The fall of the house of Enron

"A HOTBED of entrepreneurial activity and an engine of growth." So said Harvard Business School professor Christopher Bartlett of the energy giant Enron a few years ago. Well, Enron sure was a hotbed of something.

Bartlett may feel silly today after his "engine of growth" collapsed late last year in the largest bankruptcy in history. But he won't be alone.

Enron was the toast of Wall Street during the 1990s. A pipeline operator turned all-around energy conglomerate, Enron became, for ideologues of the free market, a symbol of everything that was possible under capitalism--if you could just get rid of pointless government regulations and other obstacles to super-profits.

Today, Enron is waiting on the bankruptcy courts to decide how to dismantle it. Executives face big lawsuits from investors and former employees--and a dozen investigations, led by everyone from Congress to the Securities and Exchange Commission.

Meanwhile, the company's friends in Washington--who greased the wheels for Enron's rise to glory--are scrambling to distance themselves from the wreckage.

The fall of Enron is an old-fashioned tale of greed, deceit, power politics and common criminality. In other words, a story of the capitalist free market.

"The details are bewilderingly complex, but the story line is very familiar," wrote Robert Kuttner in American Prospect magazine. "The watchmen are tamed, bedazzled or bribed, while a pitchman who claims to have invented something brand new in the history of capitalism takes everyone to the cleaners."

When Asia was hit by a desperate financial crisis in 1997, U.S. business commentators knew who to blame: Crony capitalists.

We were told that corporations in countries like South Korea were run by executives who hid financial problems. The bosses were all in bed with the government, which tailored laws to protect corporate power, and the banks, which kept lending money, no questions asked.

Now we know crony capitalism, U.S.-style--and its name is Enron. The country's seventh-largest corporation went bankrupt in December under a heap of phony accounting, massive debt, shady political deals and rip-offs of all kinds. Yet, just months before, Enron was still the celebrated symbol of the 1990s boom.

Enron was formed in 1985 out of the merger of two old-fashioned natural gas pipeline companies. But founder Kenneth Lay--a former federal bureaucrat with plenty of contacts in Washington--recognized that there were huge profits to be made from exploiting the politicians' craze for deregulating the power industry.

Enron's business strategy amounted to making sure that it was the first into any area newly freed from government control or regulation--so it could "make money in the initial chaos," as an Enron executive told the New York Times.

Essentially, the company became a giant middleman. "Enron took over a system that reliably moved a public good--electricity--from power plant to home," consumer advocate Doug Heller said of the company's role in trading supplies of electricity. "It used deregulation to make money out of nothing, simply by adding cost to the product en route."

In promoting deregulation, Lay and his protégé, Jeffrey Skilling, regularly preached the wonders of free-market competition. Yet Enron's growth depended on gaining near-monopoly powers--it eventually controlled one-quarter of all U.S. natural gas and electricity trades.

This was an invitation to price-fixing--as California consumers learned in 2000. Enron and a handful of other giant power providers exploited the state's newly deregulated system to cause a power pinch--conspiring to drive up the cost of California's electricity from $7.5 billion in 1999 to $28 billion in 2000.

Enron would have been nothing without deregulation--which is why the company bought political influence as aggressively as it did energy supplies. Right-wing ideologues already inclined toward Lay's free-market dogma were especially useful.

Wendy Gramm--the wife of Sen. Phil Gramm (R-Texas)--is a perfect example. As chair of the Commodity Futures Trading Commission under Bush Sr., she wrote the rule that exempted Enron's core business of energy trading from oversight by the federal government. Meanwhile, her husband looked after the company's interests in Congress--in return for healthy campaign contributions.

Within months of writing the rule, Wendy Gramm was out of a job following Bush's 1992 defeat. Enron came to the rescue--and put her on its board of directors. Not a bad deal for the Gramms. But it was worth every penny and much more for Enron.

Beginning in the mid-1990s, Enron tried to duplicate its success at energy trading in new fields--coal, paper, plastics, metals and even Internet bandwidth. Many of these ventures went badly wrong, so executives turned to the tried-and-true method of big business--hide the problem and hope that everything gets better.

Enron hid its mounting losses and skyrocketing debt, both in little-examined nooks and crannies of official statements and in off-the-record "partnerships" run by Enron executives. By hiding debt in the partnerships, Enron's official bottom line continued to look healthy--while executives raked in millions in fees for administering them.

Financial experts are still trying to unravel Enron's books. But Business Week magazine estimated the company's debt--hidden and not--at a staggering $50 billion. "One way to hide a log is to put it in the woods," Rep. John Dingell (D-Mich.) told Fortune. "What we're looking at here is an example of superbly complex financial reports. They didn't have to lie. All they had to do was obfuscate it with sheer complexity--although they probably lied, too."

