Arthur Andersen Ex-CEO: Enron, Europe Are Similar
Assistant Editor, CNBC.com
A number of similarities exist between the collapse of Enron in 2001 and the current sovereign debt crisis in the euro zone, Joe Berardino, a managing director at Alvarez & Marsal and the former CEO of Enron's accounting firm, Arthur Andersen, told CNBC.
"If you look at the Enron story at its most simplistic, you had a really successful company that was a bricks and mortar company, that became a trading company, that was very successful as a trading company… levered up," he said, using the term popular in business parlance for borrowing. "And then we found that leverage is really good, until it's bad," Berardino said.
Enron filed for bankruptcy 10 years ago on Friday. The scandal surrounding the energy trading firm also effectively brought down Arthur Andersen as a going concern.
Asked whether lessons had been learned since Enron filed for bankruptcy, Berardino said, "we're still learning" and pointed to the sovereign debt crisis currently engulfing the euro zone.
"(Enron) ran out of time in terms of its liquidity and a lot of the same elements — leverage, the need for liquidity, crisis when you lose confidence — are repeated in all those examples. And I would argue we're now living through it with the sovereign crisis in Europe," he said. "There are a lot of the same elements."
The 'Greed Path'
Berardino said "it's easy to go down the greed path" in corporate America due to the nature of financial transactions and the rise of service sector industries, where what is "produced" is less tangible.
"I think what complicates the matter is that we've gone more toward a service economy and years ago went off the gold standard… (now) you're finding you're trading pieces of paper, and when you're trading pieces of paper, the underlying issue is trust in your counterparty and trust in the system and transparency in the system. And so these two issues I think get intertwined," he said.
He added that although he believed leverage was essentially a good thing, the real matter at hand for markets is a lack of liquidity.
"What leverage does is it puts all your trades on octane, and it's great until it's not great and I think the real lasting issue there is also the need for liquidity which we lived through three years ago and we're living through now," Berardino said.
Europe Crisis 'Solvable'
Following a speech by German Chancellor Angela Merkel in which she warned the crisis in the euro zone would take years to solve, Berardino agreed it would take time, but the issue of sovereign debt was "largely solvable"
"The problem is significant, it's largely solvable, it is in my opinion a political issue. I think what you have to get aligned is accountability and responsibility and right now a lot of that is resident in the individual countries," he said. "They're more like individual states, and there's not enough in that union to hold it together economically because those alignments aren't yet in place."
"It's not the United States of Europe. Those are sovereign countries with their own cultures and traditions and pride and how do you reconcile the two is the open question," he added.
Remaining optimistic, Berardino said there was now recognition of problems within states in Europe and "those conversations seem to be on the table so maybe there's some reason to be hopeful."
However, he added that a credible solution from euro zone leaders on how to resolve the current crisis was crucial to calm global markets.
"I think what's needed in the short term is clarity and a vision and a plan that markets can get their minds around," he said.
"I think it has to be a credible solution, I think the markets are smart enough to see through smoke and mirrors. I think markets are smart enough to look through kicking cans down the road, we've done all that for many, many years," he added.