All language subtitles for The Ascent of Money - 3of6 - Blowing Bubbles - Ch4 2009 DVDRip XviD AC3

Some people today say that companies -

and particularly multinational
corporations - rule the world.

lt's pretty hard to believe
that any kind of human organisation

could tame the vast natural barriers
of South America.

But one company believed it could.

By constructing a 1.5 billion dollar
gas pipeline from Bolivia

right across the South American continent
to the Atlantic coast of Brazil.

By running gas along
the longest pipeline in the world

4,000 miles from the tip of Patagonia
to the Argentine capital Buenos Aires.

Such schemes exempIify the vauIting
ambition of modern capitaIism,

but they're onIy possibIe
because of one invention -

the joint stock company.

lf the 1 6th century had seen
a revolution in money and credit,

and the 1 7th had witnessed
the birth of the bond market,

then the next step in the story
of the ascent of money

was the rise of the joint stock
limited liability company.

But the ability of the company
to transform our lives

would depend on another innovation...

The stock market.

The price that people are prepared to pay
for a company's shares in the market

tells you how much money
they think it'll make in the future.

But as we have discovered
in recent months of financial turmoil,

stock markets can also be shock markets.

The future is aIways uncertain.

But we human beings
are prone to over-optimism.

When prices here on the New York Stock
Exchange surge upwards in synch,

it's as if investors are gripped
by a kind of coIIective euphoria -

what the former chairman of
the FederaI Reserve, AIan Greenspan,

once famousIy caIIed
''irrationaI exuberance''.

So stock markets reaIIy can be
Iike soap bubbIes.

We never quite know
when they're gonna burst.

The exuberance was especially irrational
and the burst especially painful

for the company that proposed
those vast projects in Latin America.

Enron became the biggest corporate fraud
in modern American history.

But Enron was very far
from the only corporate scam

since shares were first bought and sold
400 years ago.

And the shady practices
it epitomised live on.

lndeed, they've been a key cause of the
financial crisis we're living through now.

Cooked books? Stock prices rigged?

Been there. Done that.

For centuries.

Nothing illustrates more clearly
than the history of stock market bubbles

how hard human beings find it
to learn from history.

STOCK MARKET HUBBUB

Hidden away among
the many splendours of Venice

is a small clue to one of the most
astonishing tales of adventure

in all financial history.

''To the honour and memory
of John Law of Edinburgh,

''most distinguished controIIer of
the treasury of the Kings of the French.''

This is the finaI resting pIace of the man
who invented the stock market bubbIe.

An ambitious Scot, a convicted murderer,

a compuIsive gambIer
and a fIawed financiaI genius,

he not onIy caused the first true
boom and bust in asset prices,

he aIso indirectIy caused
the French RevoIution.

There was a time when John Law owned a
quarter of what is now the United States,

only to lose it all in history's
first great crash.

From Edinburgh to Amsterdam to Paris,
all the way here to New Orleans,

and finally to Venice, Law's story
is a classic tale of boom and bust.

lt's also very much a story
for our own times.

Hidden away here in the warehouse
of the Louisiana State Museum

is the onIy known painting of John Law.

Here he is.

With that Iean and hungry Iook,

he reaIIy is, for aII the worId,
a Scotsman on the make.

The path that led Law ''from obscurity
to celebrity, to notoriety'' is a path

that many of the great stock market
players have followed since.

Law was born here
in Edinburgh in 1 67 1,

the son of a successful goldsmith
and heir to the estate of Lauriston.

ln 1 694, while living in London,

Law killed a man in a duel over a woman

and was sentenced to death.

Somehow, Law managed to escape
from prison and fled to Amsterdam.

He couldn't have picked
a better town to lie low in.

By the 1 690s, Amsterdam was
the world capital of financial innovation.

To help finance their war against Spain,

the Dutch had introduced one
of the world's first national lotteries.