Since the bankruptcy, commentators have lined up to criticize Enron's shady accounting. But their methods aren't much different from what's practiced throughout Corporate America--where it has become commonplace to massage the figures to keep the bottom line looking good.

What's more, no one complained about Enron's accounting hocus-pocus--as long as profits from the company's energy business stayed strong. But when energy prices started dropping as the recession took hold, the house of cards started to tumble. Wall Street investors who had looked the other way started taking a closer look at the books. And the banks wanted to know how the company would pay off its loans.

As late as September, the Washington Post reported, "16 of 17 securities analysts covering Enron rated the company's stock a 'buy' or a 'strong buy.'" But the downward spiral was well underway.

In October, Lay made the surprise announcement--a $618 million loss for the third quarter of the year. Plus investors were told that, because of the hidden debt, the company was worth $1.2 billion less than they thought. A few weeks later, management admitted that earnings for the previous five years were overstated to the tune of another half a billion dollars.

The bottom fell out of Enron's stock price. Though executives had long ago cashed in, Enron employees couldn't get their retirement savings out of company stock.

In November, a smaller rival company, Dynegy, offered to take over Enron in a last-minute bailout, but the deal broke down. On December 4, Lay announced that Enron was declaring bankruptcy, the largest in history.

Four thousand Enron workers got the boot that day. "In Houston, security guards patrolled the Enron buildings, watching employees as if they were potential thieves as they emptied their desks," wrote Pratap Chatterjee in an article for Corporate Watch. "Workers flooded into the streets in front, many crying and hugging one another as police on horseback shouted at them to disperse."

"My group was told nothing yesterday, other than to gather personal belongings and leave," a former employee wrote in a letter to the Houston Chronicle quoted by Chatterjee. "On November 30, we were given the right to move Enron's matching funds for our retirement savings plans from Enron stock to another fund. My personal account amounted to $46.01. Another friend, with almost 20 years service, had $102. This is absurd, sad, and I think, criminal."

But will anyone go to jail? Everyone--even Enron's former champions--now admits that the company's financial practices were sleazy and misleading. But so are the books at every major corporation.

Some Enron executive may yet serve jail time. But don't count on the courts to expose Enron's greater crimes--because these are the crimes of the free market, committed every day in the name of capitalism.

How did Enron get away with its swindles for so long? Wasn't anyone--investors, bankers, accountants--keeping an eye on the books?

They were. But no one cared--as long as the profits rolled in. "Many Wall Street analysts...admitted that they had to take the company's word on its numbers," journalist Bethany McLean wrote in Fortune magazine, "but it wasn't a problem, you see, because Enron delivered what the Street most cared about: smoothly growing earnings."

Likewise, big banks like Citigroup and J.P. Morgan Chase kept pumping out the loans. No one was going to pull the plug on Enron--not when there were massive fees to be made for arranging the deals.

And as for the auditors, business insiders say that they're the biggest crooks of all. Enron's auditor was Arthur Andersen, one of the country's Big Five accounting firms. Andersen charged $27 million last year for checking Enron's books. But it also took in $28 million in "management consulting fees" from Enron.

Put another way, as consultants, firms like Andersen help Corporate America come up with ways to cook the books. Then as "auditors," they give the financial shenanigans an official stamp of approval.

Isn't that a conflict of interest? Sure. But if you can get Washington to go along, it doesn't matter, does it?

In the summer of 2000, Arthur Levitt--then chair of the Securities and Exchange Commission (SEC), the government agency that oversees financial transactions--proposed a new rule to prevent accounting firms from being both consultant and auditor to the same company.

The Big Five didn't like that. So they got their servants in Congress to get the rule dropped.

Andersen came under fire this month when the firm revealed that a "significant but undetermined" number of Enron documents had been destroyed. The memo asking employees to get rid of anything related to the audit but "basic work papers"--in Enron's audit alone, not any other--came four days before Enron revealed to the world that it was worth $1.2 billion less than anyone knew.

Business commentators are claiming to be outraged. But it's standard practice for companies to destroy potentially damaging documents. "At the crux of many corporate crises, there are typically a handful of key documents," a well-known accounting industry lawyer named Harvey Pitt wrote in 1994.

"Corporate counsel must take every available opportunity to imbue company executives with the understanding that their documents will take on separate lives when they enter the treadmill of litigation...Each company should have a system of determining the retention and destruction of documents."

In other words: When in doubt, head for the shredder.

