by Bob BrowningNews Weekly
Comment: Enron's collapse - the net widens
, March 23, 2002
Enron chairman Kenneth Lay liked declaring: "I believe in God, and I believe in free markets".
In July 2000, while his giant corporation was well into the corrupt practices that were to rob its employees and shareholders blind, Enron distributed a Code of Ethics to all of its employees.
Kenneth Lay ordered all staff to acknowledge in writing that they had read and understood the Code. "Business is to be conducted in compliance with all applicable local and national laws and regulations, and with the highest professional and ethical standards".
No wonder polls show that two-thirds of the American people believe Enron's shady accounting practices are common among U.S. corporations. The Centre for Public Integrity claims that investor trust in the American financial regulatory system is increasingly in question (CPI on line, February 25, 2002):
"It is painfully obvious that financial reporting standards have deteriorated in recent years, with corporate annual reports sometimes little more than indecipherable fictions with footnotes ... Another survey in 1998 of about 100 chief financial officers at public companies found that two-thirds of them had been asked by other senior executives to misrepresent their companies' results."
If not in theory then certainly in practice, the new corporate morality seems to be at home with deregulatory free market ideology. For the past two decades that economic orthodoxy has been sweeping the globe, pushed largely by the US superpower.
It is doubtful, however, whether the new business ethic is as compatible with a meaningful belief in God. Nevertheless, many US corporate CEOs - and the politicians they have succeeded in pocketing - think it advantageous in the American public climate to proclaim their religious faith as publicly and as frequently as possible.The financial scandal
Until Enron collapsed, creating the largest corporate bankruptcy in US history, it was America's seventh largest corporation. It set the stock market on fire with reports of ballooning profits. The reports, however, turned out to be cleverly crafted lies. Instead of the huge profits claimed, Enron had lost over $586 million.
Shareholder lawsuits launched against Enron claim that 29 of its top executives discreetly cashed in $1.1 billion in company stock before it crashed. Thousands of Enron employees were not so fortunate. They lost their jobs and their retirement savings. Investors lost a collective total of over $60 billion.
Subsequent investigations by the Enron Board of Directors found a pervasive "culture of deception" among the corporation's management. It found that some "were enriched by tens of millions of dollars they never should have received."
The culture of deceit seems to have extended to the giant accounting firm Arthur Andersen that audited Enron's books.
Andersen has just agreed to pay $217 million to settle investor lawsuits arising from its role as auditor of the Baptist Foundation of Arizona. The Foundation is a non-profit company that plaintiffs' lawyers say was yet another scheme that "liberated" investors of hundreds of millions of dollars.The New York Times
(March 2, 2002) commented that the settlement is a sign of Arthur Andersen's efforts to cope with the numerous shareholder lawsuits against it - including suits filed by investors and creditors of Enron.
Investigators have also implicated Wall Street financial analysts and the financial media in the scandal. They have criticised these banking and media watchdogs for continuing to urge investors to buy Enron stock even as the company headed toward bankruptcy. Several members of Congress suggested (New York Times
, February 27, 2002) that Wall Street firms' "hunger for investment banking business and other conflicts [of interest] kept them from levelling with investors".
Deceptive, unethical and even criminal behaviour seems not to have ceased with the bankruptcy. The FBI and 11 congressional committees are investigating claims that both Enron and Anderson deliberately destroyed thousands of documents relevant to criminal and civil inquires. Six top Enron officials, including Lay, have refused to answer questions at Congressional hearings.
Linda Lay, the wife of Enron's chairman, told US national television audiences that she and her husband were struggling to avoid personal bankruptcy following the corporation's collapse. Amid tears she said that she and her husband were "fighting for liquidity," adding: "It's gone. There's nothing left. Everything we had mostly was in Enron stock."
Subsequent investigations cast doubt on her claim. The US magazine Mother Jones
revealed (February 21, 2002) that Mrs Lay withheld the fact that she and her husband had shifted millions of dollars in personal assets to investments beyond the reach of creditors or legal judgments. The Lays put about $4 million into variable annuities, the magazine said. Unlike stocks and other investments, these annuities are beyond the reach of creditors. They will guarantee the couple an annual retirement income of $900,000.
