On October 23, 2006 Judge Simeon T. Lake III sentenced Jeffrey Skilling to 292 months in prison and ordered him to forfeit $45 million in victim restitution. Under Federal guidelines, Skilling will not be eligible for release on good conduct grounds until he completes 248 months of his sentence. The sentence is second only to the 25 years received by Bernard Ebbers of WorldCom. The forfeiture wipes out all of the fortune he accumulated in building the premier energy risk management firm in the world. Enron under his leadership pioneered the use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers. The sentence received by Jeffrey Skilling is outrageously excessive. In short, he got lynched by an angry mob.
In looking for a reason, one needs to go no further than the report published by the Chicago Tribune on October 24, 2006.
In that story several alleged victims testified in court against Skilling. One retired pipeline worker “lost” $1.3 million dollars in his retirement savings that was in Enron stock. “I had $1.3 million and all I’ve got to show for it is two clocks.” His story is a familiar one to me. I took early retirement from Amoco Corporation after 18 years in part to diversify my retirement savings that was tied up in Amoco stock. Diversification is not rocket science. It is prudent advice that has been around for decades. But that is not the only form of stock price insurance that is available these days. The retiree cited above could have bought a put on Enron shares. That would have allowed him to participate in the rise in the Enron fortunes while being protected by a floor under the price.
I can only speculate on the reason why the retiree did not take out insurance. Presumably he has insurance on his car and his house. I suspect that he does not understand how he got the million dollars in the first place. It was a result of the risk management services developed under the leadership of Jeffrey Skilling. The retiree was essentially a free rider on the risk management services provided by others in the company. Apparently he was not even aware how his nest egg was accumulated. Thus, he was unprepared to protect his nest egg. In other words, he was part of the mob. But he was not alone. The reporter who wrote the story was equally unaware of the ways investors can have insurance using the type of contracts that Enron developed under Jeffrey Skilling. The press, including the Tribune reporter, has missed out on a lot of good economics. The press essentially joined the mob instead of telling an important part of the story.
Jim Johnston ([email protected]) is a senior fellow and member of the board of directors of The Heartland Institute.