by Randolph T. Holhut
American Reporter Correspondent
January 12, 2002
ENRON'S FALL AND THE BUSH ADMINISTRATION
DUMMERSTON, Vt. -- Whatever happened to the "New Economy?"
Remember, this was the wonderful new world based on the idea that unfettered free markets are more democratic than democracy itself. If we allowed ourselves to bow to the superior intelligence of the market, there would be no need for such "old economy" things as labor unions, government regulation and other examples of stagnant, obsolete thinking.
"Free agent nation," as the magazine Fast Company called it back in1998, meant a world where we didn't have worry about work, because employers would be competing for our services. We had to think of ourselves as a brand, and market our skills to the highest bidder. Stock options were going to make us all millionaires, so why do we need Social Security?
It was a wonderful delusion while it lasted for the lucky few whowere able to profit off the irrational exuberance of a stock market thathad no basis in what had been previously known as reality.
The collapse of Enron is the most glaring example of the flaws ofthe "new economy." Its CEO, Kenneth Lay, preached the gospel ofderegulation and used a formidable army of lobbyists to get governments tosee things his way.
In the mid-1980s, Enron was a natural gas supplier. Lay believedwholesale gas prices should be deregulated and that gas should be treatedas a tradable commodity. Eventually, that model was extended toelectricity, pulp and paper, water and Internet bandwidth. Enron didn'tcreate any of these products, it merely became a middleman in the tradingof them. In 2000 and 2001, the company handled more than $1 trillion intransactions.
At its peak, Enron was the seventh-largest corporation in America, with revenues of more than $100 million in 2000. One of the keys to that growth has been Lay's tremendous clout to create what one of Enron's executives called "a regulatory black hole" where the company could freely work its magic. Anything and everything could become a commodity to be traded and sold. This is how Enron went from being an energy company to being a trading company focused on maximizing the value of its stock. Before its collapse, it had reported 20 straight quarters of increasing income.Unfortunately, these figures weren't true.
Some fancy accounting created about 30 "partnerships" that transferred the company's debt off its balance sheet to inflate its earnings and credit rating. Enron's auditor, Arthur Andersen, ignored what was going on while the firm collected $52 million in consulting and accounting fees in 2001.
When the book-cooking was found out, Enron's stock value plummeted - but not before senior executives cashed in up to $1 billion worth of stock and stock options in 2000 and 2001. Meanwhile, Enron's employees were ordered to keep their 401(k) accounts tied up in Enron stock while its price went from about $80 last February to less than $1 today. Thousands of people lost their jobs and saw their retirement savings wiped out, while the Enron brass walked off with bulging pockets.
How did Enron get away with it? It didn't hurt that Lay had the system wired (pun intended). Lay had worked for the Federal Energy Regulatory Agency (FERC) and was a deputy undersecretary for energy at the Interior Department. He's been the Bush family's primary politicalfundraiser, and giving $550,000, his largest contributor. Wendy Gramm, wife of Sen. Phil Gramm (R-Texas), served on a government oversight committee that had Enron in its sights, and then was named to Enron's board of directors. Former Secretary of State James Baker and former Secretary of Commerce Robert Mossbacher ended up on Enron's payroll within a month of leaving office. Just to show his bipartisanship, Lay even golfed with President Clinton.
Enron and Lay's ties to George W. Bush are particularly tight. Inthe 2000 election, Lay and Enron together gave $2 million to Bush's presidential campaign and another $1 million was handed to Republican congressional candidates. While GOP members of Congress got the most boodle, Enron spread the wealth. According to the Center for Responsive Politics, 71 of the current 100 senators and nearly half of the current congressmen have gotten contributions from Enron.
Bush's top economic advisor Lawrence Lindsey, Trade Representative Robert Zoellick and Army Secretary Thomas White Jr. all worked for Enronbefore joining the Bush team. Karl Rove, Bush's chief political guru, wasforced to sell up to $250,000 of Enron stock after it was pointed out thatthere might be a conflict of interest.
Lay had substantial input in Vice President Dick Cheney's new national energy policy. Needless to say, deregulation of energy markets was a prominent part of Cheney's plan. Lay also may have had a role in gettingPresident Bush to replace FERC chairman Curtis Hebert Jr., with Pat Wood, aTexan more agreeable to Enron's view of things.
It took some time, but the Justice Department, the Securities and Exchange Commission, the Labor Department and the Senate Governmental Affairs Committee all have begun investigations of this massive financial scandal. The Bush administration's role in it must be part of any Enron probe.
If there is anything that will make President Bush's 90 percent approval rating disappear in flash, it might be seeing how closely tied Enron was to the Bush team and the various quid pro quo deals Lay got for all the money he gave to President Bush and the GOP.
But even if the investigations go nowhere, the Enron debacle should stand as a lesson to everyone who believes that markets are infallible. Market volatility will never disappear. That's why government regulation has served as a counterbalance, or at least it did until the regulatory rollback that began in the 1970s, accelerated in the 1980s and becamereality in the 1990s.
Without government oversight, companies like Enron can pass off fraudulent information as truth and cheat investors with impunity. As for deregulating electric markets, just ask a Californian about how well it works. Last winter's electric shortages cost the Golden State about $50 billion (and all of its $8 billion surplus), thus proving why utilities were regulated in the first place - to prevent market manipulation and price gouging.
And if anyone tells you that replacing Social Security with a national 401(k)-type pension plan is a good idea, all you have to tell them is just one word - Enron.
Randolph T. Holhut has been a journalist in New England for morethan 20 years. He edited "The George Seldes Reader" (Barricade Books).