The Age of EnronBy Thomas Frank
This summer will mark ten years since the series of disclosures that led to the sudden bankruptcy of the Enron Corporation of Houston. The collapse of the gas-and-power leviathan, then one of the largest companies in the nation, was the starting gun for the modern age of neoliberal scandal, the corporate crime that set the pattern. It was not the first episode to feature grotesque bonuses for insiders, or a fawning press, or bought politicians, or average people being fleeced by scheming predators. But it was the first in recent memory to bring together all those elements in one glorious fireball of fraud.
And in the years since, we’ve seen many more fireballs, each following the Enron pattern and all of them culminating in the financial meltdown of 2008, along with the seemingly unending recession it triggered. It is fair to say that in some genuine, dismaying sense, we are living in the Age of Enron.
I remember Enron’s collapse with a special vividness, because in those days I was fascinated by the company. I first came across the corporate name in 1997. I lived in Chicago at the time, and Enron had been running advertisements there calling for the deregulation of the region’s electric utilities. This was puzzling to me, since Enron wasn’t a local outfit. What did they care about the energy market in Illinois?
As I soon discovered, Enron was not merely a business—it was also an ideological endeavor. "We believe in the inherent wisdom of open markets," read the first sentence on their vision-and-values webpage. The second sentence read: "We are convinced that consumer choice and competition lead to lower prices and innovation." In pursuit of that vision and those values, Enron pushed deregulation across the land. They ran TV commercialsderiding the fusty old politicians who regulated things and praising open markets with an almost religious veneration. Early in 2001, Enron CEO Ken Lay actually said, "I believe in God and I believe in free markets."
That was an outrageous statement, maybe, but only by a matter of degrees; market-worshipping libertarianism was the order of the day back then, just as it is now. What intrigued me was the way the media always chose to describe the looming deregulation of electricity markets: the change was supposed to be "inevitable," as though history itself were pushing us to undo what our market-skeptical ancestors had devised, with their old-fashioned concerns about fairness and monopoly and fraud.
These days, less jovial emotions prevail. We deregulate not because we live in some enlightened "New Economy" where the forces of history love us and want us to prosper; we do it because we are afraid. We do it because the John Galts who rule us won’t have it any other way. If we want them to create jobs, we must do as they instruct.
I am sure that the next few corporate scandals and financial crises will be just as shocking and unforeseen as were their predecessors. Of course, we have no way of knowing what those particular disasters will be until the day they crush our 401(k) accounts or ring the Fed’s bailout bell. But we can predict their broad outlines, thanks to the template provided by Enron.
The primary component of the modern scandal is deregulation, either by law or by the de facto dumbing down or hacking back of the supervisory offices of government. This is the common thread that unites such otherwise disparate events as the 2008 financial crisis, the S&L debacle of the 1980s, the BP oil spill (made possible by the driller-friendly Minerals Management Service), and the fall of lobbyist Jack Abramoff (who aimed to shield offshore sweatshops from the heavy hand of the state).
But it was Enron that fully grasped the tantalizing possibilities of deregulation. After all, it owed its very existence to the 1985 merger of two pipeline companies aiming to take advantage of the deregulation of natural gas. Later on, its corporate mission was to "make markets" in utility services once considered to be natural monopolies, like water and electricity. The 1998 deregulation of the power industry in California is what allowed Enron’s energy traders (along with energy traders from other companies) to arrange that state’s famous man-made electricity crisis a few years later.
Meanwhile, the company got a leg up with the passage of the Commodity Futures Modernization Act of 2000. By some miraculous bit of foresight, this measure created regulatory blind spots not only in energy derivatives but also in credit default swaps. It thus exempted from scrutiny not merely certain Enron operations but also the instruments that nearly crashed the world economy in 2008.
And then, in a daisy chain of dereg disaster, Enron also provided the rationale for even more blind spots, more catastrophe. A contributing factor to the 2008 financial crisis, as the world now knows, was the Federal Reserve’s relentless hostility to regulating derivatives. Amazingly, the basis for this stubbornness was the apparent awesomeness of Enron. According to a report written by former Fed bank regulator Richard Spillenkothen for the Financial Crisis Inquiry Commission, certain Fed staffers pushed for new derivatives rules in the late 1990s. They were rebuffed, however, by "senior [Federal Reserve] Board economists" who, just a few years before Enron’s collapse, cited the company "as an example of a prominent player in the derivatives market that was successfully ‘regulated’ by counterparty discipline, without needing bank-like government oversight."
The company’s spooky grip on economic policy persisted from beyond the grave. After Enron’s bankruptcy, reports Spillenkothen, the Fed’s regulatory staff made a presentation on the failure of the company’s Wall Street lenders to stop the fraud. In response, Fed brass made it clear that they were "unimpressed by staff findings"— after all, "no laws were broken [by the banks, that is] and related losses were manageable." * The economy avoided total collapse that time, so no biggie.
