Substituting Outrage for Thought: The Enron Smoking Gun Memos

Sat Aug 31 16:24:38 EDT 2002
By Jonathan Falk

In this article Jonathan Falk, NERA Vice President, critically examines the ten trading strategies cited in the Stoel Rives "Smoking Gun" memos that are the subject of intense debate among law enforcement and policymakers, and argues that on balance, there is no evidence that Enron's activities in California had any deleterious impact on electricity markets. Mr. Falk uses basic economic theory to support his argument, which states that society suffers when the same product is sold at different prices and that social welfare is generally improved when actions are taken which cause divergent prices to at least partially converge. Through brief, high-level analysis and explanation of the market forces at work in California, he demonstrates that most of the Enron trading strategies had the feature that they caused prices for highly similar electric products to converge.