The Enron Mess

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The collapse of Enron was gaudy and spectacular, providing ample grist for the mills of punditry and ample amusement for the couch potato. The only story in recent memory to which it is comparable is the savings and loan scandals of the late 1980s, to which it has plenty of similarities.

In essence, Enron and the crooked S&Ls were doing the same thing: They invested other people’s money into high- leveraged, high-risk ventures in hopes of high profits, and when the profits failed to materialize, postponed the day of reckoning by using complex schemes to disguise losses and report profits that did not exist. Both created other entities to garner such profits as there were, to disguise the risk, and hide the losses that ultimately and inevitably resulted. The S&L crooks used real estate partnerships (remember Whitewater?), while the somewhat more sophisticated Enron crooks used joint ventures and partnerships so complicated that lawyers are still having trouble figuring them out. In both cases, the schemers grabbed as much cash as they could and headed for the hills, hoping to protect themselves by taking advantage of their connections with corrupt politicians and the inept or downright crooked legislation that they enacted.

But the Enron case seems to have the edge in terms of gaudiness and spectacle. There are at least three reasons for this:

1. The schemers at Enron were far fewer, making it easy to focus on them. There were hundreds of S&L schemers, located in dozens of cities in dozens of states. When there are so many perps, it isn’t easy to find anyone to personify the crisis and to focus public hatred. In Enron’s case, the primary culprits are a handful of high-level executives, easy to identify, easy to focus on, easy to hate.

2. During the investigation of the S&L fraud, Congress’ rules allowed witnesses intending to plead the Fifth Amendment to testify in “executive session,” that is to say, away from cameras, microphones, and reporters. This denied the members of Congress the chance to hector and lecture them. But the rules were changed in 1998 so Republican congressmen could hector and lecture those involved in trying to cover up the various high crimes and misdemeanors of the Democratic president. Henceforth, people wishing to plead the Fifth would have to face the eloquent wrath of obscure congresscritters (N.B.: I avoid the sexist term”congressmen”) getting a rare chance to show their stuff on television. So every day an Enron exec goes before Congress and a dozen or two critters compete to express their indignation, each more gaudily than the one before, providing lots of videotape for the cable news channels and lots of front-page stories for the daily press.

3. The S&L schemers appear to have cost their victims substantially more than anything the Enron schemers ever dreamt of, but their victims represented a broader spectrum and were accordingly more difficult to picture and sympathize with. Indeed, the S&L fraud was ultimately paid for by every American taxpayer, which is just about as broad and diverse a group as you can get. And the losses were buried in the morass of the federal budget. What’s a few billion dollars in a budget that runs to trillions? The Enron schemers, on the other hand, appear mostly to have victimized their own stockholders. These included Enron employees not allowed to sell their stock, even when the firm’s big shots succeeded in dumping theirs. The employees are capable of appearing quite sympathetic, at least as the news media portray them. It is seldom mentioned that these people obtained stock for free (as bonuses) on the condition that they not sell it until they had held it for a certain period of time – or that they had, or should have had, reasons to believe that Enron was engaged in fraud but nevertheless continued to work there, earning their salaries from Enron’s fraud, getting free stock, and keeping their mouths shut.

One of the most amusing aspects of the Enron collapse is the fact that most of the media are blaming the fraud on the free market, when in fact Enron was able to get away with what it was doing as long as it did mainly because of goofy legislation -legislation that made it easier to commit and to hide fraud, and that thereby undermined the market mechanisms that protect investors and consumers.

Indeed, it may very well turn out that the Enron fraud may have been entirely legal, thanks to the carelessness or corruption of the legislators. The Enron schemers may even be able to avoid the imprisonment they most certainly deserve and keep their ill-gotten gains, as most certainly will the legislators who enabled the fraud to occur.

Even more remarkable is the fact that the Democrats blame Republicans for the crisis, claiming that they showered favors on Enron in exchange for political contributions. I’ve read Common Cause’s report on “What Enron Has Gotten for Its Political Contributions.” Common Cause’s non-partisanship leans strongly toward Democrats, but its list of political and economic sins consists mostly of trivial

The primary culprits are a handful of high- level executives, easy to identify, easy to focus on, easy to hate.

 

allegations, supported by very little evidence, .except for two items: In 1994, the Clinton administration insisted that India agree to a multi-billion-dollar deal with Enron before the U.S. would lend India $302 million; and in 1995, “the Clinton administration threatened to cut Mozambique’s foreign aid if the world’s poorest country did not award a pipeline contract to Enron.”

While it’s true that Enron gave more money to Republicans, and especially to George Bush, than it did to Democrats, there’s little evidence that it got anything for its money. When Enron needed a favor from Bush, it wanted a really big one – a federal bailout- and he refused to grant it.

This is not evidence that Republicans are less corrupt than Democrats. Contributions buy access, whatever the party. But it is the anticipation of future contributions that buys influence. Enron was pouring money into Democratic

The Enron schemers may even be able to avoid the imprisonment they most certainly deserve and keep their ill-gotten gains, as most certainly will the legislators who enabled the fraud to occur.

 

coffers at the time – it gave $100,000 to the Democratic National Committee just four days before India approved its Enron contract under pressure from the Clinton administration – and the Democrats, who held the presidency and thus had greater ability to reward their donors, could reasonably anticipate far more Enron donations in the future. By the time the Republicans grabbed the presidency, and thus the ability to shower their donors’ with taxpayer dollars, Enron’s massive fraud was already coming unraveled. Enron was hardly in a position to make future donations to the GOP, and the president knew it.

