This week in financial history we recount a landmark that many thought unrealistic, two important pieces of legislation, and a wee little accounting error.
Lost Count of the Zeros
On November 8, 2001, Enron announced that accounting errors going back to 1997 led to it misstating earnings by over $600 million. This announcement, along with a string of red flags, increased the scrutiny on both the energy giant and its accounting firm, Arthur Anderson. As a result of the restatement and circling SEC investigations, shareholder equity plunged by around $1 billion. It turned out that false earnings were just the tip of the iceberg, as the company's debt was also grossly under-reported. (Enron is a classic example of greed gone wrong and how investors were led astray. For further reading, see Enron's Collapse: The Fall Of A Wall Street Darling.)
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On November 8, 1965, the Higher Education Act of 1965 was signed into law by President Johnson. The bill was focused on creating programs that could help prospective students gain accesses to low-interest loans. Both the Federal Family Education Loan Program and the later Federal Direct Student Loan Program come out of this bill. The Higher Education Act has been altered by the Higher Education Opportunity Act of 2008, and various tax incentives have been periodically added to help make post-secondary education accessible for more people.
On November 8, 1966, President Johnson signed another piece of law allowing a merger between the National Football League and the American Football League. This law exempted the new organization from anti-trust laws. Although this is far from the only government-enabled monopoly, it does suggest that we'll accept things in sports that would enrage us in any other circumstance. Of course, that's hardly news.
Continuing on the topic of mergers, November 10, 1997 saw the world's largest merger between Worldcom and MCI communications. The deal was worth $37 billion. Within five years, however, $37 billion wasn't enough to even make the top 10 mergers. (While acquisitions can be hostile, these varied mergers are always friendly. Read The Wonderful World Of Mergers.)
On November 14, 1986, Ivan Boesky plead guilty for his part in the insider trading scandal that engulfed many Wall Street investment banks. Boesky received a $100 million fine - around $265 million in today's dollars - and served two years in prison. Information that Boesky provided to the SEC was used in building the case against junk bond king, Michael Milken. As part of his sentencing, Boesky was banned from ever working in the securities industry again. (Don't be fooled by the name - junk bonds can be valuable if you know how to analyze them. See Junk Bonds: Everything You Need To Know.)
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Breaking the Glass-Steagall
On November 12, 1999, the Financial Services Modernization Act was enacted, reversing many of the restrictions from the Glass-Steagall Act of 1933. Basically, this act opened the way for financial institutions to bundle financial services like insurance, banking and brokerage service. This set off a series of mergers that many economists blame for creating the "too big to fail" crowd.
As True Now As It Was Then
On November 13, 1789, Benjamin Franklin wrote a letter to his friend containing one of his most famous quotes: "In this world nothing can be said to be certain, except death and taxes." This lament has echoed down the ages and rings just as true now. In fact, of the two, taxes often seem the worst. Death only happens to you once, whereas taxes are an annual ordeal - and they hound your estate even after death.
On November 14, 1972, the DJIA exceeded 1,000 a mere 16 years after reaching 500. The average was lifted by its not-so-industrial components like IBM, Xerox, Texas Instruments, Johnson and Johnson and so on. The acceleration in the value of the Dow was also helped along by the introduction of proto-index funds for risk-averse institutional investors like insurance companies. These started appearing in 1971 and they were opened to the general public in 1976 by Vanguard.
That's all for this week. Next week we'll look at a commodities scandal, a free-trade agreement and much more.
For the latest financial news, see Water Cooler Finance: Lions And Diapers And Dows, Oh My!