June 2010

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Remembering Enron

by Toni Seger

 

Remember Enron? I just watched The Smartest Guys in the Room, a documentary about Enron. I'd seen it before, but it hit me even harder this time. The unraveling of Enron, a chimera built on greed, made my blood boil the moment I learned about it and I was thoroughly amazed when the story never exploded into one of national outrage and indignation. What got my attention watching the documentary, with the benefit of hindsight, was the realization of why this scandal was absorbed by our culture instead of being rejected by it.

 

Enron went down in conjunction with the terrorist attacks which played a role (though not the most important one) to help overshadow a scam so massive it's hard to comprehend. What's incredible about Enron isn't just the record size of the corporate bankruptcy. It's the fact that this so-called corporation was little more than a mammoth Ponzi scheme that made it to the Fortune 500 list! You don't get that far without substantial support from a lot of major players both in government and the private sector who are regularly passing off on your performance, so the size of the scam was significant. Then, there is the rapidity of Enron's fall. In March 2001, Enron was a golden stock that traded at 55 times its earnings! Six months later, it was dead. At its peak, buying Enron stock was a no-brainer, but almost overnight, dumping it was even more obvious. Continually lauded as an innovative, cutting edge example of business brilliance, this mansion of cards was toppled by a single question that, incredibly enough, no one had ever asked before. Bethany McLean, a free lance writer, simply asked how Enron made its money. The fact that a thoroughly legitimate form of 'due diligence' was enough to send Enron hurtling off a cliff of its own making says "a lot about how very important decisions (like <ahref="http://www.spectacle.org/0510/seger.html">The Return of Nuclear Power</a>) often manage to escape serious scrutiny".

 

I quoted from my own essay posted here last month in order to call attention to a very disturbing pattern. i.e. The larger the issue, the less scrutiny it seems to get. Watching the Enron documentary from this vantage point, the benefit of distance allowed me to see that at the time of the Enron collapse, in the fall of 2001, we were too busy feeding a much larger, future disaster to spend too much time directing any outrage at Enron. Seven years after Enron's spectacular collapse, a national and international financial crisis erupted that nearly toppled the global economy. What sparked this essay was how obvious it was that everything we needed to know in order to prevent that catastrophe was contained in the Enron debacle; insatiable greed coupled with a complete denial of reality protected by public and private agencies that weren't performing their function. What's especially horrifying about the juxtaposition of 2001 and 2008 is how much they mirror each other. How could the country get indignant about Enron when so much of it was ready to imitate its practices? Just as the disgraced accounting firm Arthur Anderson shielded Enron from serious scrutiny, Wall Street ratings agencies like Moody's protected the mortgage industry by giving AAA ratings to toxic mortgages. The biggest difference between the scandals is in degree. When Enron crashed, it cost 30,000 jobs. However bad that appeared to be at the time, it pales beside a global economic collapse that killed 11 million jobs in the United States alone.

 

A leading economist in my state of Maine just announced that the recession in Maine is over and we entered the recovery period in the first quarter of 2010, but he also added it will take over three years to restore all the lost jobs. That means, for a lot of people, the recession won't end for a long time and that's because this was no ordinary recession. Normal recessions are periodic market contractions due to low demand. What we experienced, in 2008, was market chaos made inevitable by too many lies being sold at very high prices for much too long. In other words, the fundamentals of the economy were completely unsound. Just as Enron collapsed when investors realized the company was nothing more than a hollow shell, the unsustainable mortgage market collapsed when reality couldn't be denied any longer.

 

What was Enron? At the end, Enron was little more than an elaborate version of Three Card Monty, the street scam played with three cards, one of which is red and which you'll never identify correctly because it's not a card trick or a game; it's a scam. Found in only the most depressed locations, the card shark is always palming the red card, so it can never turn up. That's what Andy Fastow did for Enron. He hid its considerable debt in phony companies. That's what mortgage brokers did when they kept selling mortgages that couldn't be repaid in order to make up for earlier mortgages that couldn't be repaid. As long as people with power pretend it's not happening, a mammoth mansion made entirely of cards can continue to grow...

