Enron is Whitewater in spades.
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."
The disaster of California's blackouts and soaring electric bills was a prima facie case of monopoly price-gouging--artificial scarcity induced by utilities simultaneously shutting down electricity generation for "repairs"--that cries out for criminal investigation. Collusion has not yet been proved nor Enron's involvement, as far as I know, but the firm profited spectacularly. While California groaned, Enron's share price more than doubled. Enron then used its new glamour status to leverage still more debt, expanding its reach worldwide and opening more trading tables--financing it all in ways even savvy analysts couldn't understand. It was the classic behavior of unfettered freebooters, and it ended in the familiar way.
What did we learn? First, wholesale deregulation has a vicious downside for ordinary citizens and is open to gross manipulation. Second, as Floyd Norris of the New York Times pointed out, Enron is essentially not an energy company but a financial institution that trades various financial instruments, utterly free of regulating limits. Like a bank, it must raise huge capital flows to maintain liquidity to underwrite the transactions, but unlike a bank or a financial market, it operates without oversight. Third, nearly every party to this debacle--Enron itself, its auditor, the bankers and brokerages--is guilty of profound conflicts of interest. They do not tell the truth to retail customers like small-scale investors for fear of offending their big investment clients. Enron, it seems, didn't tell the truth to its bankers either, and they didn't ask.
As we learn more, the fall of Enron may be seen as the logical result of repealing the Glass-Steagall Act, which prohibited commercial banks from merging with investment houses. The remedial agenda would start with the reregulation of banking and finance, in order to restore a milieu of prudence and honest dealings at the heart of capitalism. Other sectors should follow: energy, telecommunications and airlines, for starters.
It would be comforting to think this event will turn politics around and put a little spine in our legislators. Certainly many state governments have learned from California's pain. But don't count on Washington. Even after Enron's meltdown, leading Democrats continue to shill for more deregulation, aware that their money patrons will be most upset if they reopen fundamental scrutiny of how wealth is created in the magic market. Elite opinion leaders will probably stick with the laissez-faire dogma, as it continues to fall apart, until the bloody losses lap over their shoes too.
How the right is using trade law to overturn American democracy.
What goes down comes around. Amidst all the attention to United Airlines' post-September 11 woes, no one noticed the ringing irony of its tapping John W. Creighton Jr.
September 11 showed us true American heroes. Now let's build on their strength.
It's time to ask "borderless" corporations: Which side are you on?
The attacks of September 11 have not only exposed the failures of our intelligence apparatus and the "blowback" problem of US foreign policy. They have also stripped bare how one branch of corporate America, the $273 billion airline industry, has successfully captured the government agency supposed to oversee it and bought off the people's watchdogs in Congress. This situation argues for far-reaching changes in how campaigns are financed and how government agencies are staffed.
The vulnerability of our airports can be traced, in part, to the role of the airline industry in lobbying year after year against any federal takeover of airport security and its insistence on contracting the work out to low-bidding companies that often pay little more than the minimum wage to the people who check passengers' luggage and X-ray their handbags. Last year the General Accounting Office found that starting salaries for screeners at all nineteen of the nation's largest airports was $6 per hour or less, with five boasting starting salaries of just $5.15 per hour. According to the Federal Aviation Administration (FAA), from May 1998 through April 1999 turnover at those same nineteen airports ranged from 100 percent to more than 400 percent. Argenbright, one of the four big companies that dominate the private airport security business in America, pleaded guilty in 2000 to several charges and agreed to pay $1.2 million in fines for falsifying records, doing inadequate background checks and hiring at least fourteen airport workers in Philadelphia who had criminal convictions for burglary, firearm possession, drug dealing and other crimes. In 1978, reports the New York Times, the FAA "found that screeners failed to detect guns and pipe bombs 13 percent of the time in compliance tests, while in 1987 the agency found that screeners missed 20 percent of the time. Since then, the agency has stopped releasing figures."
Despite these worrisome facts, the airlines and their lobby, the Air Transport Association (ATA), fought against any federal takeover of airport security because they didn't want to have to pay more for it and because they didn't want potential passengers scared off by longer lines or fears of a hijacking. And the FAA dragged its heels, in part because its mandate, written by a Congress addicted to millions in transportation-industry campaign contributions, has been not only to insure air safety but also to promote air travel. The airlines alone have given more than $65 million to federal candidates and parties since 1990, and spent roughly the same amount lobbying the federal government between 1997 and 2000.
