The origins of the Enron scandal
Schwartz, Joseph M.
IN SEPTEMBER 2001, the Enron Corporation ranked as the seventh largest U. S. transnational firm in terms of total balancesheet revenues. We now know how cooked its books really were. But in...
...A global corporate order that puts short-term profits ahead of long-term economic prudence necessitates a resurgent global labor movement and a social democratic left to redress the pain inflicted by the system's speculative excesses...
...The result: a two hundred billion dollar bailout of the S&L industry by U.S...
...if unregulated, however, they encourage further speculative behavior...
...Even though regulatory economists at the Federal Home Loan Bank Board and maverick Democratic Representative Henry Gonzalez of Texas warned of the dangers ahead, the S&L industry lobbied successfully to prevent an increase in its federal deposit insurance premium to pay off the losses...
...lured by massive investment banking fees, J.P...
...He is finishing a book on the future of democratic equality in the United States...
...Political corruption is part of the story, but beneath the ideological cover of "corruption and influence buying" lies a starker reality...
...As Keynes first pointed out seventy years ago, financial markets can never be self-regulating because they are based on uncertain information about future economic performance...
...Mean and lean in regards to staffing levels, perhaps...
...Getting private money out of politics is only one piece of the reform puzzle...
...When Enron's bubble burst, large pension funds, including those of state employees in California and New York, lost billions of dollars...
...Can it be fooled again by a Bush administration that trumpets the Enron collapse as the healthy "creative destruction" that characterizes capitalist competition...
...The American public was fooled once by Reaganomics (and its neoliberal Democratic partners...
...When these foreign investments went bad, Enron's stock became increasingly diluted and its price plunged...
...THE ENRON DEBACLE iS not only a story of the calamities that befall a political system that is sold to the highest corporate bidder...
...If you are submitting to Dissent electronically, our e-mail address is editors@dissentmagazine.org . (4) Notes and footnotes should also be typed double-spaced, on a separate sheet...
...The roots of the Enron scandal go back two decades...
...The deeper, radical truth is that Enron epitomizes the dangers of the speculative "free market" mania that has resulted in deregulation and the gutting of the public sector in favor of the fool's quest for short-term profit...
...On Enron's Internet markets, one could hedge against the weather...
...Prior to 1980, federal law limited savings and loans banks to lending for home mortgages, which were further regulated by federal ceilings on interest rates...
...The ending of Glass-Steagall meant that J.P...
...A corporate-dominated mass media that worships at the altar of laissez-faire ideology will not help the public understand that the Bush administration is trying to replay supply-side economics without the now disgraced title...
...Nor will CNBC analysts tell you that privatization and public sector cuts are part of a deregulatory strategy that aims ultimately to eliminate all government regulation of labor markets...
...And it is further likely that those who rely on the mainstream media to explain the subsequent debacles will not fathom their true cause: neoliberal deregulation...
...Thus, throughout the history of market economies, "speculative bubbles" have formed and burst because investors in financial markets focus on one another's likely behavior rather than on economic fundamentals...
...As the managers at Long Term Capital Investment (LTC) learned in spring 1997, when a major finance firm fails, the federal government will come to the rescue...
...This lemon socialism, in which the victims of the risks pick up the tab for the failed DISSENT / Summer 2002 n 5 COMMENTS & OPINIONS risk-takers, prefigured the solution to the Enron collapse...
...We will not consider manuscripts submitted simultaneously to several publications...
...Enron even set up a private fund for hedging against possible bankruptcy...
...Free market ideology claims that risk-takers should receive great rewards if their risks pay off...
...To Our Contributors A few suggestions: (1) Be sure to keep a copy of your manuscript...
...In early 1980, Congress passed a financial deregulation bill that did everything the banks wanted...
...By 1985, with the collapse of oil prices in the Southwest, thirty to forty billion dollars in S&L commercial real estate loans had already gone bad...
...The interest these banks had in 6 n DISSENT / Summer 2002 COMMENTS & OPINIONS propping up Enron's stock not only cost their clients dearly...
...Glass-Steagall had prevented finance banks (which raise capital for corporations) from owning brokerage firms and commercial banks (which lend money to corporate firms...
...Enron's rise from a sleepy Southwest gas pipeline owner to a privatized corporate gaming casino in which speculators could literally bet on the future of the weather epitomizes the irrationality of unregulated capitalism...
...The federal deposit insurance funds couldn't cover them...
...What gets lost in this argument is the other side of the coin: risk-takers should also pay the costs if their risks fail...
...Check all your figures, dates, names, etc.—they're the author's responsibility...
...Derivatives are complex financial instruments that allow economic actors to hedge against extreme movements in prices and interest rates...
...Morgan, for example, was left holding the bag on $2.6 billion in Enron debt...
...but efficient, no...
...These massive conglomerate banks also used their financial analysts and brokerage firms to peddle Enron's stock to the public and private pension funds they advise...
...In return, they proposed that S&Ls be given more liberal accounting rules and allowed to enter the commercial real estate market...
...The dirty secret is that financial deregulation leads to speculative bubbles and bursts...
...JOSEPH M. SCHWARTZ is chair of the political science department at Temple University and a member of the National Political Committee of Democratic Socialists of America...
