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Gavin Rose
December 19, 2001 A political powerhouse behind global energy deregulation and major GATS designer, the Enron Corp. has been a pivotal figure in the military-industrial network of cartels behind the Bush administration. Now filing for bankruptcy, Enron is the topic of Senate hearings, the subject of SEC investigations, and the possible target of criminal charges (for concealing massive debt in �partnerships� with de facto subsidiaries). The story of Enron�s rapid rise and fall illustrates many times over the flippant ease with which leaders of multinational cartels can and will engineer global social and economic crises � banking on disaster.
Enron has been moving Bush�s hand since the 1980s, when Enron�s first foray into Argentina�s utility contract bidding failed. Asserts the former Argentine minister of public works Rodolfo Terragno, W. Bush called to personally solicit the government contract for Enron in 1988 (while his father was President-elect). Back then the brokerage was less adept at passing itself off as a legitimate business. Enron had transparently adopted as a local frontispiece the Argentine firm Westfield (Westfield's only asset the previous year was $20, its corporate filing fee). Terrango was unimpressed and considered the lame attempt an offensive joke.
After long resistance to the disreputable company's advances, in 1998 Enron was granted the first power marketer license in Argentina, "in accordance with a governmental resolution that allows companies which do not own power generation assets to market electricity"
Enron�s press release on this coup (which could conceivably have involved extensive bribery) is smug.
This marked "an important step in Enron's strategic efforts to establish power marketing operations in Latin America and to further its participation in the future integration of the Southern Cone's energy markets," said Scott Porter, Enron International Argentina executive director.
Enron International Argentina also built pipelines and sold risk management services to industrial and commercial customers, while providing "the same customers with access to low-cost capital and a range of alternatives for securing affordable debt and equity financing for energy-related projects."
While Satirewire makes light of the intimacy between Enron and Argentina sobering facts point to the likelihood that Enron's chicanery may have precipitated Argentina's financial crisis. The Argentine government has accused Wall Street of speculation on an economic collapse. Enron may have created an investment scare with this warning, on its credit consulting on-line database, which seems crafted to deliberately drive up fears of debt default (against which Enron was eager to sell protection).
Through political connections (most prominently, the presidential Bush family) Enron aggressively pressured energy officials in many other countries to overlook its shady finances and irresponsible track-record. The company�s tactic was to make eleventh-hour bids (to avert pre-emptive popular opposition).
Enron finally came under investigation in India this summer in connection with Dhabol Power U.S. Ambassador Frank Wisner had exerted enormous pressure on the Indian government to award the power plant contract to Enron, and the CIA had provided strategic intelligence on the competitors and the bidding process.
An inept risk-taker, Enron also sank billions of dollars in power companies in South Korea, China and the Philippines, a water company in Britain, pulp mills in Canada, and power plants throughout South America. U.S. taxpayers picked up the tab through corporate welfare programs (including the Export-Import Bank, which insures overseas investments for U.S.-based multinationals at unreasonably low rates).
�Get rid of people, they gum up the works�
The General Agreement on Trade in Services (GATS) is a new body of rules at the World Trade Organization (WTO) designed to liberalize international trade-in-services. One of the largest multi-sector private service providers in the world, Enron exercises critical behind-the-scenes influence over the GATS negotiations.
Enron is a key member of the U.S. Coalition of Service Industries (UCSI), comprising some of the largest service corporations in the U.S., a powerful agenda-shaper for GATS negotiations. In 1999, Enron was a top sponsor of the World Services Congress in Atlanta, where the big business agenda for GATS 2000 was consolidated. Enron is an active member on the Board of the National Trade Council, a strong backer of the WTO and a prime mover behind granting the President fast track authority over all trade negotiations.
What policies has Enron pursued from this position of influence over the GATS? An Enron executive told The New York Times that the company's intention was to create "a regulatory black hole" to suit its "core management philosophy, which was to be the first mover into a market and to make money in the initial chaos and lack of transparency."
Skilling, Enron's longtime president who bailed just months before the company�s ruin, opined at a 1997 industry conference: "You must cut costs ruthlessly by 50 to 60 percent. Depopulate. Get rid of people. They gum up the works."
"Enron's entire business plan was predicated on market volatility. I'm glad that California's market has stabilized so much that that type of business has trouble doing business in California," President of the state Public Utilities Commission Loretta Lynch told reporters.
The PBS has published on-line transcripts of interviews with many different opinion-leaders and policy-shapers on the recent California energy crisis and the ongoing energy deregulation debate, with which Enron has been so intimately involved.
The interviewees include Enron C.E.O. Kenneth Lay, as well as California Governor Gray Davis, who was reluctant to allow Enron to service the until-recently public-owned electric utility lines. His fears were confirmed when the company strategically withheld services and minimized infrastructural capacity in order to drive up prices.