The second inevitable element of the modern corporate scandal is the short-circuiting, buy-off, or capture of the private sector’s oversight mechanisms. Again, it is Enron that blazed the trail to hell. The company encouraged (or, more accurately, was built upon) astounding conflicts of interest: special partnerships funded with Enron stock, and run by Enron officers, that existed to do deals with Enron proper and thereby hide the company’s losses. They were massively lucrative for the individuals within the partnerships, and the Enron employees who were supposed to review the propriety of these arrangements were often invited to cut themselves a slice. A few squares objected, of course, but such people were simply punished for their prissiness.
The same was true, on a grander scale, at Enron’s accounting firm, Arthur Andersen, which also happened to do consulting for the company. Individual Andersen employees saw what was going wrong at Enron—the crazy math, the puffed-up quarterly results—but the giant client simply demanded that those employees vanish and be replaced by more agreeable ones. The giant client got its way.
Instead of being discredited by the Enron disaster, this way of doing business thrived. It became the all-American system. During the Wall Street analyst scandal of 2003, it was discovered that the heroic leaders of the tech boom had issued passionate ratings on shares in trash companies in order to win those companies’ investment-banking business. "What used to be a conflict is now a synergy," said Jack Grubman of Salomon Smith Barney, a man who once upgraded the stock of AT&T in order to get his children into a snobbish Manhattan preschool, and was eventually banned from the securities industry for life.
And during the financial crisis of 2008, the world discovered that the credit-ratings agencies—Moody’s, Fitch, and Standard & Poor’s—gave worthless mortgage-backed securities their respective seals of approval. The reason, again, was that they had been compromised in various Enronesque ways. Since they were paid for their ratings by the very firms that issued the securities, the emphasis was on "servicing the client," as it was called at Moody’s. And the clients let the agencies know that if the ratings ever turned against them, they would take their business elsewhere. Again, the clients got their way.
We can also be confident that the next scandal will display the distinctively truculent culture of the trading floor. This, too, we learned from the folks in Houston. As Enron’s mission statement insisted so long ago, financial traders, acting in open markets, would deliver extraordinary benefits to consumers. During California’s electricity crisis, however, Enron’s traders behaved in a notably less altruistic manner, figuring out ways to send the state’s power elsewhere and even to shut down power plants during peak hours.
Audio recordings of these traders’ conversations later emerged and were included in the 2005 documentary Enron: The Smartest Guys in the Room. The traders can be heard boasting about how a colleague "just steals money from California," cheering for a wildfire that has ignited under an important power-transmission line, and cackling with delight at the helpless idiocy of the non-trader world. "It weeds out the weak people in the market," one trader says, presumably referring to high electricity prices. "Get rid of ‘em and you know what? The people who are strong will stick around." (Several of these Übermenschen eventually did prison time for their roles in the episode.)
Where Enron led, others followed. Merrill Lynch emails made public in 2002 revealed star analyst Henry Blodget referring privately to certain stocks as a "piece of crap" or a "dog" at a time when he was recommending them to investors. Meanwhile, Jack Grubman typed out this denunciation of the whining executives at Focal Communications, which he had thoughtfully rated a "1" (meaning "buy"):
If I so much as hear one more fucking peep out of them, we will put the proper rating (i.e. 4 not even 3) on this stock, which every single smart buysider feels is going to zero. We lose credibility on MCLD and XO because we support pigs like Focal.
Since then, we have learned how Washington Mutual schemed to sell option adjustable-rate mortgages— "our most profitable mortgage loan"— even though option ARMs actually sucked for most borrowers. We found out that Angelo Mozilo, CEO of subprime lender Countrywide, described one of his company’s own offerings thusly: "In all my years in the business, I have never seen a more toxic product." We discovered that Goldman Sachs executives viewed a particular collateralized debt obligation as "one shitty deal" but sold it anyway.
Ever since Enron, pugnacious trader- talk of this sort has been a constant background noise to American life. But like a kidnap victim with Stockholm syndrome, we love the lout in spite of it all. Though he slays our bank account, yet will we trust in him: aspiring to his lifestyle, emulating his swaggering ways.
And so, in 2009, as the consequences of the financial crisis were becoming apparent to everyone, America fell in love with the Tea Party— a protest movement launched by a business reporter from the floor of the Chicago Board of Trade. And then we made a towering bestseller of Atlas Shrugged, the 1957 novel whose most famous chapter insists on understanding traders as the most exalted specimens of humanity:
We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. . . . The mystic parasites who have, throughout the ages, reviled the traders and held them in contempt, while honoring the beggars and the looters, have known the secret motive of their sneers: a trader is the entity they dread—a man of justice.
