not that scandal in the financial markets is anything new. In the
1920s, for example, investors bought shares in Grey Goose Airways,
which promised to build a plane with wings that flapped.
Even after the Securities and Exchange Commission started
patrolling the markets in 1934, fraud-tinged bankruptcies continued.
In recent years, large corporate collapses have included that of the
Bank for Commerce and Credit International (BCCI), which entangled
Washington insiders, and Lincoln Savings Bank, which cast a long
shadow over Congress.
Only two years ago, the SEC brought fraud charges against the
executives of Cendant Corp. - a corporate bust that costs investors
"History just repeats itself - fraud and greed," says Kerstein.
The Wall Street connection
One of the reasons for the modern-day scandals could be changes
on Wall Street itself.
In the past, most brokers made their money on commissions earned
from the buying and selling of stock. This led Wall Street firms to
employ stock analysts who scrutinized earnings statements looking
for clues about the basic business. The analysts issued buy or sell
recommendations, which could result in commissions.
Yet commissions have dropped dramatically over the past 20 years,
particularly with the advent of discount brokers and online trading
companies. As a result many brokers have downsized their research
The role of the analyst has changed, too, says Don Straszheim, a
former chief economist at a big securities firm.
"The analyst is much more focused on how can I bring investment
banking business to the firm instead of providing valuable
investment advice to the institutional investors," says Mr.
Straszheim of Straszheim Global Advisers in Westwood, Calif.
This shift was most noticeable during the 1990s when the dot.com
boom took off. Recruiters on Wall Street looked for analysts who
could attract new business. They got paid $10 million or more. …