Re Enron and Sarbanes-Oxley, from Criminalizing Capitalism in City Journal:
... in the end, Sarbanes-Oxley has just made it easier for ambitious government attorneys to criminalize bad business judgment and complex accounting in hindsight. Further, in their focus on strengthening legal enforcement, the feds have passed up opportunities to create commonsense protections for investors. Worse still, the government has instilled investors with false confidence by implying that they can rely on prosecutors, not prudence, to protect their market holdings. Now the housing and mortgage meltdown—which could hurt the economy far more than Enron did—is reminding investors that no law or regulation can protect them from economic disruption.
Politicians and business pundits saw Enron’s collapse as an unprecedented market failure that cried out for a new remedy. Hadn’t the country’s best stock analysts believed the Enron “story”—permanently high growth through dazzling innovation? Hadn’t the nation’s bond-rating agencies awarded Enron a rating implying that prudent investors could lend to the doomed company? Hadn’t Enron’s “independent” auditors and outside counsel signed off on its crazy financial statements? And hadn’t Enron employees who had invested heavily in company stock seen their life savings evaporate?
Yet Enron was actually an example of how markets work—messily, sometimes tardily, but in the end with ruthless efficiency. Even as most Wall Street analysts bought Enron’s sales pitch and accepted its financial statements, investors slashed the value of the company’s shares in half—far surpassing declines in the broader market—during the year before the accounting scandal broke. Investors had begun to withhold money before the government launched investigations. When Enron declared bankruptcy in December 2001, the regulators were left only to certify the market’s verdict. Those investors and lenders who hadn’t scrutinized the company lost money, as they should have.
Though Enron didn’t signal a market failure, it was a business failure, of course.