To protect their merchants
from dodgy coinage,

they'd created the world's
first central bank.

But the one that had
the biggest impact on Law

was the single greatest
Dutch invention of them all -

the company.

The story of the company had begun
1 00 years before Law's arrival

as Dutch traders spread out
all over the world,

from Manhattan lsland
to the Cape of Good Hope.

But it was Asia that became the primary
target of Dutch commercial expansion.

Why?

The East Indies were so aIIuring
because of these -

spices -

pepper, cIoves, nutmeg, ginger.

Europeans craved them to fIavour
their food, but aIso to preserve it.

TraditionaIIy, they'd come overIand
by the Spice Road.

But the Dutch pIan was to fetch them
the Ionger, but quicker way, by sea.

And that pungent aroma
was the smeII of money to be made.

This painting shows the return of one
of the first Dutch fleets from the East.

The inscription reads, ''Four ships sailed
to go and get the spices towards Bantam

''and also established trading posts.

''And came back richly laden
to the poles of Amsterdam.

''Departed 1 st May 1 598.

''Returned 1 9th July 1 599. ''

The Asian spice trade was so profitable

that just one return trip could pay
for the construction costs

of a ship like this.

But so prolonged was the journey round
the Cape of Good Hope to the East

and so hazardous that merchants had
to pool their resources and their risk.

The result was around six fledgling
East lndia enterprises.

In 1602, at the instigation
of the Dutch government,

these various companies came together

to form the United Dutch East India
Chartered Company,

or Vereenigde Oost-Indische Compagnie
for short.

And this is its originaI charter,

which speIIs out that the company
was to enjoy a monopoIy on aII trade

from the Cape of Good Hope aII the way
east to the Straits of MageIIan.

Pretty much haIf the worId.

The structure of the new entity was novel.

The capital of the company
was divided unequally

between all the major Dutch cities.

Citizens were invited to participate
in the new venture by investing.

lt was the form of this investment
that was the real novelty.

This rather wonderfuI painting is
of the famiIy of one of the founders

of the Dutch East India Company,
Dirck Bas.

For 6,000 guiIders,
he and 16 other so-caIIed ''participants'',

became the firm's managing directors,
the bewindhebber.

After 1606, however, anyone who put
his money into the East India Company

received an ''aktie'' -
IiteraIIy an ''action'',

or as we wouId say,
''a piece of the action'' -

a share in the company's future profits.

And here it is, the worId's
very first share certificate,

issued by the worId's
very first muItinationaI company.

AImost exactIy four centuries ago.

Three years later,
Bas and his fellow directors declared

that any shareholders who wanted their
cash back could not have it refunded,

but would have to sell their shares
to another investor.

Overnight, a market for
the company's shares was born -

the worId's first true stock market.

This invention was to change
the face of finance for ever,

because it created a mechanism whereby
the price of shares was determined

by the laws of supply and demand,
sellers and buyers.

And as the renegade Scotsman
John Law couldn't help but notice,

the trading of these company stocks

was making the world's
first shareholders very rich indeed.

By 1 61 0, the world's first joint stock
company, the Dutch East lndia Company,

was ready to conquer the world.

lt had a new charter, new shareholders
and a burgeoning trade in these shares.

But it had to fight to survive,

literally.

Having established a string of factories
and warehouses across South Asia

from Java to lndia, the company
had to struggle to keep the Spaniards

and their English competitors at bay.

With 40 warships and a private army
of 1 0,000 soldiers,

the directors of the East lndia Company
were the original corporate raiders.

For the Dutch East India Company,

firepower and foreign trade
went hand in hand.

But the key to the company's success
wasn't just its cannons

Iike these ones aboard The Batavia,
the pride of its fIeet.

Like aII big companies, it was abIe
to combine economies of scaIe

with reduced transaction costs

and what economists caII
''network externaIities'' -

the abiIity to pooI information between
muItipIe empIoyees and agents.

