Yellow Flag.(Brief Article)

At first glance, the Enron debacle seems like an "only in America" kind of story. An old-style energy company transforms itself into a high- flying trading house, creating a new business model that is copied the world over. It's powered by a Texas buddy of the president, yet crashes and burns virtually overnight amid accusations of abysmal management, dubious accounting, lies and even fraud. The spectacular bankruptcy would have come as an even greater shock in Europe, where a more conservative culture is slower to pioneer radical business experiments.

Yet Europe has been the backdrop for similar freewheeling capitalist tales. Consider the case of the German industrial conglomerate Metallgesellschaft (MG). In the early 1990s the company branched out from its stodgy metals and mining businesses into fancy financial- derivatives trading. Heinz Schimmelbusch, the company's Austrian CEO, was an outsider known for shaking things up. To counteract the effects of falling metal prices, he moved MG into the oil-futures business. Business was hot for a time, but when crude prices began falling, MG suffered major losses on its futures portfolio. The company was unable to raise additional financing and was on the brink of bankruptcy. In 1993 several banks with a stake in MG (including Deutsche) were forced to implement a $2 billion bailout plan. Schimmelbusch was fired and taken to court on charges including breach of trust (the case was later dismissed).

The reasons for MG's downfall remain open for dispute, but the broad parallels with Enron are striking. Market shifts helped push both companies into a bad position, and the shift from old to New Economy businesses proved more perilous than expected. Of course, MG has since made that transition, as have some of Europe's most famous companies (think Vivendi and Mannesmann). What Enron and (at the time) MG both failed to do, says University of Mannheim Prof. Martin Hellwig, is understand the risk inherent in their particular choice of new businesses: trading.

The mania of the '90s inspired entrepreneurs to open up new markets for everything from energy and plastics to complex financial investments. The risks of such operations are often unpredictable. That's one reason finance is among the most heavily regulated industries in both the United States and Europe. "It's not old versus new," says Hellwig, "but whether the proper systems for managing risk were in place." This includes measures as simple as ...