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The following article appeared in Left Business Observer #99, February 2002. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.


The second collapsing model is Argentina

It's official, a recession began in March. And since the early 1970s, every recession has claimed a headline name or two. Penn Central, Franklin National, Continental Illinois, hundreds of savings and loans.... Along with those have been a couple of near-misses, saved by government bailouts: Chrysler, Mexico (saved at great cost to ordinary Mexicans), Citibank.... This recession, seemingly short and mild, has already brought down two big names - Enron and Argentina. Both are rich symbols of the political economy of today, though they're not being read as such in mainstream discourse.

So much comes together in the Enron story - deregulation, financialization, New Economy fantasies, the links between capital and the state, the increased role for the stock market in the running of big corporations, professional corruption. It should be read as the demise not of just one firm, but of an entire economic model. It probably won't.


Enron, now the biggest bankrupt in U.S. history, "was and truly is an American success story," said the company's lawyer in Manhattan bankruptcy court in December. If trading on political connections and scheming to fleece consumers and investors while hiding behind a lot of free market rhetoric is what makes for an American success story today, then Enron surely qualifies.

It's also a great failure story. At the beginning of 2001, Enron's stock traded at around $80 a share; as recently as August, it was $45; as this goes to press, it's 67¢.

Though it grew into a globe-spanning monster, Enron began its life as a modest natural gas pipeline company. But moving gas through pipe was much too mundane a pursuit for Enron's visionary chair, Kenneth Lay. Lay and his colleagues wanted to liberate the company from the merely physical world, and enter the magical New Economy realm of the weightless corporation, where value is created not through production but through inventing and trading complex financial instruments and thinking big thoughts. As Lay told The Economist in June 2000 "We were a new-economy company before it became cool." And The Economist agreed, while worrying a bit about Enron's "hubris."

It started slowly, at first just trading gas and electricity. But as the 1990s progressed, and New Economy thinking reached the irrationally exuberant phase, it got into trading more exotic things, like advertising time, telecommunications bandwidth, and even weather derivatives. (Yes, weather derivatives: through Enron Online, you could bet on, um no, hedge your exposure to degree days.) And Enron's culture got more and more cult-like, fashioning itself "the world's leading company," and alienating even Wall Street bankers with its arrogance. But, fantasy aside, all the exotic instruments and strategies still depended on a troublesome physical world; to have the telecoms bandwidth to trade, Enron also built a big network to fulfil demand that was never demanded.


As is standard with complex financial instruments, the selling point was the management of risk. Buy the right derivatives contract and you'll be shielded against rising prices (if you're a buyer) or falling prices (if you're a seller). But risk can never disappear from the whole system - someone has to bear it. Sometimes it's the guy on the other side of the trade; A's gain can be B's loss. And sometimes it's A or B's banker or broker. It looks like Enron itself ended up holding some of it, though you'd never have known it from reading Enron's inscrutable and devious accounts.

Magical accountancy typically comes crashing sooner or later against reality. Enron created scores of off-balance-sheet entities, many of them headquartered in offshore tax and regulatory shelters. The point was to make Enron look healthier than it was - to allow the parent company to report bigger profits and smaller debts than the whole Enron really deserved. Indeed, it was the revelation last October that one of these arrangements would knock $1.2 billion off the parent firm's value that really set off the final panic (though market anxieties had been building for over a year). But there were also some plain old bad investments, like a water company in Britain and a power firm in Brazil.


Despite the free market rhetoric, Enron spent lots of money cultivating politicians. It was one of the biggest corporate campaign contributors around, and the Enron circle in Houston were among George W. Bush's biggest boosters. But the relationship goes way back. In 1988, the young, still-irresponsible George W. Bush - holding no office other than being the vice president's son - lobbied the Argentine minister of public works to throw a pipeline contract to Enron. Later, as governor of Texas, Bush let Enron violate Texas' none-too-strict antipollution laws. Lay & Co. helped convince Bush to reject the Kyoto accord on global warming (not, of course, that this was a big challenge, given Bush's own petrophilic proclivities). It was a major promoter of the pointless and expensive experiment in electricity deregulation, a scheme that will mainly benefit large business users at the expense of everyone else, and which brought ludicrous bills and rolling blackouts to California last year.

Enron was also busy abroad, twisting arms (with the help of friends in the U.S. government) in Latin America, Asia, and Africa to get deals done. Its smelliest involvement was in the Indian state of Maharashtra, where its subsidiary pressed local authorities to crush protests against an unpopular power project, often quite brutally. The project, deemed "not economically viable" by the World Bank, which refused to finance it, was nonetheless guaranteed by the Indian government - though the state has, sensibly, stopped paying Enron. Lest Enron seem like a monopartisan company, it should be noted that the Clinton administration helped promote its interest in India, earning the Dems a prompt $100,000 contribution. Behind every free market fantasy lurks state power, managed by the best politicians money can buy.


Enron is a fine illustration of the transformation over the last 20 years in how corporations are run. From the 1930s through the 1970s, managers largely ran the show, with little attention paid to the stockholders. As the economy soured in the 1970s, and with it profits and stock prices, stockholders woke from their passivity and demanded the firms be run in their interest rather than those of managers or some broader good. As a result, the interests of managers and boardmembers were supposed to be aligned with those of stockholders, a realignment guaranteed by replacing salaries with stock options.

The doctrine shows a touching faith in the wisdom of the stock market; investors are presumed to be both skeptical and prescient, seeing through managerial scams and correctly anticipating the best corporate strategies. But with the demise of the dot.com bubble and the broader bull market of the 1990s, the stock market's wisdom is in serious doubt. And the crash of Enron shows that making managers and boardmembers think like stockholders dulls their critical faculties; who would want to blow the whistle when the stock was rising 60% a year?

With Enron circling the drain, the ideologists are busy trying to rescue some of the big ideas that its demise threatens to discredit. New York Times reporter Neela Banerjee worried that with Enron gone, no one could lead the charge for electricity deregulation - as if the disasters of California and Enron itself were separable from that idiotic agenda. And Financial Times columnist John Plender worries that the 401(k) wipeout could compromise the move away from the old "paternalistic" pension system - in which workers were guaranteed a fixed pension, and employers bore the risk - towards the present one, in which employers contribute funds but workers bear the risk.

The Enron debacle is reminiscent of the savings and loan debacle of the 1980s, in that it was made possible by reckless experiments in deregulation - with a nice theoretical grounding provided by prestigious economists - compounded by private chicanery and incompetence. Then, as now, regulators, politicians, executives, consultants, pundits, accountants, lawyers, rating agencies, and the press cheered on as the bubble was inflating, and seemed shocked when it burst. The S&L mess should have inspired serious study of how we do economics and politics in the U.S., but that never happened; we spent some $200 billion of public money on a bailout with little debate and few consequences.

It would be nice if the Enron disaster gave rise to a bit of critical introspection, but, given the history of these things in the USA, this is probably too fond a hope. A few people may go to jail, but it'd be a shock if it were more than a few. A 1990 Wall Street Journal retrospective on the S&L crisis said that the list of malefactors was "so long that some observers conclude there is something profoundly wrong with the country's political and financial systems, which appear easily undone by feckless and reckless behavior. In fact, they say, the behavior of this legion calls into question the performance of this nation's professional class itself." When that many people are guilty, it's as if no one is, and amnesia quickly sets in. Alas.

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