Prof. John Langbein Testifies at U.S. Senate Enron Hearings
John H. Langbein, Sterling Professor of Law at YLS, presented testimony before the U.S. Senate Committee on Governmental Affairs chaired by Joseph I. Lieberman '67 on Thursday, January 24. The committee investigated the collapse of Enron in a session entitled "The Fall of Enron: How Could It Have Happened?" and Langbein was invited to testify about the pension investment aspects of the bankruptcy.
Langbein has taught and written about pension law and policy for two decades. He is the coauthor of the principal textbook used in American law schools on the subject (Pension and Employee Benefit Law). Langbein was also the reporter (drafter) for the Uniform Prudent Investor Act (1994), which now governs fiduciary investing at the state level in most American states.
His testimony, which can be read through the link below, points out that the concentration of employee benefits in Enron stock that proved so disastrous when the company's stock lost nearly all of its value was not illegal under the Employee Retirement Income Security Act (ERISA). However, Langbein maintains that the practice was foolish. "ERISA invited this mess, and unless you change ERISA, I can predict to you with utter certainty that such cases will happen again, as they have repeatedly in the past."
The problem Langbein focuses on is the lack of diversification in the benefits accounts of Enron employees who owned large amounts of Enron stock. This concentration violates what he calls "the most important finding in the entire field of financial economics"--the advantages of diversification. In fact, the effect is doubly pernicious for employees of the company, who already have their "human capital" tied to Enron's fortunes.
Langbein's suggestion for lawmakers is to expand the diversification requirements that ERISA places on defined benefit pension plans to defined contribution plans like the one Enron used.
However, recognizing that Congress may not have the political will to enact this change, Langbein urges that Congress at least mandate a disclosure (similar to the Surgeon General's warnings on cigarettes) of the risks to employees in insufficiently diversified pension plans.
Read Professor Langbein's Prepared Testimony