...To prevent speculative booms and busts, the democratic state needs to regulate the wild price swings of financial markets caused by, as Keynes put it, speculators devoting their "intelligence to anticipating what average opinion expects the average opinion to be...
...In 1997, the SEC granted Enron a further exemption from the Investment Company Act of 1940, which prevented U.S.-based firms from leaving debt from foreign power plants off their books...
...5) We're usually quick in giving editorial decisions...
...FNRON'S UNREGULATED private derivatives markets were made possible by the Clinton administration...
...This time, the victims were not the taxpayers as a whole, but those employees whose pensions depended upon their forced holdings of Enron stock...
...taxpayers...
...Absent SEC regulation, investors could increase their risk by buying on margin (where an investor only has to put down a small percent of his or her potential total liability, but is liable for the full value of any final losses...
...Such a massive loss occurred in part because of the repeal of the Glass-Steagall Act in 1999...
...Beginning with the Carter administration's deregulation of the savings and loans (S&L), transportation, and telecommunications industries, advocates of deregulation promised what John Maynard Keynes argued could never exist (and in fact doesn't): a selfadjusting free market economy that would be efficient in both the short and long runs...
...This behavior is exactly what Glass-Steagall's ban on the "one-stop shopping" of joint commercialfinance banks aimed to prevent...
...This summer's congressional battles will witness another round in the fight against the gutting of the democratic public sector and basic income support...
...THE EDITORS DISSENT / Summer 2002 • 7...
...In LTC's case, the Federal Reserve arranged for eight billion dollars of emergency bank financing...
...3) Type your ms double-spaced, with wide margins...
...Or take a chance and send us your article...
...Instead, the employees bear the risks, and will continue to do so in the absence of strong social insurance—high-value, definedbenefit pensions and universal health care...
...Look at our last few issues to see if your idea fits in...
...And please remember that we can't consider articles unless they're accompanied by a stamped, self-addressed envelope...
...In the private derivative markets administered by Enron, speculators could bet on future price trends in telecommunications, bandwidth, and energy...
...Progressive social movements will have to work hard to make sure the American public does not get fooled again...
...As we're not an academic journal, we prefer that they, wherever possible, be dropped altogether or worked into the text...
...The first signs of crisis were ignored...
...According to free market ideologues, a democratic state should not enforce health and safety rules or defend the right of labor to organize—since "cost-cutting" benefits all by making industry globally competitive...
...What did Enron do...
...In 1993, Enron persuaded the Securities and Exchange Commission to grant it an exemption from the Public Utility Holding Company Act, a depression-era law that forbids utilities from investing in unrelated risky businesses...
...The other side of speculative profit is speculative bust, the costs of which fall on small investors and workers rather than on corporate executives routinely rescued by government bailouts and "golden parachutes...
...By the 1990 recession, S&Ls across the country could not meet their deposit obligations because of massive defaults on speculative real estate loans...
...The mainstream media frame the Enron scandal as a story of political insider trading: Bush's Texas buddies using political connections to garner (de)regulatory breaks and manipulate energy prices...
...In response to the Enron scandal, the mainstream media have called for common-sense reforms such as banning financial auditors from selling management services to the very firms whose accounting practices they vet...
...The Enron collapse is not a footnote to an otherwise healthy global capitalism...
...While Bush fiddles with regulatory reform, the administration's budget replays Reaganomics' perverse military Keynesianism—deficit financing of a massive military buildup and upwardly redistributive tax giveaways...
...It traded almost anything on its futures and derivatives markets and produced almost nothing...
...If there's a delay, it's because a few editors are reading your article...
...Rather, it is another calamitous product of a deregulated financial system that places all the costs of corporate risk-taking on ordinary citizens and allows the speculative risk-takers to get away with—for them—costless failure...
...We may yet discover that Enron executives made a killing by betting that their own company would go under...
...But in the seven years preceding the scandal, Fortune magazine had ranked Enron as our most innovative firm...
...This second deregulatory move by the Clinton administration's SEC allowed Enron to create what turned out to be its Achilles' heel—the famous offshore "Star Wars" companies (named Chewco, Jedi, Raptor, Braveheart, and so on...
...Until the appearance of these two, there are likely to be more victims of Enron-type failures...
...The regulatory economic regime established by the New Deal saved American capitalism from the short-sightedness of American capitalists...
...Morgan, Citicorp, and Bank of America not only underwrote bonds for Enron, but also traded derivate contracts with the company and bought stock in the firm...
...These extremely leveraged offshore companies financed risky foreign energy purchases (including the famous Indian power plant that Dick Cheney lobbied for) by huge investor loans, with Enron stock as collateral...
...But there is indeed a kind of social insurance...
...Enron employees learned a painful lesson from the decimation of their private pensions, which were largely invested in Enron stock...
...For years, commercial banks campaigned to deregulate interest rates and to enter the home mortgage arena...
...Please use inclusive language so that we don't have to make adjustments during editing...
...2) Please don't write to ask whether we're interested in such and such an article—it makes for useless correspondence...
...The corporate media have trumpeted deregulation and social welfare cutbacks as creating a mean and lean twenty-firstcentury capitalism...
...Yet the editorialists at CNBC and the Wall Street Journal have yet to criticize deregulation...
Vol. 49 • July 2002 • No. 3
