After Enron. (Forward Observer).(Brief Article)

After any breakdown of a public institution, politicians feel the urge to "fix" things so it doesn't happen again. Often, however, the cure is worse than the disease. That's the case with the proposed remedies following the collapse of Enron.

Why does Congress need to do anything in the first place? The Enron scandal was primarily a story of executives and auditors deceiving investors about the true state of a business. If it was "greed" that caused the deception, it was greed that uncovered it as well. James Chanos, a money manager who specializes in short-selling (speculating that a stock's price will fall), got wind of Enron's shenanigans, and tipped off a reporter at Fortune. Enron was forced to restate its earnings and acknowledge hidden debts.

Investors reacted with fury, dumping Enron stock. The company's worth declined from $30 billion to almost nothing. Before any indictment or government report, the market pronounced Enron guilty and imposed a sentence of capital punishment. Then longtime clients started punishing Arthur Andersen, Enron's auditor. Delta ended its 53-year relationship with the auditor, as did Merck and Freddie Mac. Andersen, and the executives who allowed it to stray, face oblivion.

This is just what we want markets to do: Exact justice quickly and brutally. There are already plenty of laws against fraud to handle corporate executives who lie. Punishments meted out by markets and legal authorities serve as a powerful demonstration to others. The Enron reaction from many corporations, like General Electric, has been to issue even more detailed annual reports. Investors have battered the stocks of any firms they suspect of being dishonest.

Is a further response needed? Just one. If Congress really wants to help investors analyze complex corporations, it should encourage firms to issue dividends. Quarterly payouts are the most accurate manifestation of a company's health; it's hard to monkey with cash. But dividends have been on the decline--mainly because they are taxed twice at high rates, first at the corporate level, and then again when the individual receives them. If Congress ended this double taxation, shareholder dividends would recover, and small investors would regain a ...