And by the way, are you wondering what Harvey Pitt is doing today? He was appointed by George W. Bush to head the SEC--which is running investigations into both Enron and Arthur Andersen.

Even as they hyped Enron as the company to lead American capitalism into the 21st century, company executives were selling, selling, selling. According to a lawsuit filed by shareholders, 29 top executives and board members--virtually every leading figure at Enron--sold an average of 44 percent of their personal holdings of Enron stock from 1998 to 2000, to the tune of $1.1 billion.

Ken Lay dumped more than $101 million in stock. Former Chief Financial Officer Andrew Fastow, the architect of the scheme to hide the company's debt, sold almost every share of Enron stock he owned--for a cool $30 million.

Meanwhile, Enron employees were blocked from pulling their retirement savings out of company stock--even as the share price fell to less than $1. The Labor Department estimates that Enron employees lost as much as 90 percent of their retirement savings. But the crooks at the top got out while the getting was good.

"Conversation is routine between people in this country and government," sniffed White House spokesperson Ari Fleischer when asked about Enron's political influence in the Bush administration. But the conversation does get easier if you spend more money on George W. Bush's political career than anyone else.

From his first run for governor of Texas, Bush and Enron were inseparable--as inseparable as the company is from the Bush White House today. Dozens of leading administration officials were Enron stockholders, and several went to Washington last January directly from the Enron payroll as executives or consultants--among them, Bush's chief economic adviser Lawrence Lindsey, Federal Trade Representative Robert Zoellick and Secretary of the Army Thomas White.

Bush himself had the gall to try to distance himself from Ken Lay--pretending that the Enron founder had been a supporter of Ann Richards, his predecessor as Texas governor. But Bush and Lay go back much further.

A former cabinet member in Argentina remembers Dubya in 1988--then the beer-swilling idiot son of the vice president--lobbying him to give Enron an oil pipeline deal worth $300 million. And Bush certainly knew Lay during his father's presidency, when Enron became an increasingly generous and powerful player in Washington. In his races for governor, Bush got much more of Enron's money than anyone else--and showed his gratitude in office by supporting energy deregulation.

When Bush took over the White House, Lay got veto power over the new administration's energy policy--and he wasn't shy about using it. Curt Hébert, the Clinton-appointed chair of the Federal Energy Regulatory Commission, says that Lay told him he would lose Enron's support--and therefore, his job--if he wasn't sufficiently enthusiastic about deregulation. Hébert wouldn't back down and was canned.

His replacement, Pat Wood, sat on the Texas Public Utility Commission--in other words, he was a Texas oil insider. Wood showed his leanings last month when he declared that Enron's collapse "doesn't seem to be tied too much to deregulated energy markets."

Enron obviously had a lot of influence over the White House's special task force on energy issues, run by Dick Cheney. Cheney admitted this month that he or his staff met six times with Enron executives--the last one coming just a week before October 16, when Enron disclosed the depth of its problems.

A few weeks later, Enron executives were trying their pull with Treasury Secretary Paul O'Neill, Commerce Secretary Don Evans and others--essentially begging for the administration to intervene with banks to keep the loans coming.

The ties between Enron and the White House are plain to see. But as sordid as they are, they're only part of the story. An incredible 71 senators--including 29 Democrats--have taken money from Enron, as have 188 members of the House, among them 71 Democrats.

All told, Enron and its executives spent more than $2.4 million on national races in Election 2000. Republicans got most of the money. But Democrats got more than a quarter of it, according to the Center for Responsive Politics.

And campaign funding tells only a part of the story. Enron ran one of the most aggressive lobbying operations in Washington, spending $2 million last year alone. Its list of pitchmen ranged from former Christian Coalition head Ralph Reed to Republican National Committee Chair Marc Racicot to Jack Quinn, former White House counsel to Bill Clinton.

If Enron remained primarily associated with the Republicans, its lobbyists knew how to get what they wanted from Democrats, too.

One classic example of Enron's political influence came in June 2000, when several lawmakers proposed the Commodity Futures Modernization Act. The legislation would have tightened government oversight of precisely those obscure energy trading markets where Enron was a major player.

So Enron got to work. Within three weeks of the bill's introduction, the Republican and Democratic Parties had taken in $220,000 in soft-money contributions from Enron.

Enron lobbyists descended on Capitol Hill. And lo and behold, the version of the legislation that passed the Senate Banking Committee had a provision exempting energy markets.

The chair of the Senate Banking Committee? Sen. Phil Gramm (R-Texas), whose wife was on Enron's board and who had raked in $97,350 from Enron since 1989.