The Guardian January 23, 2002


Enron: America's Largest Bankruptcy

by Mark Weisbrot*

The demise of Enron leaves us with another huge, ostentatious symbol of the 
once-vaunted "New Economy" going belly up, and the inevitable year-end 
question: what lessons will be learned? This monster trader of everything 
from energy futures to advertising space, and producer of very little, went 
from number seven on the Fortune 500 list of America's largest corporations 
to a bankrupt failure in a matter of months.

A fall from grace of this magnitude and speed inevitably causes rethinking, 
with teary-eyed employees who lost their life savings testifying at 
Congressional hearings, and shareholder lawsuits piling up. There are a 
number of easy lessons that are likely to result in legal reforms.

First, some limits on how much of employees' pension funds can be put in 
company stock. It was an ugly spectacle: Enron's top executives, some 
undoubtedly knowing what the company concealed from investors, selling 
hundreds of millions of dollars worth of company stock while employees lost 
US$1.2 billion, more than half of their retirement savings. This is more 
than even our normally corporate-compliant Congress can ignore.

Some reforms on financial disclosure, in the form of legal changes to the 
Securities and Exchange Commission's auditing and enforcement rules, are 
also likely. Enron had 3500 affiliates and partners throughout the world, 
and used at least some of these to hide massive amounts of debt and to 
inflate its profits.

There were conflicts of interest all over the place, including those 
finessed by the accounting giant Arthur Andersen, which performed both 
internal and outside audits for Enron.

But regardless of who ends up with most of the blame, it shouldn't have 
been so easy to get away with misstating the company's earnings and hiding 
so much vital information from investors. Something is likely to be done to 
make at least some of these deceptions more difficult in the future.

Larger lessons seem more distant, or barely recognised. Enron's co-
conspirators grew rich by creating markets where they were not needed, and 
through deregulation of public utility systems that didn't need to be 
deregulated.

California's energy crisis should have made it clear to anyone who wasn't 
directly profiting from the chaos (as Enron did) that the old system worked 
a lot better. For electricity at least, a regulated monopoly is far 
superior to a "competitive" system in which suppliers are able to gouge 
consumers and the market doesn't even ensure that there will be adequate 
capacity to keep the lights on at night.

There are a number of clear economic and technological reasons for that 
result. But the combination of ideological and pecuniary interests in 
deregulation was so powerful that the whole debate was badly distorted.

Even at the peak of California's troubles, much of the press continued to 
blame "partial deregulation" for the disaster-as if allowing consumer 
payments for electricity to rise without limit would have solved the 
problem created by deregulation.

That brings us to another problem that Enron exemplified: the selling of 
our government to the highest corporate bidders. Enron was as much a part 
of the Bush Administration as it is possible for a corporation to be: CEO 
Kenneth Lay is a long-time friend of the Bush family, raising funds for 
both father and son, with Enron and its employees contributing US$1.3 
million to George W Bush's presidential campaign.

Enron's investment in government was a profitable one, buying crucial 
support for its deregulatory agenda across the country. Its political 
influence was also instrumental in choosing members of the Federal Energy 
Regulatory Commission, which oversees Enron's business, and making Enron a 
co-author of the Bush Administration's energy plan.

It remains to be seen whether this clout will rescue Enron's officers from 
any federal investigations or prosecution.

Perhaps the most immediate lesson that has yet to be gleaned from the 
largest bankruptcy in history concerns the stock market bubble that drove 
the 1990's expansion. Stock prices that are out of line with any plausible 
story about future profit growth cannot hold.

This is still true for the stock market taken as a whole, where the average 
price is currently 25 times the level of even pre-recession earnings. 
Compare this to the market's historic average of about 14 to 1, and it is 
clear that current stock prices cannot be sustained, no matter how fast or 
furiously our economy recovers.

This reality has yet to sink in. A big bubble named Enron has burst, but 
much of the "bubble mentality" that drove investors into its fold still 
remains.

* * *
* Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. (http://www.cepr.net), and co-author, with Dean Baker, of Social Security: the Phony Crisis (2000, University of Chicago Press) Mark Weisbrot at: http://www.alternet.org/

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