For weeks, conservative commentators and Bush White House defenders have been huffing that the Enron matter is a corporate scandal, not a political controversy–that it is an affair of business skulduggery (accountants shredding, executives bamboozling), not one of influence-peddling and favoritism in Washington. The first Senate hearing on Enron of the new Congressional session, overseen by Senator Joseph Lieberman, a Connecticut Democrat, provided comfort to the ain’t-no-scandal-for-Bush crowd.
True, it was not a good four hours for American capitalism, but the hearing, which focused on corporate governance (as opposed to government governance), barely ventured into the area of Enron’s relationship with political figures or the reasons for the lax regulatory policies that permitted Enron to develop its shady finances. Lieberman’s opening bid was conducted mostly in a dispassionate style; it showed no sign of any Democratic strategy to make political use of the Enron mess. If the investigations on Capitol Hill follow the lead Lieberman established, Bush and the GOP will not have much to fret about.
The point of the hearing, said a Lieberman aide, "was to put the whole story in a large context." Toward that end, the committee heard only from five financial experts who testified about the problems at Enron and what these improbities say about Corporate America. With this the topic of the day, committee members whacked away at business-as-usual within the corporate world. Senator Fred Thompson, a Tennessee Republican, observed, "All too often the name of the corporate game is to conceal the true financial situation of the company while doing the minimum amount of disclosure to avoid legal exposure. The system is clearly not designed with the primary interest of the general public or the investor in mind." Such a sentiment–the current markets system is rigged against most people–is not often expressed by GOPers on the Hill. Senator Susan Collins, a Maine Republican, noted that oversight of public companies is rife with conflicts of interest. Lieberman called into question the entire system, asking if "the average American trusting his or her future to the stock market is inadequately informed and, therefore, poorly protected?" Senator Dick Durbin, an Illinois Democrat, quoting Teddy Roosevelt, remarked, "The genius of capitalism could also be a triumph of greed."
The witnesses, with little pause, indicted the current financial system. "What has failed is nothing less than the system for overseeing our capital markets," said Arthur Levitt, who chaired the Securities and Exchange Commission (SEC) in the Clinton years. Levitt noted that Enron’s collapse occurred within a "culture of gamesmanship," in which executives "bend the rules, tweak the numbers," companies "bend to the desires and pressures of Wall Street analysts," analysts "overlook dubious accounting practices" as they seek to put together deals of their own, auditors "are more preoccupied with selling other services and making clients happy than detecting potential problems," and board directors "are more concerned about not offending management than with protecting shareholders."
Levitt added that Wall Street analysts–those supposed experts who millions look to for buy/sell advice–have "lost all credibility." And in hard-to-follow testimony, Frank Partnoy, a professor at the University of San Diego Law School, detailed how Enron–which not only "wiped out $70 billion of shareholder value but also defaulted on tens of billions of dollars in debt"–fell apart because of its sleazy and complicated use of unregulated derivatives. "How did Enron lose so much money?" Partnoy asked in his written testimony. "That question has dumbfounded investors and experts in recent months. But the basic answer is now apparent: Enron was a derivatives trading firm [more than an energy company]; it made billions trading derivatives, but it lost billions on virtually everything else it did, including projects in fiber-optic bandwidth, retail gas and power, water systems, and even technology stocks. Enron used its expertise in derivatives to hide these losses. For most people, the fact that Enron had transformed itself from an energy company into a derivatives trading firm is a surprise." Partnoy added, "The collapse of Enron makes it plain that the key gatekeeper institutions that support our system of market capitalism have failed."