Another hallmark of the contemporary scandal is a sort of unconscious journalistic perversity. In virtually every case we have been considering, what turned out to be the worst companies were considered the best. Management theorists loved Enron. Fortune magazine compared it to Elvis. "We’re on the side of angels," Enron president Jeff Skilling told BusinessWeek in 2001.
Skilling’s statement chimes nicely with the famous 2009 self-assessment of Goldman CEO Lloyd Blankfein, who said he was "doing God’s work." And why shouldn’t he make such a claim? In the decade past, Goldman was routinely included on such lists as World’s Most Admired Companies (Fortune), 100 Best Companies to Work For (ditto), Best Place to Launch a Career (BusinessWeek), and Global 100 Most Sustainable Corporations (the verdict of Corporate Knights, a magazine launched in 2002 to "humanize the marketplace").
And before journalists learned to scorn WaMu, the biggest bank to fail in American history, they invariably praised it as "innovative." Its CEO, according to an analyst quoted by Fortune magazine in 1997, was "the Alexander the Great of the thrift industry." Meanwhile, it was the sober opinion of Countrywide CEO Angelo Mozilo, among the grabbiest, grubbiest gents in the entire business, that his outfit had "made more difference to society, to the integrity of our society, than any company in the history of America."
And let us not omit the kept politicians. Enron, again, was exemplary, so chummy with the Bush family that Bush the First rode to his son’s inauguration on a company jet, with Ken Lay by his side. The company’s handholding, kimono-opening complicity with the second Bush Administration was staggering to behold. But all this seems almost quaint in 2011, now that we know the level of clout wielded by Wall Street. Laws are written their way. Treasury secretaries are drawn from their corner offices. Regulatory agencies are run with their well-being in mind. And when they get in trouble— well, there’s always their old pal Hank Paulson to write them a $700 billion check.
The final feature of the next Enron- style scandal—and the most important one—is that we will not get it. For most of us, the politics of it all will remain as foggy as were the complex derivatives and Special Purpose Entities themselves.
Oh, some people will understand. Certain business-school professors will recant, and politicians in places like Iceland will reconsider runaway bank deregulation. In the immediate aftermath of the disaster, we will enact reforms like Sarbanes–Oxley and Dodd–Frank to replace the reforms we gutted the last time around.
Yes, we will get mad when we first hear about what’s happened. The financial thieves of tomorrow will put it in our faces, just like the Enron bosses who cashed out as the company sank and the bonus-grabbing AIG execs in 2009. Americans will be infuriated. We will buzz like bees. We will scream for blood.
Then we will proceed to do exactly what Enron or AIG or Goldman Sachs wanted us to do all along. We will convince ourselves that these terrible things happened to us because markets aren’t free enough—that our only mistake was in not carrying our campaigns for deregulation or tax cuts to their logical conclusions. After Enron collapsed, let’s recall, the nation decided that Enron had been right all along: California had such terrible problems because it was run by tree-hugging liberals who stifled entrepreneurship with their preposterous interfering ways.
And today, after one of the clearest lessons in deregulatory folly that history is likely to provide, we are once again on a national crusade against regulation. We have filled Congress with clear-eyed believers who know that economic rules are an affront to freedom itself. We have signed up by the millions for Tea Party groups organized by antiregulatory outfits like FreedomWorks— which, in its earlier incarnation as Citizens for a Sound Economy, took some $20,000 in funds from none other than Enron.
Or perhaps I’ve just misunderstood. Maybe what we’re so agitated about is the possibility that some law-and-order killjoy might bring the Age of Enron to a close. Maybe, for all our fond talk of the untainted republic of the Founders, the Texas of Ken Lay is where we really long to be. So let the next scandal ruin our neighbor, let it black out entire regions of the country, let it throw millions out of work—as long as we get a chance for our turn at the trough.
* In point of fact, according to a 2003 report by Neal Batson, the examiner appointed by the court overseeing Enron’s bankruptcy, the banks weren’t all that innocent: "There is sufficient evidence from which a fact-finder could conclude that: (i) certain financial institutions that were involved in Enron’s SPE [Special Purpose Entity] transactions had actual knowledge of the wrongful conduct of these [Enron] officers; (ii) these financial institutions gave substantial assistance to the officers by participating in the structuring and closing of the SPE transactions; and (iii) injury to the Debtors was the direct or reasonably foreseeable result of such conduct. As a result, a fact-finder could conclude that certain of these Financial Institutions aided and abetted these officers in breaching their fiduciary duties."From Harper's Magazine, August, 2011