Much of that boodle helped to weaken the implementation of new security procedures recommended by a 1996 presidential commission chaired by Vice President Al Gore, set up after the TWA 800 crash. For example, according to a report by Public Citizen, the commission's recommendation that the background of all airport employees be checked for criminal records was opposed by the industry because it would create administrative and financial burdens. Even Gore himself backed down on his commission's insistence that all bags be matched to passengers on all flights. The day after he wrote the ATA about his change of heart, campaign contributions started to pour in from the airlines to various Democratic Party committees at double their previous pace.
Many people in Washington have enriched themselves by maintaining this sordid status quo. Current or recent lobbyists for the airlines and/or the ATA include Linda Hall Daschle (wife of Senate majority leader Tom Daschle), Haley Barbour (former Republican National Committee chair), Harold Ickes (deputy chief of staff in the Clinton White House), Ken Duberstein (chief of staff for Ronald Reagan and a crony of Colin Powell), Nick Calio (now President Bush's Congressional liaison) and former Senators Dale Bumpers and Bob Packwood. Three recent FAA administrators, including Linda Hall Daschle, have come from the industry.
So far, nothing has changed in the wake of the September 11 attacks. According to Paul Hudson, director of the Aviation Consumer Action Project, Transportation Secretary Norman Mineta has "excluded all aviation security proponents, consumer or public representatives, air crash victim groups, former FAA security officials critical of aviation security and the manufacturers of advanced aviation security equipment from his advisory group" on new security measures, relying instead on the industry alone. The airlines finally came out in favor of federalizing airport screening, though by September 12 their lobbyists were already plotting the $15 billion taxpayer bailout. A month later, the thousands of laid-off employees, who lack a similarly well-heeled lobby, are still waiting to find out if they will get emergency unemployment, healthcare and job-training support.
The Bush Administration is blocking efforts to rein in offshore banking.
Citigroup proclaims that its "private bankers act as financial architects,
designing and coordinating insightful solutions for individual client needs,
with an emphasis on personalized, confidential service." That is so colorless.
It might better boast, "We set up shell companies, secret trusts and bank
accounts, and we dispatch anonymous wire transfers so you can launder drug
money, hide stolen assets, embezzle, defraud, cheat on your taxes, avoid court
judgments, pay and receive bribes, and loot your country." It could solicit
testimonials from former clients, including sons of late Nigerian dictator Sani
Abacha; Asif Ali Zardari, husband of Benazir Bhutto, former prime minister of
Pakistan; El Hadj Omar Bongo, the corrupt president of Gabon; deposed
Paraguayan dictator Alfredo Stroessner; and Raul Salinas, jailed brother of the
ex-president of Mexico. All stole and laundered millions using Citibank
(Citigroup's previous incarnation) private accounts.
One lesser-known client, Carlos Hank Rhon of Mexico, has been the object of
a suit by the Federal Reserve to ban him from the US banking business. Hank
belongs to a powerful Mexican clan whose holdings include banks, investment
firms, transportation companies and real estate. Hank bought an interest in
Laredo National Bank in Texas in 1990. Six years later, when he wanted to merge
Laredo with Brownsville's Mercantile Bank, the Fed found that Citibank had
helped him use offshore shell companies in the British Virgin Islands to gain
control of his bank by hiding secret partners and engaging in self-dealing, in
violation of US law. One of the offshore companies was managed by shell
companies that were subsidiaries of Cititrust, owned by Citibank.
The Fed says that in 1993, Hank's father, Carlos Hank González, met
with his Citibank private banker, Amy Elliott, and said he wanted to buy a $20
million share of the bank with payment from Citibank accounts of his offshore
companies, done in a way that hid his involvement. Citibank granted him $20
million in loans and sent the money to his son Hank Rhon's personal account at
Citibank New York and to an investment account in Citibank London in the name
of another offshore company.
Citigroup spokesman Richard Howe said, "We always cooperate fully with
authorities in investigations, but we do not discuss the details of any
At press time, there were reports that Hank had negotiated a settlement
with the Fed, which the parties declined to confirm.
US employers like Coca-Cola are implicated in Colombia's brutality.