The rise and fall of Enron is an instant classic in the annals of capitalism because, in one calamitous stroke, it wipes out so many sanctified illusions that rule in the magic marketplace. Enron embodies Nobel-class hubris like that of the market sophisticates who brought Long-Term Capital Management to ruin in 1998. It also smells of the raw monopolistic greed common a century ago. An energy-trading company that Wall Street had valued at $80 billion ten months ago is now a penny stock. Meanwhile, California consumers and businesses are stuck with the ruinously inflated electricity prices that Enron rode to brief financial glory. The firm's gullible creditors include some of the best gilt-edged names in American banking–J.P. Morgan Chase, Citigroup–whose ancestral houses were big players during the first Gilded Age too. Unfortunately, then and now, these venerable financial institutions lured millions of innocents to the slaughter, unwitting shareholders who bought the exuberant promises.
In this case, the lambs include Enron's own employees (thousands of whom are abruptly out of work) because top management cleverly prohibited their 401(k) accounts from selling Enron's plummeting stock while the big boys were dumping theirs. If the financial losses to banks are severe enough–we don't yet know the full truth–then US taxpayers may be burned too, their money used once again to rescue delinquent financiers from their just deserts in the name of "saving the system." Nobody ever said capitalism was pretty.
Markets are imperfectible human artifacts and always subject to gross error, not to mention high-stakes fraud, because the transactions are always the work of human beings. Computerization and esoteric mathematical formulations do not change that humble fact; neither does the Internet. This same lesson was learned from great pain and loss in the early twentieth century and led eventually to the political understanding that markets without governors and regulators will repeatedly throw off disastrous consequences–extreme price swings, occasional busts and clever larcenies–so stabilizing rules and limits were imposed. That knowledge was pushed aside by the modern era's deregulation.
Enron was a massive experiment in e-commerce–a commodity-trading firm that used the Internet to connect distant buyers and sellers of everything from electricity and natural gas, steel and newsprint to pollution credits and financial derivatives hedging against interest rates or the weather. If you check out Enron Online, you will see the hubris still on display, despite the bankruptcy. "Why Enron?" the company's website asks. "We have strong skills in risk intermediation and good systems to control risk…. We have successfully sourced capital for all potential investments." As it turns out, these are the very qualities that were missing, the "new economy" conceits that brought it down. Enron's siren song was plausible enough (if you left out the human folly and greed). Deregulation, combined with Internet trading, exposed the old-line utilities to fierce, continuous price competition, the firm explained, forcing them to eliminate inefficiencies or get out. Consumers would win from the lower wholesale prices; so would producers of "soft energy" alternatives, like wind or solar. Enron would preside like a wise monarch.
But while Enron promised to scrutinize the soundness of buyers and sellers, nobody was scrutinizing the trader king. The middleman is unregulated in this brave new world. When Enron management made a series of outrageous and self-interested off-the-books deals to raise capital, its auditor, Arthur Andersen, gave approval. The credit-rating agencies remained mute. Enron's bankers were busy touting the stock as on its way to the moon. Enron and chairman Kenneth Lay, meanwhile, pumped nearly $2 million into the election of George W. Bush, who returned the favor by letting Enron pick federal regulatory appointments. Lay and his agents were all over Vice President Cheney's secretive energy task force, and White House economic adviser Lawrence Lindsey received $50,000 last year as an Enron "adviser."