TCS Daily


Isn't It Enron-ic?

By Radley Balko - January 17, 2002 12:00 AM

It's a tough argument to make - that the largest bankruptcy in U.S. history is actually good for markets, for consumers and for the economy. But given what we know at this point, that may be exactly the case.

In a decade, Enron completely transmogrified from a pipeline builder with considerable assets to a full-fledged, high-falutin,' "asset-light" commodities broker. Its rise was predicated on the notion that anything and everything could be hedged, sold, and made to generate profits on the margins. Internet bandwidth? Credit? The weather? Enron brokered all of them as commodities.

Meanwhile, Enron rocketed to the top of the Fortune 500 through an accounting glitch that enables energy brokers to include the full price of a transaction as revenue, instead of just the net profits traditional brokerage firms are allowed to report. As first reported in The New York Times, Enron's revenues vaulted from $40 billion in 1999 to $101 billion in 2000.

Enron was on everyone's dance card. Fortune magazine named Enron its most innovative company - six years in a row. Enron was getting boosted from everyone because everyone was getting a boost from Enron. There were more artificial props flying about than in a dozen Carrot Top routines.

But then, unlike in a Carrot Top routine, a funny thing happened. Market controls kicked in. And a paper giant came tumbling to earth - as it should have.

Investors who unwisely put huge chunks of their portfolio in a bad company got burned. Brokers who recommended Enron to clients will now have a hard time getting phone calls returned. Arthur Andersen, serving as Enron's accountant and consultant, has suffered a punishing blow to its reputation and could very likely go out of business. Enron execs are ruined professionally.

On the political side too, Enron has proved to be a blessing. At least so far.

John McCain, ever eager to find ammunition for his beloved campaign finance overhaul, admitted he took money from Enron, and said of his colleagues, "we're all tainted by it." He would be better off speaking for himself. Enron presents a great argument against changing the campaign finance system.

Twice Enron honcho Kenneth Lay called Bush cabinet officials requesting bailout-type help from the White House, once to Commerce Secretary Don Evans, once to Treasury Secretary Paul O'Neill. Twice he was refused. This, despite the now well-reported campaign contributions Enron made to President Bush, and the three-to-one advantage in contributions company execs gave to Congressional Republicans. Here was a fellow Texas titan, a friend of Bush, a big-time contributor, asking a favor. And he was shown the door.

Democrats, apparently frustrated at the dearth of scandal, have actually criticized the White House for not intervening. Unofficial White House Agitator Henry Waxman issued a statement critical of the Bushies for doing nothing as "average investors" got burned. But imagine the outrage if O'Neill had bailed out Enron. So Congressional Democrats, with their partisan fangs bared, have the administration where they think they want it: damned if it did, and damned if it didn't.

But this strategy won't work. The only shady dealings involving a government official surround former Clinton Treasury Secretary Robert Rubin. Rubin made a call to Treasury Undersecretary and fellow Democrat Peter Fisher for help. As Slate's Timothy Noah writes, while the call wasn't illegal, it was questionable from an ethical standpoint because Bill Clinton signed an executive order in 1993 banning executive officials from lobbying their former departments for five years after they leave office. As Noah writes, "the only thing that keeps Rubin from being in formal violation of the executive order is the fact that Clinton rather shamelessly revoked it on his way out the door in 2001."

The Enron imbroglio certainly isn't devoid of genuine sleaze, of course. Executives reportedly made $1.1 billion in stock sales predicated on fixed books. Day-to-day employees may have been locked out of selling Enron shares while the company fell - this after being encouraged to invest substantial portions of their 401(k)s in the energy giant. Arthur Andersen may have ordered employees to destroy incriminating documents.

But there are systems in place to deal with all of this. And those systems are rolling into action. Enron employees are already hitting the courts with civil suits. Congressional and Justice Department investigations will inevitably yield indictments. People will probably go to jail. Employee 401(k) programs will likely be changed to guarantee diversification. And all of the appropriate reputations will be damaged or ruined.

In the big picture, the systems in place to process and take care of these matters are functioning smartly. And we're all better off as a result.

The author is a freelance writer living in Virginia.
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