The Batavia was part man-of-war,
part muItinationaI corporation.

The big networked company
was simply more efficient.

That was why, by the 1 620s,

it had established a virtual monopoly
on spice exports from Asia to Europe.

The world's first multinational was making
its shareholders enormously wealthy.

I'm Iooking here
at the originaI sharehoIders' register

of the Dutch East India Company,

and IiteraIIy every name in here
was a winner.

If you'd put 1 ,000 guiIders
into the company at its very inception,

by 1 736, your investment
wouId have been worth 7,000.

Over its entire Iifetime, the company
paid an average annuaI dividend of 16.5%.

VirtuaIIy aII its profits were paid back
to the sharehoIders.

Dirck Bas's original shareholding
of 6,000 guilders

had been transformed
into a 500,000 guilder fortune.

To John Law, lying low in Amsterdam
having escaped the gallows in London,

the workings of the Dutch East lndia
Company came as a revelation.

Law was living off his winnings
at the gambling table.

But he was fascinated by the relationships
between the company,

with its splendid offices in the
Hoogstraat, the nearby stock exchange,

where dealers busily traded the company
shares, and the Bank of Amsterdam.

Yet this Dutch financial system
struck Law as not quite complete.

To Law's financiaIIy supercharged mind,
the Dutch were missing a trick, or two.

For one thing, it seemed compIeteIy nuts

to restrict the number
of East India Company shares

when the markets
were so cIearIy enamoured of them.

Law was also puzzled by the conservatism
of the Bank of Amsterdam.

lt had created an internal system which
allowed merchants to settle their accounts

by direct cashless transfers,

but it hadn't issued
any real banknotes to the public.

The idea was aIready taking shape
of a breathtaking modification

of the institutions that Law
had first encountered here in Amsterdam.

OnIy combine the properties of a monopoIy
trading company and a pubIic bank

and the sky reaIIy wouId be the Iimit.

Law was preparing to unIeash
a whoIe new system of finance

on an unsuspecting nation.

ln 1 7 1 6, John Law arrived in Paris.

He had identified France
as the ideal laboratory

for what would be the biggest experiment
in the history of the stock market.

But why did the French
give him his chance?

The answer is that France's fiscal
problems were exceptionally desperate.

The country was saddled
with enormous public debts

as a result of the wars of Louis XlV.

When the Sun King died in 1 7 1 5,

the Duke of Orleans, who was acting as
Regent for the under-age king Louis XV,

faced a country on the brink of its third
bankruptcy in less than a century.

lt was the perfect opportunity for Law,

the maverick self-taught economist
who'd developed his theories

somewhere between the casino
and the stock market.

Law's ambition was to revive
economic confidence in France

by estabIishing a bank
on the Dutch modeI,

but with the difference that this bank
wouId issue paper money

Iike this 100 Iivres note.

As money was invested in the bank,

the government's huge debt
wouId be consoIidated.

But at the same time, and this was
the reaIIy important part of Law's system,

paper money wouId revive French trade,
and with it French economic power.

The Royal Government gained doubly.

Consolidation simply meant
that its onerous debts

were magically transformed
into shares in Law's bank.

At the same time,
the monarch gained the ability

to print as much money as he liked.

As Law wrote - ''l maintain that an
absolute prince who knows how to govern

''can extend his credit further and find
needed funds at a lower interest rate

''than a prince
who is limited in his authority.

''ln credit, supreme power
must reside in only one person. ''

That absoIute power
was in the hands of the Duke of OrIeans

who Iived here in the PaIais RoyaI,

just a short step from Law's apartment
in the PIace Vendome.

It was to him that Law
now unfoIded his scheme.

The prize was nothing Iess
than the revivaI of French power

through financiaI engineering.

But that was onIy haIf
of Law's ingenious pIan.

As Law wrote,

''The bank is not the only,
nor the grandest of my ideas.

