where is the criminal investigation???

[telebob x]

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COMMENT | December 24, 2001

Enron's Rise and Fall

The rise and fall of Enron is an instant classic in the annals of capitalism 
because, in one calamitous stroke, it wipes out so many sanctified illusions 
that rule in the magic marketplace. Enron embodies Nobel-class hubris like 
that of the market sophisticates who brought Long-Term Capital Management to 
ruin in 1998. It also smells of the raw monopolistic greed common a century 
ago. An energy-trading company that Wall Street had valued at $80 billion 
ten months ago is now a penny stock. Meanwhile, California consumers and 
businesses are stuck with the ruinously inflated electricity prices that 
Enron rode to brief financial glory. The firm's gullible creditors include 
some of the best gilt-edged names in American banking--J.P. Morgan Chase, 
Citigroup--whose ancestral houses were big players during the first Gilded 
Age too. Unfortunately, then and now, these venerable financial institutions 
lured millions of innocents to the slaughter, unwitting shareholders who 
bought the exuberant promises.

In this case, the lambs include Enron's own employees (thousands of whom are 
abruptly out of work) because top management cleverly prohibited their 
401(k) accounts from selling Enron's plummeting stock while the big boys 
were dumping theirs. If the financial losses to banks are severe enough--we 
don't yet know the full truth--then US taxpayers may be burned too, their 
money used once again to rescue delinquent financiers from their just 
deserts in the name of "saving the system." Nobody ever said capitalism was 
pretty.

Markets are imperfectible human artifacts and always subject to gross error, 
not to mention high-stakes fraud, because the transactions are always the 
work of human beings. Computerization and esoteric mathematical formulations 
do not change that humble fact; neither does the Internet. This same lesson 
was learned from great pain and loss in the early twentieth century and led 
eventually to the political understanding that markets without governors and 
regulators will repeatedly throw off disastrous consequences--extreme price 
swings, occasional busts and clever larcenies--so stabilizing rules and 
limits were imposed. That knowledge was pushed aside by the modern era's 
deregulation.

Enron was a massive experiment in e-commerce--a commodity-trading firm that 
used the Internet to connect distant buyers and sellers of everything from 
electricity and natural gas, steel and newsprint to pollution credits and 
financial derivatives hedging against interest rates or the weather. If you 
check out Enron Online, you will see the hubris still on display, despite 
the bankruptcy. "Why Enron?" the company's website asks. "We have strong 
skills in risk intermediation and good systems to control risk.... We have 
successfully sourced capital for all potential investments." As it turns 
out, these are the very qualities that were missing, the "new economy" 
conceits that brought it down. Enron's siren song was plausible enough (if 
you left out the human folly and greed). Deregulation, combined with 
Internet trading, exposed the old-line utilities to fierce, continuous price 
competition, the firm explained, forcing them to eliminate inefficiencies or 
get out. Consumers would win from the lower wholesale prices; so would 
producers of "soft energy" alternatives, like wind or solar. Enron would 
preside like a wise monarch.

But while Enron promised to scrutinize the soundness of buyers and sellers, 
nobody was scrutinizing the trader king. The middleman is unregulated in 
this brave new world. When Enron management made a series of outrageous and 
self-interested off-the-books deals to raise capital, its auditor, Arthur 
Andersen, gave approval. The credit-rating agencies remained mute. Enron's 
bankers were busy touting the stock as on its way to the moon. Enron and 
chairman Kenneth Lay, meanwhile, pumped nearly $2 million into the election 
of George W. Bush, who returned the favor by letting Enron pick federal 
regulatory appointments. Lay and his agents were all over Vice President 
Cheney's secretive energy task force, and White House economic adviser 
Lawrence Lindsey received $50,000 last year as an Enron "adviser."

The disaster of California's blackouts and soaring electric bills was a 
prima facie case of monopoly price-gouging--artificial scarcity induced by 
utilities simultaneously shutting down electricity generation for 
"repairs"--that cries out for criminal investigation. Collusion has not yet 
been proved nor Enron's involvement, as far as I know, but the firm profited 
spectacularly. While California groaned, Enron's share price more than 
doubled. Enron then used its new glamour status to leverage still more debt, 
expanding its reach worldwide and opening more trading tables--financing it 
all in ways even savvy analysts couldn't understand. It was the classic 
behavior of unfettered freebooters, and it ended in the familiar way.

What did we learn? First, wholesale deregulation has a vicious downside for 
ordinary citizens and is open to gross manipulation. Second, as Floyd Norris 
of the New York Times pointed out, Enron is essentially not an energy 
company but a financial institution that trades various financial 
instruments, utterly free of regulating limits. Like a bank, it must raise 
huge capital flows to maintain liquidity to underwrite the transactions, but 
unlike a bank or a financial market, it operates without oversight. Third, 
nearly every party to this debacle--Enron itself, its auditor, the bankers 
and brokerages--is guilty of profound conflicts of interest. They do not 
tell the truth to retail customers like small-scale investors for fear of 
offending their big investment clients. Enron, it seems, didn't tell the 
truth to its bankers either, and they didn't ask.

As we learn more, the fall of Enron may be seen as the logical result of 
repealing the Glass-Steagall Act, which prohibited commercial banks from 
merging with investment houses. The remedial agenda would start with the 
reregulation of banking and finance, in order to restore a milieu of 
prudence and honest dealings at the heart of capitalism. Other sectors 
should follow: energy, telecommunications and airlines, for starters.

It would be comforting to think this event will turn politics around and put 
a little spine in our legislators. Certainly many state governments have 
learned from California's pain. But don't count on Washington. Even after 
Enron's meltdown, leading Democrats continue to shill for more deregulation, 
aware that their money patrons will be most upset if they reopen fundamental 
scrutiny of how wealth is created in the magic market. Elite opinion leaders 
will probably stick with the laissez-faire dogma, as it continues to fall 
apart, until the bloody losses lap over their shoes too.

WILLIAM GREIDER

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