To Big To Fail

16 Min Read
To Big To Fail
To Big To Fail

In the US, there is a system of free enterprise. The Definition of free enterprise is: The freedom of private business to organize and operate for profit in a competitive system without interference by government beyond regulation necessary to protect public interest and keep the national economy in balance.

While this might sound all rosy and dandy, there are many regulations that still remain in place and at times, the government does step in to create many problems for the “free enterprise.”

One of many such cases involves Standard Oil. John D Rockefeller had over the years built an oil and kerosene – the light bulb had not been invented yet, so homes were lit with kerosene lamps – empire in the 1800’s worth $900 million in 1913 ($13 billion in today’s dollars).

On November 18, 1906, the U.S. attorney general under Roosevelt sued Standard Oil of New Jersey and its affiliated companies making up the trust. The suit was filed under the Sherman Antitrust Act of 1890. Under this federal law, “Every contract, or combination, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.”

The Standard Oil trial took place in 1908 before a Missouri federal court. More than 400 witnesses testified. The government produced evidence that the Standard Oil Trust had secured illegal railroad discounts, blocked competitors from using oil pipelines, spied on other companies, and bribed elected officials. Moreover, the government showed that from 1895-1906 Standard’s kerosene prices increased 46 percent, giving enormous profits to the monopoly.

In probably one of the greatest court speeches ever, John D Rockefeller stood before the court, knowing that the court was about to demolish the enterprise he had worked so hard to build, and stated “You call it a monopoly; I call it enterprise.”

A lot has changed since the days the of Rockefeller, Vanderbilt, Carnegie and Morgan. These four men were 80% responsible for building America to be what it is in today’s society.

This writing is a reminder that no matter how big you or your company or “enterprise” becomes, if the government is not happy, they will make your life miserable, but at times, it is not the government that interferes with one’s affairs relating to the day-to-day operation of one’s business, no matter if it is a small business or if it a behemoth, such as a international bank.

No. At times, it is the company or corporation that creates their own demise, forgetting that they do not have enough fire extinguishers to put out the fire once it is started, leaving only the proverbial BBQ pit that is slowly burning through each floor of the corporate building as the company sinks deeper and deeper into despair, mass employee lay-offs, chief executives, being tossed out of the boardroom window in hopes that the next one can stop the approaching asteroid that is days away from slamming into their “to big to fail” corporate headquarters.

In more modern times, we have witnessed countless to big to fail corporations create their own demise. Some from lack of understanding the market they serve, to some just that are purely pompous in thought once they have seen the mighty dollar sign (a very common phenomenon that happens in the movie and music industries).

Some of the more notable corporations in the last 40 years that have made international headlines are Enron, Myspace and of course Facebook. In all of these cases, all of them drowned or are in the process of drowning themselves as the days go on from shear greed that dictates how they think and react to everyday problems as they arise. Problems that should only require a small fire extinguisher, easily putting out the fire without anyone having to get out of their comfy chair.

In the case of Enron, the corporation reached dramatic heights only to face a dizzying fall. The fated company’s collapse affected thousands of employees and shook Wall Street to its core. At Enron’s peak, its shares were worth $90.75, just prior to declaring bankruptcy on Dec 2, 2001, they were trading at $0.26. To this day, many wonder how such a powerful business at the time; one of the largest companies in the United States, disintegrated almost overnight. Also difficult to fathom is how its leadership managed to fool regulators for so long with fake holdings and off-the-books accounting.

Enron was formed in 1985 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. Following the merger, Kenneth Lay, who had been the chief executive officer of Houston Natural Gas, became Enron’s CEO and chairman. Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation.

Skilling joined Enron at an auspicious time. The era’s minimal regulatory environment allowed Enron to flourish. At the end of the 1990’s, the dot-com bubble was in full swing, and the Nasdaq hit 5,000. Revolutionary internet stocks were being valued at preposterous high levels and consequently, most investors and regulators simply accepted spiking share prices as the new normal.

Enron created Enron Online (EOL) in Oct 1999, an electronic trading website that focused on commodities. Enron was the counter-party to every transaction on EOL; it was either the buyer or the seller. To entice participants and trading partners, Enron offered its reputation, credit, and expertise in the energy sector. Enron was praised for its expansions and ambitious projects, and it was named “America’s Most Innovative Company” by Fortune for six consecutive years between 1996 and 2001.

By mid-2000, EOL was executing nearly $350 billion in trades. When the dot-com bubble began to burst, Enron decided to build high speed broadband telecom networks. Hundreds of millions of dollars were spent on this project, but the company ended up realizing almost no return. When the recession hit in 2000, Enron had significant exposure to the most volatile parts of the market. As a result, many trusting investors and creditors found themselves on the losing end of a vanishing market cap.

By the fall of 2000, Enron was starting to crumble under its own weight. CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company using mark-to-market accounting. This technique measures the value of a security based on its current market value instead of its book value. This can work well when trading securities, but it can be disastrous for actual businesses.

