Subject: Re: Sell BAM, buy BN?
If something blew up tomorrow, some accounting maneuver that turned out to be illegal, would any attentive shareholder honestly be shocked?
. . .
Actually, yes I would be shocked if it came to light that they intentionally engaged in illegal and fraudulent accounting in any material way leading to a major blow up.

These sentences are saying different things. The first refers to something that "turned out" to be illegal. The second refers to "intentional" illegal acts.

We tend to underestimate our ability as a species to believe what we want to believe. Two of the better-known descriptions of this tendency:

* 'It is difficult to get a man to understand something when his salary depends on his not understanding it.' -- Upton Sinclair

* "A man hears what he wants to hear and disregards the rest." -- Paul Simon

The leadership at Enron insisted to the end they had authorized nothing illegal. When the details of Andy Fastow's off-balance-sheet vehicles were made public, they retreated to the position that they hadn't known what he was doing. Ken Lay and Jeff Skilling insisted that was true to the end -- quite belligerently in Skilling's case. In their heads, it probably was. They wanted outcomes, namely, quarterly results that hit the mark. By then, Lay's incentives had nothing to do with the details of company operations. He was hoping for an appointment to President Bush's cabinet. He liked his image as a master of the universe, which required a perpetually rising Enron stock price. That's what all the deals that turned out to be illegal were intended to achieve.

When the results of actual trades or investments failed to produce the necessary quarterly results, they let Fastow do his magic. Fastow gave them and the somnolent board assurances that everything was OK. His incentive was to cover up the massive fees he was taking, not to monitor whether his complex arrangements met the legal definition of fraud. The complexity of these deals went over the heads of executives and board members who had no particular incentive to dig deeper.

This is a very common tale. The top dogs dont' want to know how the results they demand are produced. It's the story of pretty much every amateur athletics payoff scandal in the U.S., which is why assistant coaches are so often nabbed while their lavishly-paid superiors walk away unscathed. An American federal administration of some decades ago introduced the phrase "plausible deniability" into the lexicon.

So, no, I was not imagining a concerted conspiracy by top management to engage in illegal acts. I was imagining subsidiaries of subsidiaries in some far-flung places pushing the envelope to produce the impressive numbers Brookfield publishes like quarterly clockwork. It would be more surprising if such activity were monitored or caught by outside authorities than if it were going on. Cops on the white-collar fraud beat are underpaid and badly outnumbered. Neither Madoff nor Enron were caught by authorities. Their frauds blew up of their own accord. The incompetence of the SEC in the Madoff case was breathtaking.

The consolation for the shareholders of black box companies like BN is that even if something improper is going on, it is unlikely to be revealed. Witness the allegation that BPY facilitated a payoff to a former U.S. federal official by the Qatar Investment Authority in its buyout of an underwater Manhattan office tower. Was it true? Who knows? No government agency felt compelled to investigate.