The Lays began disposing of their Enron stock about the time the Chairman received a warning that reality was catching up with the corporation's machinations. Enron management, however, continued to encourage its rank-and-file employees to keep buying the company's stock. Worse, management actively discouraged them from selling Enron stock to purchase variable annuities - the very investment strategy that the Lays were utilising in the days before abandoning ship.The political scandal
The Enron affair is more than a financial scandal. It is also a political scandal of historic proportions and will impact public policy deeply. As the Center for Public Integrity notes:
"There is no better example in modern times of the symbiosis between commerce and politics, between wealth and power, between access and influence ...
"Enron's influence, and the taint of its collapse, touches Washington, D.C., and every state capital in America. The financial chicanery and excesses were enabled by the supposed elixir of government deregulation, limited liability, and minimal reporting requirements for the energy futures, securities and accounting industries... government laws and policies changed over the past decade for the favored few, all in the name of free market competition ..."
Enron and a clique of its self-enriching top executives contributed nearly $6 million to US politicians. Over 74 per cent of the money went to Republicans. Overall, 71 US Senators and 186 Congressmen enjoyed the corporate handouts. But, as CPI noted:
"No politician in America today is closer to Enron than George W. Bush... Bush's top career patron was Enron ... A few senior Bush administration officials today formerly worked for Enron, and at least 34 of them held Enron stock when they entered government last year.
"Bush's father, while Vice President and then President, received major campaign funding from Enron and assisted the company's Washington policy agenda in different, specific ways. Enron chairman Ken Lay was Co-Chairman of the Bush re-election campaign and chairman of the host committee of the Republican National Convention in Houston in 1992".
Not in memory has a single major company grown so big in tandem with a presidential dynasty, according to political analyst and author Kevin Phillips commenting in the Los Angeles Times
. The Bush family has been a prominent and well-rewarded rung in Enron's climb to national political influence, he said.
Enron's financially-motivated political manoeuvring helps explain the confused crisis over the privatisation of California's electricity system. Whistleblowing former Enron employees now allege that the corporation manipulated California's electricity markets. Internationally known economist Paul Krugman supports their claim (New York Times
, February 26, 2002):
"The key fact about California's crisis is that it peaked not in summer, when air-conditioners gobble electricity, but in the cooler months. Supplies should have been ample. Instead, there were severe shortages, because for some reason a third of the state's capacity stayed off line. The power companies say that generators were shut down for maintenance ...
"A more likely explanation - widely accepted by energy economists - is that power companies found that they could make more money by shutting down some of their plants, and hence creating shortages that sent prices into the stratosphere, than they could by actually meeting demand".
According to Krugman this raises questions about the independence of the US Federal Energy Regulatory Commission. The Commission's chairman was recommended for the post by none other that Enron's ubiquitous chairman, Ken Lay.Mounting distrust
It hardly seems unreasonable that, according to CBS News/New York Times
polls, 67 percent of the American people believe that members of the Bush administration are "hiding something" or "mostly lying" in regard to their Enron connections.
Distrust in governments is growing around the developed democratic world. Much of it is due to the surge of what might be called "electoral rationalism", the political counterpart of economic rationalism. Political rhetoric and behaviour is increasingly crafted with the principal aim of retaining political power. The public interest is made a lesser priority. In what some now call the tactic of the "perpetual election", the end not only justifies the means, it also determines them. A "good" political tactic is whatever helps keep the party elite and their key backers in power.
Political tactics revolve around spin doctors, politicised public services, corporate dominance of political party funding, media manipulation, and a host of other nasties - including the lining up of corporation-related jobs for the top political boys after they step down from office.
Concern over political rationalism is something that currently reverberates in Australia. There has been the recent spate of questionable corporate collapses (eg. HIH, OneTel, Ansett), the drift of ex-Ministers into jobs related to their former portfolios (eg Reith, Wooldridge, Fahey), and the issue of federal government credibility dating back to the last federal election. Allegations of electoral deceit are on-going, extending now into charges of political interference in Australia's armed services.
We can but hope that democratic electorates will soon demand more effective corporate and political governance guided by authentic rather than PR-crafted declarations.