''l will produce a work
which will surprise Europe

''by changes more powerful than were
produced by the discovery of the lndies. ''

The second part of Law's idea

was that a huge monopoIy
trading company shouId be estabIished,

the Compagnie d'Occident,
the Company of the West.

As he put it, the whoIe nation
wouId become a body of traders

and Law himseIf, named here
as the company's chief director,

wouId be at its head.

The focus for this wildly ambitious
scheme would be in America,

where the French laid claim
to a vast tract of land

either side of the Mississippi -
Louisiana.

The Regent gave Law's company, what
was to become the Mississippi Company,

a monopoly on trade with the new colony.

Frenchmen, regardless of rank, were
encouraged to buy shares in the company.

Law's name headed the list of directors.

In modern parIance,
what these documents teII us

is that Law was attempting
a refIation. And why not?

France in 1 7 16 was in a depression

and Law's banknotes
heIped stimuIate a recovery.

At the same time, what he was doing

was effectiveIy transforming a burdensome
and badIy managed pubIic debt

into shares in what was a privatised
tax-gathering and trade company.

WeII, what was not to Iike about that?

ln a fever of mass speculation,

the Mississippi Company's
share price soared,

from the original price of 500 livres
to 5,000 on September 4th.

By December 1 7 1 9,
it had reached 1 0,000.

And this is where it aII happened.

This was where Law's share issuing office
was Iocated, the Rue Quincampoix.

You can imagine the scenes of frenzy here

as haIf of Paris descended
on this narrow aIIeyway

aII desperate for a piece of the action.

The higher the share price went,
the more they wanted to buy.

It was a cIassic stock market
feedback Ioop.

lt was in these heady times that the word
''millionaire'' was first coined.

Yes, millionaires, like entrepreneurs,
were invented in France.

And by January 1 720,
John Law was the richest of them all.

Louis XlV had said ''L'etat, c'est moi'' -
''l am the state. ''

Now the renegade Scotsman,
John Law, was able to say,

''L'economie, c'est moi'' -

''l am the economy. ''

Ensconced in his paIatiaI suite,
here in the PIace Vendome,

that's the Ritz HoteI over there,

Law had achieved a greater concentration
of financiaI power in his hands

than any individuaI in aII French history.

As ControIIer-GeneraI of French Finances,
he was IiteraIIy in charge of

the coIIection
of aII France's indirect taxes,

the entire French nationaI debt,

the 26 mints that produced
the country's goId and siIver coinage,

the Company of the Indies -
better known as the Mississippi Company -

which had a monopoIy
on the import of tobacco,

aII of France's trade
with Africa and Asia,

oh, and the Louisiana coIony,

which covered around a quarter
of what is today the United States.

ln his own right,
Law also owned the Mazarin Palace,

more than a third of the buildings
around the Place Vendome,

more than 1 2 country estates,

several plantations in Louisiana,

and a hundred million livres of shares
in the Mississippi Company.

Not bad going for a man who, when
he'd first come here 12 years before,

had been identified as a joueur -
a professionaI gambIer and a possibIe spy.

By January 1 720,
Law's triumph seemed complete.

A Scots murderer was, in effect,
Prime Minister of France.

Law's problem was that he had
no clear idea where to stop.

On the contrary, he had a strong personal
interest in printing more money,

which his own bank controlled, to drive up
the price of his own company's shares.

FortunateIy for Law,
both his bank and his company

were now operating
out of the very same buiIding,

the Mazarin PaIace,
which he himseIf happened to own.

So aII he had to do in order to
drive up the company's share price

was to take a waIk down the corridor from
the office where the shares were issued,

to the office where the money was printed.

You couId say that Law had become
the uItimate insider trader.

At root, Law's system was what
we nowadays call a Ponzi scheme,

after the legendary ltalian-American
conman, Charles Ponzi.

