How immigration is transforming our society.
The definition of terrorist has drifted far from ground zero.
The return of the culture wars.
The Angolan wars connection to suburban Arizona.
Market Magic's Empty Shell
Days of infamy and memory.
Let's review the tape.
The liberal media strike again.
Israels gravest danger is not the Palestinians.
Bush unilaterally junks the ABM accord.
Washington gives Indians the runaroundagain.
Mumia's death sentence is overturned, for now.
Massey Energy, Inc. targeted by labor and greens.
Phil Radford: Last Call, Save the Ales.
BOOKS: Empires new clothes.
The Empty Theater
BOOKS: Joan Didion vs. the political class.
BOOKS: The Complete Works of Isaac Babel.
FILM: The Devils Backbone of the Spanish Civil War.
December 22, 2001
Market Magic's Empty Shell
If theres any justice, the fall of Enron from miracle new economy
corporation to bankrupt shell should land quite a few executives in jail. But
Enrons demise is not only a tale of corporate hubris, greed and likely
criminality. More important, it is a cautionary guide to many of the dominant
trends in the American economy.
For the past quarter century, a growing ideological chorus has contended that
markets are rational and efficienttherefore goodand any interference,
especially by government, is bad. But as Joseph Stiglitz, a winner of this year's
Nobel Prize in economics, has argued, if markets are to work perfectly on their
own terms, the information available to all participants must be perfect. Since
thats never true, a case to intervene in markets can always be made, if
only to correct information flaws.
The Enron story is a massive argument for intervention. A gas pipeline company
that transformed itself into a maker of markets in energy, water, metals and
much more, Enrons executives bought political influence (not only by providing
more than $113,000 to Bushs 2000 campaign) to push deregulation of energy
and other markets. Like many U.S. companies, Enron shifted from providing real
energy to selling a complex variety of financial derivativescontracts
abstracted from some real commodity.
These financial devices are the centerpiece of the new risk management
game in which complex bets on the future of the economy are balanced against
each other to eliminate risk. But real-life risk didnt disappear; it just
sneaked up in a new way to bite Enron in the financial butt (as it did in 1998
to the Long Term Capital Management hedge fund).
Markets are always volatile, but big government spending and regulation stabilize
themhelping both business and the general public. Free market fundamentalists
argued that companies like Enron could provide better stabilityand make
big bucks. Enron quickly grew to No. 7 in the Fortune 500. It also went global,
leading the crusade for privatization and deregulation worldwide through the
World Trade Organization.
Like many of its brethren in the hot fields of Internet business and financial
services, Enron greatly overstated its profits through a fiendishly complex
scheme that included roughly 30 partnerships with privately held firmsmany
run profitably by Enron executivesthat were used to shift debt off Enron's
books. The result: a boosted stock price and inflated credit rating. The rah-rah
stock analysts touted Enron even as it was collapsing.
Worse, Enron's auditor, Arthur Andersen, ignored the shenanigans, its vision
apparently clouded by the $52 million Enron paid it last year in consulting
and accounting fees. Meanwhile, top Enron executives made more than $1 billion
over two years selling their overpriced stock while they lied to investors about
the condition of the company and pressured lower-level employees to hold Enron
stock in their 401(k) pension plans as the company collapsed.
The Enron debacle is an argument for stricter financial disclosure laws, new
(and restored) restrictions on banks and auditors playing double roles (like
consulting and auditing), tougher corporate law enforcement, rigorous regulation
of financial derivatives, and new rules to protect employee pension plans. (It's
also an argument against privatization of Social Security.) Enron is a perfect
example of American-style crony capitalism, the misguided idiocy
of energy deregulation and the social dangers posed by the risk-management craze.
Most of all, it is a reminder of how flawed markets can beeven in the holy sepulcher of deregulationparticularly when information is distorted by both outright fraud and the manic belief in market magic by a herd of willing investors and silent watchdogs. We have seen the end of Enron, but the problems that the company so boldly exemplified live on.