Enron's deep inner meaning: The world's biggest bankruptcy teaches some very old lessons

RMA Journal, The, March, 2002 by Thomas K. Brown

2. Hostile takeovers will come back in a very big way. You're thinking, "Oh, so '80s"--but you're wrong! 2002 has all the ingredients necessary to produce a riot of unfriendly deals: 1) Cheap, abundant credit, 2) A regulatory and cultural climate that won't frown on unsolicited bids, 3) Attractive valuations in a number of sectors, and 4) The likelihood of economic growth near term. All that, plus an accounting change that doesn't saddle acquirers with costly goodwill amortization.

3. Auto lending will become a respectable business on Wall Street again. A number of players have exited the business entirely, which will presumably ease the competitive burden for those who remain. And the recession is apparently ending on schedule, and without any of the bears' more extreme scenarios coming to pass. Instead, the key players not only survived this downturn, many thrived. Non-hallucinatory investors will shortly appreciate that fact and will do the rational thing: They'll fatten up the valuations of the leading players.

4. Property & casualty insurers will consistently post better earnings than Wall Street expects. The conventional wisdom says that the current strong P&C pricing environment won't last long; the new capital flooding into the business will soon return the industry to its old, price-cutting habits. Hooey, I say. Too many balance sheets were substantially under-reserved before 9/11; post-9/11, fuhgeddaboudit. The only way for most companies to build reserves quickly will be to hold the line on pricing. Many will have no choice but to stand firm. Plus, the eventual total cost of the attacks will likely be substantially higher than the Street admits even now. Meanwhile, most P&C analysts literally have never experienced an extended period of strong pricing. They literally don't know how to model for it. Thus their earnings estimates for the industry will consistently be too low.

5. The brokers and investment banks will produce a spate of better-than-expected earnings, too. This is, of course, a nonsurprising follow-on to Surprise #2. But there will be other things going for the brokers in 2002 as well. The P0 market is in better shape than most people realize, for one thing. And retail volumes at a number of the online brokers have stayed surprisingly strong. No, the industry isn't in for a replay of 1999. Then again, expectations are low, even as the basic pieces are in place for a modest turn in the business.

6. The accounting industry becomes the target of a regulatory free-for-all. The Enron debacle will have more far-reaching effects on the accounting industry than people realize. The first casualty: the industry's traditional system of self-regulation. The coming regulatory reform will be a high-level fracas that will include the SEC, the Fed, the AICPA, and Congress. Everybody's going to want a role in keeping an eye on the accountants. Once the dust settles, CPAs will face severe restrictions in the services they'll be allowed to offer their audit clients. That will be bad for the profitability of the big accounting firms, I suppose. But it will be good for investors, who can expect to have a whole lot more confidence in the numbers they read in companies' filings. Oh, and the Big Five will shortly become the Big Four.