To pay out the generous returns
it's promised to the first lot of suckers,

a Ponzi scheme needs to take in
more money from the next lot of suckers.

ln John Law's scheme,
the acquisitions of other companies

and the generous dividends Law paid

were financed not from company profits,

but simply by selling new shares.

Like aII Ponzi schemes, however,
the effect of Law's system

was to generate an unsustainabIe bubbIe.

Law had refIated the French economy

with a combination of paper money
and pubIic confidence.

Now, unfortunateIy,
his bubbIe was about to go pop.

By the beginning of 1 720,

France was in the grip of a mania -
the Mississippi Bubble.

But the man responsible, the renegade
Scots murderer and gambler, John Law,

who'd risen to become master
of the entire French economy,

was about to discover
an inviolable law of finance...

Trees don't grow to the sky.

According to Law's PR campaign,

the huge profits he was projecting would
come from the French colony of Louisiana,

which he painted as
a veritable Garden of Eden,

inhabited by friendly noble savages

willing to exchange
a cornucopia of exotic goods.

These would flow to France
through a new city

at the mouth of the Mississippi,
New Orleans,

named to flatter the always susceptible
French Regent, the Duke of Orleans.

All the colony lacked was settlers.

Grasping that Frenchmen were more
interested in stock market speculation

than the hard graft of colonisation,

Law launched a recruitment drive
in the Franco-German borderlands.

Several thousand bold Germans signed up
and set sail to the promised land.

They ended up here.

This was the unfortunate immigrants'
first gIimpse of Louisiana,

an insect-infested swamp.

Within a year, 80% of them
had died of starvation

or tropicaI diseases Iike yeIIow fever.

SadIy for Law,
the Mississippi Company's principaI asset,

its monopoIy on trade with Louisiana,
Iooked Iike being more or Iess worthIess.

As the inscription
on this Dutch cartoon put it,

''This is the wondrous Mississippi land
made famous by her share dealings,

''which through deceit and devious conduct
has squandered countless treasures.

''However men regard the shares,
it is wind and smoke and nothing more. ''

To Law, economic success
was all about confidence.

But this was a confidence trick.

THUNDER RUMBLES

ln Paris, the first rumours
began to circulate

that all was not well with Law's system.

The share price of the Mississippi Company
began to slide.

ln a desperate bid to avert meltdown,
Law called on the Duke of Orleans

to cut the official share price
from 9,000 livres to 5,000.

This was when the limits
of royal absolutism,

the foundation of Law's system,
suddenly became apparent.

Within weeks, the share price
was in freefall.

Angry crowds gathered outside Law's bank.

Stones were thrown, windows broken.

By December, the shares had lost
more than 90% of their value.

This French map from 1 730 gives an
absoIuteIy wonderfuI visuaI representation

of the worId's first stock market bubbIe.

Here at the top is the goddess Fortuna,

pouring down goodies
from her horn of pIenty.

Here are the happy investors
receiving their shares

in the Mississippi Company
from fIying cherubs.

But down beIow, there are some
other cherubs chopping up the shares

beside a shattered printing press.

And there are two more cherubs
bIowing bubbIes.

To the right, there are four
very unhappy Iooking men,

one of whom is preparing to commit suicide
by faIIing on his sword.

As if pricked by a sword,
the Mississippi Bubble had now burst.

lt was at this moment that Law, vilified
by the French people, fled the country.

He never saw his wife and daughter again.

He spent the rest of his life in Venice,

dividing his time between writing
long, self-justifying letters

and gambling.

He died in 1 729.

ln France, however,
his devastating legacy lived on.

Law's bubbIe and bust fataIIy
set back France's financiaI deveIopment,

putting Frenchmen off paper money and
stock markets for more than a generation.

The French monarchy's fiscaI crisis
went unresoIved

and for the rest of the reign of Louis XV
and Louis XVI,

the crown Iived from hand to mouth.

Eventually, France was driven
by royal bankruptcy to revolution.

