Enron and the US crony capitalism
Girish Ghildiyal
ENRON’S IS no normal case of bankruptcy that occurs in droves at the trough of every business cycle. Rather, it epitomizes the crony capitalism, the true face of the ‘new economy’, right at the Mecca of world capitalism, the USA. And Enron is not just another business house. It had even the White House on its strings. It bankrolled Bush’s political career as Governor of Texas and also his presidential campaign. Thomas White, Secretary of the Army, is a former high-ranking Enron executive. Robert Zoellick, the U.S. Trade Representative, was a paid member of Enron’s advisory board. Lawrence Lindsey, top economic advisor, worked for Enron. James Baker, Chief of Staff, and Robert Manchester, Commerce Secretary (both in Senior Bush’s administration), had been hired by Enron.
Sheer size makes Enron different from other companies that collapsed. It was once the world’s 7th largest company. The size of its financial dealings alone equalled the size of big banks. Investors, employees, regulators and the public believed till the last moment that it was in a sound business. It managed to con all till the very end. It was the largest single corporate bankruptcy ever.
The collapse of the energy trading major last winter and the unraveling of the story of sleaze, deception and lies has all the ingredients of a big scandal. So wide is the net that everybody connected with Enron – auditors, investment bankers, high-ranking executives, analysts – all who were acting in fiduciary capacity, are guilty of negligence or complicity or both.
The meteoric rise of Enron, lobbying skills of its top executives, its penchant for bending rules and making use of legal loopholes etc. were legendary. The successive US governments actively promoted its business interests abroad, including in India. Stories of its usurious practices in newly emerging economies like India and Argentina kept it in news around the world. Its high-ranking executives made no bones about their proximity to the highest offices in their country.
The collapse of such a company has created a collective disgust among public at the goings on within the company. The systemic rot that helped it get away for so long is almost revolting. A lot of influential people in the US are in an introspective mood these days. There is talk of reforms in campaign financing system, which puts the political system at the mercy of big corporates. Stock and options system of compensation, which gives top executives ridiculously high rewards for doing little, and investing the pension funds of employees in one’s own stocks, thereby increasing the risk of insolvency have come under fire. Questions are being raised about the supposed independence of auditors, and the role of the regulators, the transparency and disclosure norms in accounting etc.
But all talk of greater regulation, transparency, independence of market participants etc. can barely hide the true nature of these economies. Capital in search of profit will wreak havoc with the laid down rules of the market and its processes are bound to destabilise the functioning of the market from within. With every exposure, one or the other “conflict of interest” or “ moral hazard” becomes apparent. New mechanisms are installed to make the markets govern themselves better. To protect the investors’ interests stock analysts analyse the prospects of companies and rating agencies give rating to companies and so on. While developing countries are plagued by “government interference” and “endemic corruption”, these markets are served by the so-called independent agencies and are supposedly regulated by professionals. But somehow periodically things go wrong and “conflict of interest” arises in one from or the other.
Enron embodied trends that are noticeable in advanced capitalist economies these days. One, competitive markets are forcing companies to merge and grow in size and cut costs aggressively by shedding labor. Two, the search for greater profits is also forcing them to look for new markets. Enron, which started with the merger of medium-sized gas companies, had in a span of 15 years completely transformed itself from a utility to a trading major. It aggressively lobbied for deregulation of electricity trading (i.e., created a market for it) to earn superior returns. It hardly had any plants/units at the time of its demise. Its main source of earning was purchasing and selling gas to different players. It was also a virtual stock exchange and dealt in exotic derivative instruments. It used its considerable influence to keep away from the prying eyes of the regulators and did away with any of the safety norms normally required from institutions dealing (lending/borrowing etc.) with large amounts of public money.
But other market players soon caught up with Enron’s game and started employing the same tricks to show improved results. Slowly Enron’s impressive earnings growth began to erode. To stem the tide, Enron resorted to more ‘innovations’ – this time on the accounting side. It created thousands of companies where it could park temporary losses. It continued to report gains but kept on hiding losses. Essentially, it became “confidence trickster” – so long as people had faith in the company it could hope to cover the losses in future. However, deepening recession resulted in mounting losses and put paid to those hopes. And it ultimately met its nemesis in the very markets, which it helped to create, and lobbied hard to keep unsupervised.
THE POSTER boy for the charade is Michael Eisner of Disney. As CEO, he must answer to a board of directors that includes the principal of his kids’ elementary school, actor Sidney Poitier, the architect who designed Eisner’s Aspen Home and a university president whose school got a $1 million donation from Eisner.
ANDERSENS, THE auditors, already face SEC investigation for their role in Dunlap’s butchery of Sunbeam and has paid $110 million to settle Sunbeam investors’ damage suits. A decade ago Andersen fronted for Charles Keating’s notorious Lincoln Savings & Loan, which milked the elderly and then collapsed at taxpayer expense – despite a prestigious seal of approval from Alan Greenspan (Keating went to prison; Greenspan became Federal Reserve Chairman). But why only pick on Arthur Andersen? Ernst & Young paid out even more for “recklessly misrepresenting” the profit claims of Cendant Corporation – $335 million to the New York and California public-employee pension funds. Cendant itself has paid out $2.8 billion to injured investors, but hopes to recover some money by suing Ernst & Young. Price WaterhouseCoopers handled the books at Lucent, accused of inflating profits by $679 million in 2000 and prompting yet another SEC investigation.
THE SEC, which is the regulatory authority, is headed by Harvey Pitt. Pitt’s firm represented Arthur Andersen, and each of the Big Five in the notorious Miliken scam and Ivan Boesky, whose fraud case was settled for $100 million. He blames Arthur Levitt’s inquiries for upsetting the accounting industry’s ‘self-regulation’. Pitt is yet to resign. Similarly sympathetic cops are scattered throughout the regulatory agencies. At the Federal Reserve, a new governor, Mark Olson, headed “regulatory consulting” in Ernst & Young’s Washington office.