Of course, this does not prove that the Bush administration is indeed as corrupt as the Clinton administration. At least with regard to Enron, it simply never got the opportunity to do a “favor” in anticipation of future payoffs.

The lesson of Enron is that politics and business do not mix. The opportunities for corruption and fraud are just too extensive, a lesson that is illustrated for every generation, but usually quickly forgotten. Today, people are upset about Enron, but few remember the S&L frauds, and fewer still Billy Sol Estes, the Teapot Dome, Jay Cooke’s Northern Pacific, or Credit Mobilier. The magisterial 1911 edition of Encyclopedia Britannica reported that Credit Mobilier “gave rise to the most serious political scandal in the history of the United States Congress,” yet I doubt that one American in a thousand has any knowledge of it whatever.

Ayn Rand had it right: What we need is the complete separation of economy and state.

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What an infuriating spectacle. Current and future retirees cheated by fraudulent accounting designed to fake huge assets while hiding enormous liabilities. Top dogs exempted from the same rules that trap employees. A cynical public skeptical that Congress will do anything to reform the system.

But enough about Social Security. How about that whole Enron thing?

It looks like Congress is using the Enron mess as an excuse for Congress to /I protect” all private retirement plans. What is Congress going to do, force us to diversify among politically approved investments like government bonds, stocks of /I good corporate citizens,” and Texas and South Dakota real estate deals?

And they’re also using Enron as a justification to keep the Social Security time bomb ticking. As fraudulent as Enron’s practices were, it wasn’t Enron that locked employees into a scheme where 15.3% of their pay was confiscated for mandatory investment in a glorified Ponzi scheme. And at least Enron employees have retirement accounts that actually exist. Tragically, of course, their Enron shares are now penny stocks, but they could have followed standard investing advice and diversified their personal 401(k) plans among several non-Enron alternatives.

Compare this to forced investment in a scheme with only one asset: the promises of future politicians. What’s worse, it’s not just the single asset that’s bogus. The account itself is bogus. There are no actual personal Social Security accounts that we can touch, much less leave to our beneficiaries. We’ll get what future politicians say we will get.

And like the Enron executives who bailed out of the stock while the peons were locked in, the savvy investors in Congress exempted themselves from participation in Social Security the moment it was created. But the rest of us are locked in until this Mother of All Accounting Frauds collapses.

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Enron chairman Kenneth Lay met with President Clinton and Vice President Gore in the Oval Office in 1997, prior to the Kyoto energy conference, according to the Washington Times of Jan. 16. The apparent purpose was for Clinton and Gore to get an agreement from Enron that it would support the draconian regulations and higher costs on the industry that would emerge from the conference, in exchange for government guarantees and taxpayer subsidies. This would expand the government’s power within the industry and guarantee handsome political contributions for the Democrats.

Enron would not disappoint. It became the poster corporation for the junk science of global warming, and supported the industry-killing Kyoto Protocol. Enron probably believed that promised taxpayer payouts would make up for its losses in support of unproductive, but politically correct, energy initiatives. The U.S. Senate, however, recognizing Kyoto’s negative impact on the economy at large, foiled Clinton-Gore plans by voting 95-0 to trash the unfair and inequitable Protocol. The Senate action wouldn’t stop Enron, however, from attempting to become the corporation of choice for the Clinton-Gore globalization agenda.

One source has stated that at Hillary Clinton’s prodding, seats were allotted on government trade mission flights to $50,000 Democratic National Committee (DNC) donors. Documents related to the practice were later subpoenaed, but were reportedly shredded, Enron-style. Nevertheless, Enron was apparently there with checkbook in hand for the coveted seats. In 1994, chairman Lay accompanied Commerce Secretary Ron Brown on a trade mission to India. An Export-Import bank $302 million loan to build an Enron- controlled Indian plant soon followed. The DNC received a $100,000 check from Enron just four days before India approved the power plant project. Another $100,000 Enron check followed in 1995. Clinton had instructed his chief of staff to help Enron obtain the power plant construction contract in India, and Enron received $398 million in taxpayer assistance. Another $100,000 Enron donation to the DNC in 1996 may have resulted in Regulatory Commission rulings favorable to the firm.

Federal and confidential corporate records show that Enron donated thousands in political soft money beginning in 1995, according to Jerry Seper and the Times. Seper further reports that Clinton energy and EPA officials often made themselves available for Enron executives. A December 1997 Enron memo emphasizes that approval of the Kyoto Protocol would be good for Enron stock. In 1998, Enron called for “restructuring” of legislation to deal with “the problems of global climate change.” Never mind that there was growing skepticism about the seriousness of global warming.

Democratic Sen. Joe Lieberman, who is heading the Senate investigation of Enron, has benefited from $250,000 given to his political causes by firms with Enron ties, but has not recused himself. Clinton Treasury Secretary Robert Rubin now runs Citibank,’ which is owed $800 million by Enron. Rubin called the Bush Treasury Department to seek an Enron bailout and was turned down cold. So this is the Enron record: They sold out their own stock-holding employees, bought big into the global warming myth to get government handouts, banked on the Kyoto Protocolbecom- ing law even after being drubbed in the Senate, and gave most of their money to Republicans when they were getting all that favoritism and assistance from the Democrats.

Is it any wonder this company collapsed?

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Enron and Arthur Andersen apparently conspired to inflate Enron’s profits, hide shrinking assets, and generally misrepresent the company’s true and dismal financial picture. So what do people want? Greater regulation by the government, whose departments routinely misplace billions of dollars, waste billions more on favored clients, hide misconduct, and keep lousy records? Yeah, makes sense to me.

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