The Mississippi Bubble of 1 7 1 9 was
the first stock market bubble in history.

But it's been by no means the largest.

When we think of stock market bubbles,
we think of this.

The nightmare
that haunts the world of finance,

which has returned to haunt us
in the last few months,

is that there could ever be a bust
to match the Great Wall Street Crash,

which began on October 24th 1 929,
Black Thursday.

Over the next three years, the US stock
market declined a staggering 86%,

reaching its nadir in June 1 932.

What was worse,
this asset price deflation

was accompanied by the worst
depression in all history.

ln the United States,
output collapsed by nearly a third.

Unemployment reached a quarter
of the civilian labour force.

Why did the 1 929 crash happen?

Why, indeed,
does any crash happen?

This remains one of the most hotly
debated questions in financial history.

There are all kinds of technical
explanations for stock market crashes.

But at root,
it's all about herd psychology.

ln a bull market,
that's when share prices are rising,

even the smartest investors can succumb

to what the former chairman
of the American Federal Reserve,

Alan Greenspan,
famously called ''irrational exuberance''.

But when the herd changes direction,

sometimes in reaction to nothing more
than a change in the wind,

their mood can also change
from euphoria to gloom.

The herd stampedes.

One cow gets scared,

and that fear just transIates
to the whoIe herd and they aII take off.

And the rest of them
don't know why they're scared.

They just feeI that fear and they run.

Fear overwheIms aII rationaI thinking.

UntiI it's over.

ln market jargon, the buyers have turned
into sellers, the bulls into bears.

Despite the zooIogicaI imagery,

the point is that markets are mirrors
of the human psyche.

Like homo sapiens,
they are prone to mood swings,

from greed to fear.

They can suffer from depression.

And sometimes they can experience
compIete breakdowns.

That happens rather more often

than some financiaI theories
wouId Iead you to expect,

but not so often that we're ever
quite ready for the next breakdown.

lf movements in financial markets

were statistically distributed
like human heights,

there would hardly be any crashes.

Most months would be clustered
around the average,

with only a tiny number
witnessing extreme ups or downs.

Let's face it, not many of us are below
four feet in height or above eight feet.

This is the cIassic beII-shaped curve,

where things are distributed
according to their frequency -

the most commonIy occurring
cIustered here around the middIe

and the reIativeIy rare dwarves
and giants out here at the extremes.

That's why it's quite a steep curve,

because most human heights
are quite cIose to the average.

But if you do the same thing
for financiaI markets,

for daiIy moves in the stock market,

you end up with something
that Iooks more Iike this,

with reIativeIy fewer smaII movements

and reIativeIy more
big movements down or up.

And these are what the statisticians mean
when they taIk about Iong or fat taiIs.

lf stock market movements
were distributed like human heights,

a drop of 1 0% would happen
only once every 500 years.

And stock market crashes of 20%
in a year would be unheard of,

rather like people just six inches tall.

Whereas in fact, there have been
seven such crashes in the past century.

As it turned out, those who feared
that the brief panic of October 1 987

would turn into the next great crash
were proved wrong.

The market had one
really bad month, then rallied.

But that bubble provided a golden
opportunity for corporate crookery.

What John Law's Mississippi Company
had been to the bubbIe

that Iaunched the 18th century,

so another company wouId be
to the bubbIe that ended the 20th.

It was a company
that promised its investors

weaIth beyond the dreams of avarice.

It was a company that cIaimed to have
reinvented the entire financiaI system.

And it was a company that used
its impeccabIe poIiticaI connections

to ride aII the way to the top
of the buII market.

Named by Fortune Magazine
as ''America's Most lnnovative Company''

for six consecutive years,
that company was...

Enron.

Seven years after its collapse,

most of us have consigned Enron
to the dustbin of financial history.

Yet it pioneered many
of the dubious business practices

that continue to plague us today.

ln the three years up to August 2000,

shares of the Houston energy company
had gone through the roof.