In the fourth quarter last year, California�s emergency proved to be a windfall for Enron: energy prices soared, the company's revenues tripled, and profits jumped by 34 percent. Enron�s C.E.O. Kenneth Lay reportedly netted $123 million in 2000, three times higher than his 1999 (and ten times higher than his 1998) take. In July Enron was held in contempt by the California Senate for bucking a subpoena for documents on the company's shady energy trading in the midst of California's deregulation-driven crisis. Likewise current national Senate hearings have been snubbed by Enron executives, so far creating only murmured dismay. The gears in Washington have been more generously greased by the Enron Corporation, though.
Bush and Co.
At Lay�s recommendation, the President would not intervene in California's crisis this summer � the state�s first experiment with energy utility deregulation. Bush had raised a record $21.3 million a single fundraiser hosted by Kenneth Lay, chief executive of Enron.
By then the candidate had a proven track-record with Lay as a staunch political advocate of the company's interests. In 1997 Bush placed a telephone call on behalf of Lay to then-Pennsylvania Gov. Tom Ridge to help Enron crack into Pennsylvania's then-regulated electricity market. "I called George W. to kind of tell him what was going on," Lay told the New York Times about his solicitation of the 1997 phone call, "and I said that it would be very helpful to Enron, which is obviously a large company in the state of Texas, if he could just call the governor [of Pennsylvania] and tell him [Enron] is a serious company, this is a professional company, a good company."
Lay led his company and employees - who were strongly advised in a corporate mailing to contribute $500-$5,000 each to Junior�s run for the Oval Office - to outspend all other supporters of the Republican Presidential ticket last year ($2 million together, not including contributions to Congressional campaigns or money raised at fundraisers).
Three top White House advisors who helped draft the Bush administration's energy plan own stock in (or earned consulting fees from) the Enron Corporation. Enron officials interviewed candidates to fill vacancies on the Federal Energy Regulatory Commission (which regulates Enron's main markets) and Lay�s picks were �coincidentally� the President�s choices: Pat Wood III and Nora Mead Brownell (former Pennsylvania Public Utilities Commissioner, nicknamed �Nora Mead Brownout� for the consequences of her penchant for deregulation1). Lay himself was the only Bush advisor privy to Cheney�s secret drafting of the new national energy policy.
There is something fundamentally inappropriate about allowing a corporation to exercise such direct influence over the ostensibly independent and impartial government body responsible for regulating that industry�s activities. In California (and throughout the developing world, where multinationals of Enron�s ilk often commit analogous abuses of influence over government), the elimination of checks and balances by enterprising con artists has had calamitous results, especially for the vulnerable poor.
Analogously, in any business, selling and financial engineering are independent activites meant to act as checks and balances on each other. The selling side is focused on maximizing revenues and market share, whereas the financial side takes care to only allow sales to creditworthy customers. Enron�s strategy of systematically combining these activities through derivatives, futures, guarantees and options, combined with the company�s policy of keeping debt off the books through deliberately opaque partnership arrangements, proved to be a recipe for disaster.
Chief financial officer Andrew Fastow developed the partnership strategy to cunningly assuage lenders� concerns about the extent of Enron�s indebtedness. "Enron's partnerships are a thicket of complexity. Two-year-old Whitewing Associates, for instance, involves at least nine different legal entities. But Enron's aim in most of these deals is actually simple: to take investments in foreign and domestic projects of its balance books and get them ready for sale." Fastow became the manager of some of the largest partnerships, with approval of the audit committee of Enron's board.
Enron's description of the partnerships baffled Wall Street analysts: "share settled costless collar arrangements," and "derivative instruments which eliminate the contingent nature of existing restricted forward contracts." Too confused to offer salient criticism of the company�s business practices, analysts sometimes even dared to recommend the stock, as when a government boost or massive advertising campaign sent shares climbing.
Several heads of the audit committee charged with reviewing Enron�s financial statements received thousands of dollars in fees and indirect support from the company they should have been scrutinizing. Stanford University�s business school professor Charles O'Reilly politely refers to this problem as a "pattern of reciprocity" among chief executives and directors, in which they do favors for each other and gradually become reluctant to rock the boat, particularly on complex accounting matters.
Lynn Turner, who recently resigned as chief accountant at the Securities and Exchange Commission2, points out that Enron's original financial statements for the past three years involve clear-cut errors under SEC rules that had to have been known to Enron's auditors at Arthur Andersen. "One has to wonder if a million bucks a week didn't play a role," Turner said, referring to the $52 million a year in fees Andersen received last year from Enron, its second-largest account.
Meltdown
In mid-October, Enron�s precarious prestige, based entirely on the stock-market value of financial illusions, began to unravel. Investment losses in water-management, fiber-optics and telecommunications which Enron had hidden in its partnerships suddenly came to light. Reporting a $638 million loss for the third quarter, Enron reduced the value of the company's equity by $1.2 billion. Within a week, Fastow was gone with $30 million in fees and profits from his involvement with the outside partnerships. The Securities and Exchange Commission began an inquiry. Lay�s pick for future C.E.O. Skilling resigned in August. In November Enron confessed to overstating earnings (by $586 million) over the past four years (by hiding losses in the partnerships).