In Enron’s case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though the company had not made one dime from the asset. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer the asset to an off-the-books corporation where the loss would go unreported. This type of accounting enabled Enron to write off unprofitable activities without hurting its bottom line.

Although their aim was to hide accounting realities, the SPV’s were not illegal. But they were different from standard debt securitization in several significant and potentially disastrous ways. One major difference was that the SPV’s were capitalized entirely with Enron stock. This directly compromised the ability of the SPV’s to hedge if Enron’s share prices fell. Just as dangerous as the second significant difference, Enron’s failure to disclose conflicts of interest. Enron disclosed the SPV’s existence to the investing public, although it’s certainly likely that few people understood them and it failed to adequately disclose the non-arm’s-length deals between the company and the SPV’s.



By the summer of 2001, Enron was in free fall. CEO Kenneth Lay had retired in February, turning over the position to Jeffrey Skilling. In August 2001, Skilling resigned as CEO citing personal reasons. Around the same time, analysts began to downgrade their rating for Enron’s stock, and the stock descended to a 52 week low of $39.95. By Oct 16, the company reported its first quarterly loss and closed its “Raptor” SPV. This action caught the attention of the Securities Exchange Commission.

A few days later, Enron changed pension plan administrators, essentially forbidding employees from selling their shares for at least 30 days. Shortly after, the SEC announced it was investigating Enron and the SPV’s created by Fastow. Fastow was fired from the company that day. Also, the company restated earnings going back to 1997. Enron had losses of $591 million and had $690 million in debt by the end of 2000. The final blow was dealt when Dynegy, a company that had previously announced it would merge with Enron, backed out of the deal on Nov 28. By Dec 2, 2001, Enron had filed for bankruptcy, citing $74 billion in debt.

Ultimately, former Enron CEO Jeffrey Skilling received the harshest sentence of anyone involved in the Enron scandal. In 2006, Skilling was convicted of conspiracy, fraud, and insider trading. Skilling originally received a 17-½ year sentence, but in 2013 it was reduced by 14 years. As a part of the new deal, Skilling was required to give $42 million to the victims of the Enron fraud and to cease challenging his conviction. Skilling was originally scheduled for release on Feb 21, 2028, but he was instead released early on Feb 22, 2019.

In the next case, MySpace. A social networking site founded in 2003. Myspace quickly took off and was purchased by News Corp in 2005 for $580 million. By 2006, Myspace was the top social network in the country. A few years later, it would cede the position to Facebook, which opened up its site to all new comers in September 2006, and would overtake Myspace by April 2008.

In the spring of 2008, Myspace was top dog. That April, the upstart Facebook grabbed the lead and never looked back. In those three years, Myspace lost over forty million unique visitors per month, lost both co-founders, laid off the vast majority of its staff and more generally, diminished to a cluttered afterthought of the power it once was.

But how did things sour so fast? Critics point to Myspace’s consistent administrative and strategic blunders combined with a seeming inability to evolve with the social web it had helped inaugurate. That social web that would come to be more and more dominated by rival Facebook, leaving Myspace scrambling to keep up.

Myspace was created by people in the entertainment industry, not by technology gurus, therefore they could not innovate at the pace that they needed to compete. An analyst with Chess Media Group, told HuffPost in an email. “So when Facebook came on the scene, a newer better way to network with your friends surfaced. Facebook offered something as basic as being able to actually see your real friends vs. anonymous friends.”

But the adoption by News Corp didn’t help much either. Rupert Murdoch, once enthralled by his new buy, soon turned his attention to pursuing the Wall Street Journal. “We’ve got to admit that in the last 3 or 4 years, we made some big mistakes,” Murdoch said of Myspace.

“Myspace failed to execute the product development,” former Facebook president Sean Parker said in a recent interview. “They weren’t successful in iterating and evolving the product enough. It was basically this junk heap of bad design that persisted for many, many years. There was a period of time where if they had just copied Facebook rapidly, I think they would have been Facebook. The network effects, the scale effects were enormous.

According to Businessweek, the pressure to drive revenue, when other startups were using the luxury of venture money to create and explore, stifled the possibility that Myspace would have the breathing room it needed to innovate. Instead, executives were focused on trying to raise advertising profits. A mission that only intensified in 2006, when Google paid $900 million for a three year advertising deal contingent on the site’s traffic.

“There was a lot of pressure to drive revenue,” Shawn Gold, Myspace’s former head of marketing and content, told Businessweek. “There were things that we knew would be more efficient for the user that we didn’t act on immediately because it would reduce page views, which would have hurt the bottom line.”

Myspace was also dealing with a public image problem. The network had started to flood with scantily clad would be celebrities, filling the site with highly sexualized photos that led to the site’s tarnished reputation as a hotbed of obscenity. In Feb 2006, a Connecticut investigation into whether Myspace was exposing minors to pornography cemented public opinion that Myspace wasn’t safe.