Once a small-time
gas company in Nebraska,

Enron was now the fifth largest company
in the United States,

with stated revenues
of 1 1 1 billion dollars.

Enron was the darling of Wall Street.

Yet a little historical knowledge might
have made Enron's investors think twice.

lndeed, the story of Enron was like
a re-run of the Mississippi Bubble

280 years before.

John Law's plan had been to revolutionise
French government finance.

Ken Lay, the chairman of Enron,

planned to revolutionise
the global energy business.

For years, the industry had been
dominated by huge utility companies,

which both produced the energy, pumped
the gas and generated the electricity,

and sold it on to consumers.

Lay's big idea was to create
a kind of energy bank,

which would act as the intermediary
between suppliers and consumers.

His dream was to make Enron
the greatest energy company in the world.

Caught up in the heady spirit of the times

was senior Enron executive,
Sherron Watkins.

It was very eIectric.

You feIt Iike you couId...
If you came up with a good idea,

Enron wouId give you the money and
you couId go for it at a very young age.

Like John Law,
Ken Lay had friends in high places.

He contributed generously to
George HWBush's presidential campaign.

As President,
Bush duly pushed through legislation

that deregulated the energy industry.

Riding a global wave
of energy privatisation,

Enron snapped up assets
all over the world.

ln Latin America alone, the company
had interests in Colombia, Ecuador,

Peru and Bolivia, where they laid a huge
pipeline across the continent to Brazil.

And thanks to the intervention of
Ken Lay's personaI friend, George W Bush,

Enron was abIe to acquire
a controIIing stake

in the Iargest naturaI gas
pipeIine network in the worId,

here in Argentina.

Above all, however, Enron traded.

Not only in energy,
but in virtually all the ancient elements

of earth, water, fire and air.

lt even traded in internet bandwidth.

Enron led a Wall Street surge unnervingly
reminiscent of the Mississippi Bubble.

Despite his half-hearted warnings
against ''irrational exuberance'',

this bull market was propelled upward

by the chairman of the US Federal Reserve,
Alan Greenspan.

As in John Law's time,
a stock market bubble could only happen

if money was abundant.

And by raising interest rates only once
between February 1 995 and June 1 990,

Greenspan made sure that it was.

The rewards for investors were immense,

and aIso for the managers here
at the company's Houston headquarters,

who were generousIy incentivised
with share options.

In the space of just three years
after 1997,

the Enron stock price rose
by a factor of very nearIy five,

from beIow 20 doIIars a share
to above 90.

It was the Mississippi Company
aII over again.

Even a city used to extravagant
oil-fired living had seen nothing like it.

This is where Ken Lay
and his Enron executives used to live,

in River Oaks, Houston's
most exclusive neighbourhood.

ln the final year of its existence,
Enron paid its top 1 40 executives

an average of 5.3 million dollars each.

Luxury car sales went through the roof.

(Sherron Watkins) You got muItipIes
of your annuaI base pay.

You were reaIIy Iess thought of
if you got a percentage,

even if it was 75%
of your annuaI base pay.

Oh, you were getting a percentage.
You wanted muItipIes.

You wanted two times
your annuaI base pay,

three times, four times
your annuaI base pay, as a bonus.

And Lay, the pillar of society,

espoused the highest moral
standards for his company.

(Ken Lay) Enron is a company that deaIs
with everyone with absoIute integrity.

We pIay by aII of the ruIes,
we stand by our word,

we mean what we say,
we say what we mean.

The only problem was that,
like John Law's system,

the Enron system was an elaborate fraud.

PHONE RINGS

ln this tape, an Enron trader

is discussing with
the El Paso Electric Company

how to hold California's
consumers to ransom

by closing power stations
to restrict the supply of electricity.

OK.

The results were not only
the higher prices Enron wanted,

but also, despite there being
plenty of power available,

repeated blackouts for consumers.

