Rats Staying on After the Ship is Sinking

Something in the thread of a recent post, and Steven Kyle’s recent post on short term trading horizons, reminded me of a question I’ve had for a long time… what was up with Enron? Who knows… it may even have been possible for most people above the janitor’s pay scale in the Houston headquarters not to know (if they went out of their way not to know) that the numbers didn’t add up. (I personally doubt it, and perhaps in some other post I’ll go into details why I reach that conclusion, having been in that headquarters for a day at the end of the year 2000.) However, at least some people, not only knew but knew the details.

Now, assuming you have the moral standards that allow you to go along or participate in such an environment, the rational thing is to go along, but walk away with a lot of cash before the inevitable end. Now, it may be tough to spot the inevitable end – perhaps the temptation is there to always stick around just a bit longer – but as I recall, only one of the big boys, Lou Pai, actually showed any signs of doing just that. I should hasten to note that Lou Pai, though he headed a few of Enron’s divisions and left the company with over $250 million payout 6 months before the end, has not, as far as I can tell, been alleged to have committed any wrong-doing.

But Enron is not a special case where the folks running the shell game decide to stay on long after the gig is up. We all can name other instances where it happened in corporate America. And it will happen again.

But its not just corporate America. For example, I had a post a while back showing that, using data available in 2000, one should have anticipated that cutting taxes was going to lead to reductions, not increases in revenue. Now, I don’t doubt GW was ignorant, but his economic advisors had to have the skills to do the analysis. Maybe you couldn’t tell at the time that we would have, for the first time in history (at least of the data that the OMB has up), 3 consecutive years in which nominal tax revenues declined, but you could tell that the Economic Blueprint was BS. And yet, smart guys went along with it. Heck, they’re still going along with it now. (And why not… in this case, they’re making out well, being hired by the Romney organization to do the same for yet another candidate.)

And its not just something involving business or economics. Even GW had to know a year ago that things were not fine in Iraq, let alone a Rumsfeld or a Cheney. But a bunch of smart guys (and GW too) continued to the peddle the line that all was well. A bunch of cheerleaders too.

So why do people continue propping up the house of cards after it has started falling? Why do so few of the rats try to leave until its too late?