Ironically, Myspace’s desperate attempts to recoup its former success came in the form of imitating Facebook, a site it’d once tried to set itself apart from. It adopted the news feed Facebook had popularized, and neatened up the site itself in a way that also suggested it was taking visual cues from Zuckerberg’s page. In Nov 2010, the site integrated with Facebook Connect, calling it “Mashup with Facebook.”

Myspace’s last ditch attempt was in rebranding itself as an entertainment hub, playing to the strengths it still had. Plenty of bands still used the site as their primary method of broadcasting to fans. Myspace CEO Mike Jones made it clear that the site was no longer competing with Facebook directly, and would instead try to provide a complementary service.

But it simply wasn’t enough. The site, which has lost over a million users a month on average over a two year period, was clearly on shaky ground. Co-founders DeWolfe and Tom Anderson left the site in 2009. Replacement Owen Van Natta departed less than a year after he took over.

Myspace was finally purchased by Specific Media for $35 million. $65 million less than News Corp’s asking price, and over $500 million less than News Corp had paid. Myspace laid off over half of its remaining 450 employees.

To this day, Myspace remains a mystery to many and a very faint memory to most.

Last, but not least, comes Facebook. A once shinning darling that nobody thought could do no wrong or end up in any kind of trouble. While Facebook still remains a strong corporation, it too is in it’s early stages of demise from mismanagement, security breaches that went unreported, the mishandling of it’s users data, as well as it’s mishandling of it’s own employees.

In one such case, Facebook found themselves having to face a grilling that lasted several days from a data breach that was found to have exposed millions of users personal data. Anyone that has been on Facebook knows, this means every inch of a users life – photos, locations, motel stays, family gatherings, etc – was collected and a psychological profile was built from that data that could only be compared to something found in George Orwell’s book 1984.

In this particular session in congress, Mark Zuckerberg is ask a simple question that should weigh heavy on everybody’s mind that has been a former or is a current user of Facebook. The question was “Would you feel comfortable telling us what motel you stayed in last night?” Obviously, Mr. Zuckerberg felt that was to much information to release to the public, leaving any and every user to ask themselves “Why am I posting my entire life on this web site?”

As with many big corporations that have been caught, this one was no different. The end result was to tell the public “Gee. I’m sorry,” leaving the public to fend for themselves. As part of the cleanup effort, the corporation will institute stronger guidelines, policies, terms of conditions, etc. These “sorry’s” do not fix the problem at hand, but merely, push the underling problem under the rug in an effort to “make it go away.”

With new policies, comes a new set of challenges that not only effect the moral of people working at the corporation, – as we have seen with mass exits of Facebook, whistle blowers, etc – but have a severe impact on how the public feels about the corporation they are dealing with.

One such dilemma that users have been faced with is fact checkers. Another would be a convoluted, contrived set of rules called “community standards.” A set of rules that is a mere spin around the bush, leading to nowhere, much less the average lay person able to understand exactly what it is that the company is attempting to convey to the reader.

These community standards, as they are called are a lose set of standards that allows the company to say “we don’t like you so we are going to delete or disable your account without reason.”

After much reading, researching, the problem of community standards seems to be a problem that dates back to 2015, in which users are arbitrarily deemed to be “disqualified” or a user might be found to have violated a “community standard,” resulting in their account being disabled without explanation.

What seems to be very big problem for Facebook, unlike the other tech giants, is that there is no way to contact anyone at Facebook. No email, no phone, no help center for answers, leaving the effected user left in the dark as to what happened or what to do.

In one case in 2016, an effected user reached out to a Conflict Consultant asking for help. After much research, the Conflict Consultant found himself staring down the same empty void as the effected user was, leaving him with only one email address to write to, only to find out that the email address was for internal use only.

In that particular case, the Conflict Consultant literally found that his only options to get any kind of answers from Facebook were left to 1) File a law suite in San Mateo county US District Court, 2) Take his plight to all of the major news outlets in an attempt to put enough pressure on the company to receive some kind of communication and 3) Walk away without ever knowing what has happened to their data or ever getting resolution as to why they were their account was disable.

In an article I wrote in July of 2019 about the Futurist Who Predicted 9/11, Dr Hames believes that by 2023, Facebook will begin to see it’s final days, citing “By 2023 Facebook will be renamed Instagram. By 2028 we will not remember either. Facebook will become powerless to stop its own descent.”

In conclusion. During the emerging tech revolution, many giant tech firms were created. Cisco, Oracle, Apple, Amazon, Twitter, etc. All of these companies have had their fare share of troubles, but there remains one distinction. They all have easily accessible ways to be contacted, Apple, Amazon have call centers full of people to take calls from their users. All but one have open lines of communication, Facebook. Any lay person with enough comprehension to put their own clothes on in the morning would think that a corporation the size of Facebook would not only be financially able to have a chat/email type of call center, but would believe that it should be a standard for doing business.

David

Author: David

As a retired traveler, IT systems engineer by trade, Electronics engineer by hobby. I spend my free time writing about subjects giving the reader events in history to ponder, as well as current events.

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