Enron's money was stolen
in more ways than one.

The company's stated assets
were vastly inflated.

But its key financial innovation was to
remove its debts from the balance sheet

and hide them in so-called
''special purpose entities'',

dubious names like Chewco and Raptor.

Each quarter, the company's executives
had to use more smoke and more mirrors

to make actual losses
look like bumper profits.

lt couldn't last.

When you cook the books
and then you try to hide it,

you're toast.

When they sensed
the game would soon be up,

Lay and his cronies started to unload

hundreds of millions
of dollars worth of shares,

while at the same time
reassuring the public

that the share price
would continue to soar.

Like John Law's desperate attempts

to stem the freefall
of Mississippi Company shares,

all Ken Lay's reassurances were in vain.

On November 1 5th 2001, Alan Greenspan,
head of the US Federal Reserve,

received the Enron Prize
for Distinguished Public Service,

adding his name to a roll of honour

that included Mikhail Gorbachev
and Nelson Mandela.

Greenspan deserved it, because without
his monetary policies in the late '90s,

the Enron bubble, and the dotcom bubble
that coincided with it,

would surely have been impossible.

Just two weeks after the award ceremony,
Enron filed for bankruptcy.

The company owed billions.

But just how many billions?

When Enron decIared bankruptcy,
December 2001 ,

they met with their creditors to say,

''Erm, guys, I know on our baIance sheet,

''we have reported 13 biIIion doIIars
of Iong-term debt.

''Our true Iong-term debt picture
is 38 biIIion doIIars.

''There's 25 biIIion doIIars
in off-baIance-sheet debt''.

(NiaII Ferguson) Did those numbers
come as a shock to you?

You knew there were probIems,
but not on that scaIe.

Yes, I mean, I think
we were aII fIabbergasted.

The day before 4,500 employees at Enron's
HQ were given their marching orders,

a final round of bonus cheques
were issued to grateful executives.

ln May 2006, Ken Lay was convicted on all
six counts of securities and wire fraud.

His sidekick, Jeffrey Skilling,
was sentenced to 24 years in prison.

Lay died before sentencing,
while on holiday in Aspen, Colorado.

Yet the fraudulent practices
that propelled Enron's rise and fall

didn't die with Ken Lay.

On the contrary, the habit
of hiding debt off-balance-sheet

that Enron pioneered subsequently spread
throughout the Western financial system.

The unravelling of this dodgy accounting

has been a key component
of the current crisis.

In many respects, I think
the Enron probIem was in a Petri dish

and the germ has spread
throughout the financiaI markets.

Some of which comes from
Enron traders and finance foIks

that are gainfuIIy empIoyed at banks
and energy trading houses.

So that rot is everywhere
in the financiaI markets.

The joint stock Iimited IiabiIity company
truIy is a miracuIous institution.

And yet throughout financiaI history,

there have aIways been
a few crooked companies,

just as there have occasionaIIy
been irrationaI markets.

Indeed, the two go hand in hand,

because it's preciseIy when the buIIs
are stampeding most enthusiasticaIIy

that peopIe are most IikeIy
to get taken for the proverbiaI ride.

THUNDER RUMBLES

As we've seen in the past year,

the path of financial markets can
never be as smooth as we would like.

Since the current credit crunch began,

some stock markets around the world
have fallen by as much as 50%.

So long as human expectations
of the future veer

from the over-optimistic to
the over-pessimistic, from greed to fear,

stock prices will tend to trace a line

not unlike the jagged
and irregular peaks of the Andes.

As an investor, you just have to hope

that when you have to come down
from the summit of euphoria,

it'll be on a nice, smooth ski-slope,
and not over a sheer cliff.

But is there nothing
we can do to protect ourselves

from real and metaphorical falls?

As we'll see in the next episode
of The Ascent Of Money,

finance is as much about risk
as it is about return.

And the big question is,

are you insured?

Or are you hedged?