Fraud's house of cards: The world have made as a result of the level of thinking we have done creates problems we cannot fix at the same level at which we created them--Albert Einstein.

• Author: Brewer, Lynn
• Position: Report

The global economy is currently sitting on a $62 trillion house of cards. To emphasize just how perilous this is, some are actually taking comfort with the fact that the amount may have been reduced to closer to $57 trillion, but only through the failures of financial services firms like The Bear Stearns Cos. Inc. and Lehman Brothers Holdings Inc.

Now, this number should not be confused with the U,S. leveraged public debt of more than $50 trillion of accrued civilian and military retirement benefits; unfunded, promised Social Security and Medicare benefits; and other financial obligations (see Will the Federal Debt Become Yours? on page 34).

While many Americans were justifiably outraged at the $700 billion bailout package passed by Congress in October, the failure to bail out the banks and Wall Street would likely have caused this proverbial house of cards to fall. Two things are certain: First, no one knows the exact size of the house of cards; and second, fraud may actually be part of the glue that is holding together the global economy.

A mere seven years ago, the world watched in amazement as Enron Corp. imploded virtually overnight. As this author warned in 2002, in Confessions of an Enron Executive: A Whistleblower's Story, "look to Enron to foretell the future."

Enron was--and is--symptomatic of everything that is wrong with the global economy: this house of cards built upon increasingly complex transactions involving overvalued assets that were "supposed" to be hedged with unregulated credit-default swaps.

These derivatives or "weapons of mass destruction" as investing guru Warren Buffett warned, are exploding before our eyes, causing major destruction as the Dow Industrial fell to under 10,000 and then plunged into the 8,000s, despite the bailout designed to loosen the noose on the credit markets.

In August of 2005, Buffett and this author engaged in correspondence regarding the likely impact of business practices that had failed to change despite laws to "prevent" future Enrons. This author inquired of Buffett: Is our global economy similar to a barn in the rural countryside that is perilously leaning after years of decay and very likely to fall over in the not too distant future? And, if so, do we shore it up now or wait until it falls and then rebuild it?

Greed, Complacency = Unethical Behaviors

Realistically, the same fraud that contributed to Enron's dramatic demise sustained the life of the company long after the health of its balance sheet had been destroyed. The fact that Enron was allowed to "hide" the fraud in plain sight for so long is remarkable. As is too often the case--inside and outside such companies--the existence of fraud and deception is accepted as long as money is being made and complacency toward the fraud is warranted. Or so it seemed.

When America and investors became enraged, Congress "fixed" the problem with The Sarbanes-Oxley Act of 2002, which was designed as a mechanism that aimed to prevent this sort of thing from ever happening again.

So, why is it we are facing yet another wave of fraud? The answer: Because you can't legislate a conscience. The sad truth: we only want to make money, and never lose it.

Many experts would be surprised to learn, in all likelihood, that two-thirds of Enron employees were at one time or another aware of unethical behavior, and not at the hands of Chairman and Chief Executive Officer Ken Lay, CEO (briefly) Jeffrey Skilling or Chief Financial Officer Andrew Fastow, but rather by the mid-level executives and those reporting to them.

If you'd asked the Enron employees whether it was a highly ethical or highly unethical company, 90 percent would have said...