Joseph Berardino, the chief executive of Arthur Andersen, has identified an Enron transaction with one of these 'partnerships' - described now as 'special-purpose entities' - as a possible crime.
Enron's many crucial 'partnerships' were actually with companies controlled by Enron - de facto subsidiaries. But their liabilities could be kept "off [Enron's] books if an unrelated company put up 3 percent of the equity, even if virtually all the risk remained with Enron." Thus debts were deeply hidden and reported income quadrupled, in an illusion that drove up stock prices. In-the-know executives cashed out these junk stocks promptly before the fall through insider trading.
Lay almost managed to sell Enron to its much smaller rival Dynergy Inc. for $10 billion in stock. But when Dynegy officials were allowed to examine Enron's books, the company�s prospects appeared so abysmal that Dynegy dropped the deal.
Finally filing for bankruptcy, Enron laid off more than half of employees at its Houston headquarters, promising each a few thousand dollars in severance pay. Nearly 600 higher-ups received more than $100 million in bonuses last month. The Justice Department and the Labor Department are each investigating Enron�s handling of employees' retirement benefit plans. For weeks before filing its bankruptcy petition, while watching the share price plunge, Enron prohibited its workers from selling stock held in voluntary retirement plans.
How did Enron�s collapse take so many workers and investors by surprise? The company was rarely subjected to any kind of federal regulation, exempted from oversight in 1992 by the Commodity Futures Trading Commission. Wendy Gramm (wife of Sen. Phil Gramm � Rep., TX), now an Enron board member, headed the CFTC in 1992 and is now a defendant in a law suit filed by Amalgamated Bank accusing many Enron executives of insider trading and �grotesque fraud.'
Amalgamated Bank is seeking an immediate injunction to freeze the bank accounts of 29 Enron officers including Chairman and C.E.O. Kenneth Lay, alleging they artificially inflated the stock price and gained about $1.1 billion from the sale of more than 17.3 million shares of stock over the past three years. Lou Pai, chairman and chief executive of Enron unit Enron Accelerator, allegedly gained the most ($353.7 million) from insider trading of Enron shares, followed by Kenneth Lay ($101.3 million). More than 50 related law suits have been filed against the company and its executives, with the number of defendants steadily rising. The foremost are Enron, Lay, former chief executive J. Skilling, former chief financial officer Andrew Fastow, and the company's auditor, the accounting firm Arthur Andersen LP.
Rep. Waxman (D-Calif.) has urged Cheney to disclose details of any meetings between executives of financially stricken Enron Corp. and the White House, suggesting that Enron executives who contributed heavily to President Bush's campaign may have exerted "significant influence" on the energy plan formulated by Cheney's task force last spring. "In light of Enron's financial failure, you should reconsider your insistence on secrecy," Waxman, the ranking Democrat on the House Government Reform Committee, wrote the vice president. Rep. Tauzin (R-La.) also wants to investigate the company's accounting practices.
But the fall of Enron has not discouraged Congressional advocates of the deregulation plans that Lay and his company�s lobby brought to the table. Senate Majority Leader Daschle (D-S.D.) will probably introduce a major energy bill next week, and the bill is still expected to affirm the authority of the Federal Energy Regulatory Commission to force traditional utility companies to open their grid system to electricity marketed by the traders, a move Enron championed. The omnibus energy bill will also deal with automotive fuel standards, global warming fears, energy conservation programs, tax credits for energy development, and pipeline and drilling initiatives. Enron�s Washington lobby appears to have been so intense and comprehensive that, although the corporation and many of its executives will be spending the next several years in court, national policy makers are still enthralled by deregulation ideologues and will obliviously continue to serve the defunct business�s interests.
1 Check on your state�s electric utilities policy agenda.
2 The Securities and Exchange Commission is now headed by Harvey Pitt, a Wall Street lawyer and corporate lobbyist who made his name defending corporations against SEC prosecution. This particular Bush appointment has been described as "roughly the equivalent of making Johnnie Cochran head of the FBI."
When his predecesor in the SEC tried to prohibit accounting firms from doing other business with the same corporations they audit, Pitt spearheaded a lobbying campaign that destroyed the proposed ban. Most accounting firms do more corporate business as consultants than as auditors. Arthur Andersen, for instance, examined Enron's books while making $27 million in fees for consulting and other services, a conflict of interest which probably enabled Enron�s deceptive financial practices.
As head of the SEC, Pitt promptly replaced top staff on the agency�s corporate-finance division with fellow representatives of the industries the SEC regulates. Two months ago this commission instituted an amnesty policy, apparently anticipating Enron�s imminent need of a blanket pardon for massive violations. The corporation has only to offer a confession, and punishment will be negligible.
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