 | | | | by James Malone |
The biggest and fastest bankruptcy ever. Separate companies created, shady deals and piles of debt hidden off the books. More than half a billion dollars of profits written off. Executives making millions by bailing out before the news hits the public, much of the staff's retirement funds going down the drain with the share price.
| And to cap it off, it's a Texas company that was the largest contributor to President George W Bush's election campaign, whose chairman is a personal friend of the president himself.
| It certainly sounds like the Enron scandal has all the makings of a classic tale of corporate swindle. The company clearly committed wrongs, and was bound to cause a storm in the business world sooner or later. But is it worthy of a major political scandal?
| The US media jumped on possible White House connections. The Democrats nudged them along, with barely concealed glee, depicting the Republicans as being in the pockets of the corporations. At first, the accusations were mainly guilt-by-association, but the questions really took off in early January 2002 with the disclosure that Enron executives called Treasury officials to ask for assistance. The now-familiar 'who knew what when?' line of interrogation is in full flow.
| It looks like Washington will be embroiled for some time, with investigations from at least six congressional committees, the Justice and Labor Departments, and the Securities and Exchange Commission. If a more substantial tie to the Bush administration is discovered, this could go on for ages.
| Of course, we don't know all the details yet. But the impulse to seize on Enron tells us more about the degraded state of US politics than it does about the ethical character of the White House.
| The Enron scandal has emerged at a time when American politics is stagnating, with a major lack of what Dubya's dad called 'the vision thing'. The 'war against terrorism' in response to 11 September has not provided the hoped-for sense of direction and purpose - and it is no coincidence that Enron hit the headlines as the war in Afghanistan subsided. Politics, like nature, abhors a vacuum. Bush officials complain that Enron has knocked its education plans from the top of the news agenda, but their education proposals were hardly riveting.
| | | There are plenty of scandal-mongers in the business world |
| As Philip Roth illustrates in his novel The Human Stain, American society now relies on cases of public disgrace and humiliation to give it some semblance of moral purpose (1) - what Roth calls the 'purifying ritual'. Now that the frenzy of the Clinton impeachment scandal has passed, it seems that the US political elite is ready to (self-) indulge again, in another cycle of accusation and public shaming.
| When the Republicans went after Clinton, many Democrats said it was a desperate ploy, revealing a lack of substantive criticism. Yet here they are now - the party that was virtually silent on all issues post-11 September, in the name of wartime unity - arranging congressional hearings, and resorting to much of the same low-road politics. Sure, Enron concerns more than an affair with a White House intern, but the juicy bit of the Enron story concerns possible deals made in (non-smoke-filled, of course) backrooms, with personal friendships and money allegedly lubricating the wheels of corruption. In the event, the Democrats had better tread carefully - after all, Enron was also a major donor to their party.
| There are also plenty of scandal-mongers in the business world. In recent years, a movement led by investor groups has campaigned against supposed abuses of boardroom power.
| These shareholder groups use scandals like Enron to serve their own ends - to make the world safe for speculation. Their calls for 'transparency' in financial accounts and following protocol in the boardroom are means to further extend their influence over the day-to-day affairs of the company, in the noble pursuit of short-term stock price rises. Indeed, it looks like one of the reasons Enron engaged in accounting manipulations was that it feared punishment by speculators, who are quick to sell their shares if a company misses a quarter's earnings target.
| Others have descended, vulture-like, on the Enron carcass. Most predictably, assorted anti-corporate, No Logo/Silent Takeover types wasted no time holding up Enron as Exhibit A of the conspiracy (2). But, as the Enron case shows, such critics of capitalism simply echo - in a shriller voice - the criticisms emanating from the corridors of the political and business leaders themselves.
| Meanwhile, it is a pity that the scandal trials and tribulations are likely to distract from what could be a useful discussion about the company - namely, what it reveals about the workings of the US economy. Enron is, in many ways, emblematic of today's economy, where finance infuses all companies' operations and transactions.
| Enron is commonly referred to as an energy company, but its chairman Kenneth Lay is no JR Ewing. More than 80 percent of its profits came from financial trading operations, dwarfing its earnings from pipelines and power plants. It took advantage of the deregulation of the energy industry to transform itself into almost entirely a financial middleman, buying and selling energy like any other commodity. Its traders used complex financial instruments such as credit derivatives that matched anything Wall Street could come up with. Enron was the poster child of management gurus, praised as the most innovative company in the USA and the prototype for all the companies of tomorrow.
| | | Enron's downfall is attributed to arrogance and ambition |
| Given that Enron's trading business depended on it being perceived as a trustworthy partner to deal with, news of its secret partnerships and write-offs was bound to be damaging. The final straw came when Enron's debt was downgraded to junk status by the credit rating agency Standard & Poor's, triggering the immediate demand for almost $4billion in debt, which Enron was unable to pay. Enron's collapse never had the potential to disrupt the economy deeply, unlike Long Term Capital Management, the hedge fund whose demise in 1998 led to a bailout by the US authorities. But - as the long list of creditors and customers who lost out shows - Enron's tentacles reached widely throughout the US economy.
| In many ways, Enron is an extreme example of what many firms are doing. It is far from alone in creating 'off-balance sheet vehicles'. Many stipulate that at least part of their pension fund contributions must be in the company's stock. And, as Business Week pointed out, Enron is only one of a significant number of companies this year that restated their earnings histories - showing that the profits of the 1990s were not really record-breaking (and, since some write-offs are hitting this year's profits, that today's losses are not so bad) (3).
| Enron's downfall is attributed to arrogance and ambition. Its executives and traders are portrayed as throwbacks to dealers like Michael Milken of the 1980s, who, they claim, similarly over-reached themselves (Milken ended up behind bars in 1991). It is a fable of excessive risk-taking.
| Yet as Daniel Ben-Ami explains in his book Cowardly Capitalism: The Myth of the Global Financial Casino, the goal of the financial system today is to manage risk (4). Ben-Ami argues that the new financial economy is the result of first, money going into the financial sphere rather than the real economy, and second, the desire to spread these financial investments across many areas, in an attempt to control risk. All of which has negative consequences for economic growth.
| In this context, Enron can be understood as a player in a game whose many sponsors - from banks to pension funds - sought safety by diversifying. The fact that some traders, like Enron, can't cover their own bets doesn't change the reality that the whole system is geared toward risk-management.
| The Enron case is portrayed as a lesson in hubris, leading to admonishments to companies and individuals to avoid risks, and calls for greater regulation. All these urges for restraint can do is set back economic development.
| The Enron issue is unique in combining two major contemporary themes: scandal-seeking in politics and risk warnings in economics. This makes it a story for our times. Enron's former CEO, Jeffrey Skilling, was once quoted as saying, 'We're on the side of the angels'. Now a lot of other people are trying to make themselves look like angels in comparison. But it's really a story without any good guys.
Read on:
In the wake of WorldCom, by Phil Mullan
Confidence goes bust, by James Malone
Accounting for Enron, by Daniel Ben-Ami
spiked-issue: Economy
(1) The Human Stain, Philip Roth, Houghton Mifflin, 2000. Buy this book from Amazon (UK) or Amazon (USA)
(2) No Logo, Naomi Klein, Picador 1999; The Silent Takeover, Noreena Hertz, William Heinemann, 2001
(3) 'Confused about earnings?', Business Week, 26 November 2001
(4) Cowardly Capitalism, Daniel Ben-Ami, John Wiley & Sons, 2001. Buy this book at
Amazon (USA) or Amazon (UK)
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