 

To quote Jon Wallace's May issue of <ahref="http://www.spectacle.org/0510/rags.html">Rags and Bones</a> "Wall Street wizards... bundled bad mortgages together, on the theory that shit encased in brass transmutes into gold. They learned how to game the rating agencies, who published their criteria, so that if an instrument met certain useless and arbitrary criteria, it got a high rating other than the crap rating it deserved."

 

"Shit encased in brass" which brings new color to the more commonly used: "lipstick on a pig", is precisely what Goldman Sachs was doing when it sold mortgages it knew were bad and because it knew they were bad, it sought to protect itself by issuing additional instruments that bet against the ones they knew would fail. That's not capitalism. That's theft. Capitalism is a legitimate financial system that can generate and multiply productive capital through sound and successful investment. Phony investment activity used to mask thievery like Enron's and the myriad crooks who nearly brought down our economy are examples of criminal acts and have no relationship to legitimate business activity. In the case of Goldman Sachs, their behavior is comparable to taking out a life insurance policy on someone you're already poisoning which can be an entertaining plot twist for a Hollywood thriller as long as it's not really happening to you... In this case, it was happening to millions of people, many of whom are still wondering if they can save their homes.  

 

Still, regardless how fantastically large the sums of money get, the hungry among us only tend to get hungrier. Over a month after the disaster in the Gulf began, we are all aware how little of BP's obscene profits were applied to safety issues because the company had never developed a plan for dealing with the current crisis. Apparently, BP's record setting disaster in the Gulf was inevitable as they cut corners to speed up the pace of drilling and ignored safeguards including rig workers who tried to report accidents and safety problems.

 

In retrospect, one might think BP would be smart enough not to endanger its own economic interests because this catastrophe will cost billions, perhaps trillions of dollars to repair. Unless, of course, BP assumes they won't pay for it. After the Exxon Valdez, legislation was passed that was supposed to hold oil companies accountable for such disasters, but Big Oil got a special exemption that limited their liability and the Gulf disaster will far exceed those limits which means we'll pay for it, eventually, while they continue to prosper.

 

The bigger the scam, the bigger the payoffs required to keep the scam quiet. Before its fall, Arthur Anderson made a lot of money off Enron. Moody's and all the rating agencies that papered over bad mortgages made a killing at it, too. Global size scams require very powerful enablers looking the other way. Question: How much will it cost BP to keep Congress in their pocket? Answer: A lot less than carrying the full burden of the disaster they created.

 

Here is the very reason why Enron executives Ken Lay and Jeff Skilling never admitted to wrongdoing and why Wall Street is indignant when anyone tries to blame them for anything. When you've regularly enjoyed political protection from reality, you don't have to face it yourself. You can tell yourself you're creating wealth, instead of stealing it. Lay and Skilling were convinced they were, in fact, the 'good guys' even as Enron produced rolling blackouts in California that robbed the state of millions of dollars.

 

Watching The Smartest Guys in the Room and recognizing that it did nothing to expose the greater scandal to come, I'm reminded of the basic principle defined by Victor Hugo in Les Miserables; "Prosperity supposes capacity." In other words, we used inductive reasoning to reach the conclusion that Lay and Skilling had to be 'the smartest guys in the room' by basing our conclusion on the fact that they were making so much money. There's nothing new in the assumption that wealthy people are simply smarter. What has always disturbed me about this simplistic assumption is, as a society, we've enshrined it. Now I believe, if we can't stop thinking this way, the scandals that flow from it will continue to grow in size and destructive power until they destroy us.

 

Co-owner of a media/communications firm; ProseWorks(tm) Associates since 1992, Toni Seger has been a professional writer for four decades. Seger is the author of "The Telefax Box", the first in a satiric trilogy about our overly mechanized lives available at https://www.CreateSpace.com/3335778 She has produced and directed original plays for stage and television and is an award winning film maker with endorsements from Maine Public Broadcasting. Her film, "The Force of Poetry" is available at https://www.CreateSpace.com/260202