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.