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July - Duke Energy Employee Advocate

Deregulation - Page 7 - 2002

"(Enron) was like a nuclear meltdown where the core melted through all the layers." - NYT

Enron Influence

Associated Press – by Alan Clendenning – January 26, 2002

Jan 25, 2002 (AP Online via COMTEX) -- The dollar trail snaked from Enron Corp.'s hometown of Houston to the Texas capital of Austin to Washington, D.C. Along the way, politicians who could help the energy trader got money for their campaign chests.

From there, the largesse of the company and its employees extended well beyond George W. Bush, Texas' top elected officials and nearly half of Congress. Their charity donations built a web of goodwill nationwide while benefitting individuals and causes from cat shelters to art museums, from Christian missionaries to Planned Parenthood.

Former Enron chief executive Kenneth Lay, who resigned from his job this week but remains on Enron's board of directors, was known in Houston as the man to woo for favors and contributions to charitable causes and civic improvement projects.

"Enron operated in a way that was reminiscent of the way tobacco companies historically operated before they came under so much fire," said Bill Miller, a political consultant based in Austin who has worked for both Democrats and Republicans. "If you asked for $5,000, they might say, 'Well wouldn't $10,000 be better?"'

Some Enron observers insist the company was simply doing an effective job protecting its interests at various political levels while being a good corporate citizen in Houston and beyond. But critics say the strategy was carefully planned to buy influence and improve the company's bottom line.

"The ways they did it weren't unique, but they did it more aggressively than anyone else," said Andrew Wheat, research director for Texans for Public Justice, a group critical of Enron's contributions to state politicians in Texas and national politicians around the country.

The donations are facing more scrutiny after the company's rapid collapse into bankruptcy late last year, following revelations that it hid billions of dollars of debt in a series of partnerships that benefited some company executives. It has raised questions of whether Enron managed to avoid scrutiny of its often secretive operations that might have revealed the company's problems earlier.

"Maybe they trimmed the edges off of policies that would have been quite objectionable," said Daron Shaw, a government professor at the University of Texas in Austin. "Since they were working both sides of the aisle, they wanted to minimize the chances of maximum regret."

An Enron spokesman said the company, once listed No. 7 on the Fortune 500 list, and its top executives acted no differently than any other top businesses and their leaders.

The political contributions were "something every company does to support like-minded individuals that support the efforts of a particular company," said the spokesman, Eric Thode.

And he said it was a "travesty" that people might criticize Enron's charitable donations, saying "it's a figment of the imagination that there is anything sinister about being a good corporate citizen."

Of the $5.77 million in contributions to candidates the company has made since 1989, nearly three-fourths went to Republicans. In the 2000 election, it gave $2.4 million to individual candidates, political action committees and soft money contributions to political parties, said the Center for Responsive Politics, a campaign finance watchdog group.

Over those 12 years, according to the center, 71 current senators and 188 House members have benefited from Enron's donations. Topping the list were Texas' two Republican senators, Kay Bailey Hutchison and Phil Gramm, each receiving almost $100,000, and seven Texan representatives led by Democrat Ken Bentsen with $42,750.

Enron was a major contributor to the Bush presidential campaign and donated $100,000 for the Bush-Cheney inaugural gala last a year ago, a sum matched by Lay and his wife.

Gramm's wife Wendy is on Enron's board and also served on its audit committee, which is supposed to keep a close watch on the company's financial practices. By their own accounting, the Gramms lost nearly $700,000 in stock options when the company went under. Wendy Gramm collected between $915,000 and $1.85 million from Enron in salary, attendance fees, stock options and dividends between 1993 and 2001, according to Public Citizen, a Washington watchdog group.

Wendy Gramm took a seat on Enron's board in 1993, just five weeks after resigning as chairwoman of the Commodity Futures Trading Commission, where she pushed through a key regulatory exemption that benefited Enron.

She heads the regulatory studies program at George Mason University's Mercatus Center, which received $50,000 from Enron since 1996, less than 1 percent of total corporate gifts to Mercatus.

Gramm said he had no warning of the company's bankruptcy or its dire financial situation. And he said his wife had done nothing wrong from her vantage point on Enron's board and audit committee.

Another board member on the audit committee, Lord John Wakeham, a former leader of the British House of Commons, received a $72,000 yearly consulting contract for "services rendered" to Enron's European arm, according to documents filed with the Securities and Exchange Commission. And Enron board member Herbert S. Winokur Jr. is a managing partner of the company that owns the National Tank Co., which had $370,294 in sales to Enron subsidiaries.

The side deals with board members raise serious questions about their ability to perform their duty of making sure top managers were doing their jobs, said Harold Star, a management professor and corporate governance expert at the State University of New York at Buffalo.

"You've got a board that's passive, co-opted and basically corrupted in terms of its role," Star said.

Enron board members also had ties around the country through their charitable contributions. For example, Robert Belfer, the company's largest shareholder, and his wife gave $7.5 million for the Robert and Renee Belfer Center for Science and International Affairs at Harvard University's Kennedy School of Government. He graduated from the school.

Lay and his wife Linda gave generously to causes primarily based in Houston through the Linda and Ken Lay Family foundation, which donated $2,546,771 in 2000, according to Internal Revenue Service records. The foundation also contributed to out-of-state groups, including $10,000 to the American Dance Festival in New York; $28,900 to the Washington, D.C.-based Barbara Bush Foundation for Family Literacy; $125,000 to the Illinois Institute of Technology in Chicago; $6,700 to Knox Theological Seminary in Fort Lauderdale, Fla.; $60,000 to Louisiana State University's Manship School of Mass Communications; and $6,627 to Ozarks Public TV in Springfield, Mo.

Lay's influence alone was profound in Houston, where he had a sterling reputation as one of the city's most prominent movers and shakers.

Miller, the political consultant, said he and other lobbyists asked for Lay's help several years ago when a problem finding financing for a parking garage threatened a plan to bring a basketball arena to Houston. "He sent a memo to some CEOs for a meeting in Houston, and it meant forking over a lot of money, millions of dollars," Miller said. "When the meeting was over, the deal was done. You can only do that if you are giving a lot of money or helping a lot of other people make money."

It was Lay's connection to influential black groups in Houston that helped get out the vote in favor of a successful 1996 referendum to build a new baseball stadium that would be named Enron Field, said David Walden, chief of staff to Houston Mayor Bob Lanier from 1992 to 1998.

Walden said he believes Lay worked to improve Houston out of a sense of civic duty.

"He thought it was important for the image of the city to have the stadium downtown," Walden said.

"Having pro sports franchises and the ballet was a great recruiting tool and the folks he wanted to attract (as Enron employees) paid attention to those things," Walden said.

But Enron's generosity was also aimed at impressing influential people with the power to help or hurt the company, said Ralph Estes, accounting professor emeritus at American University and the author of "Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things."

"Most of the rationale is that somehow it will pay off on the bottom line," he said. "It's calculated to pay a dividend, and these actions can keep the wolves from the door."

- Investigative Researcher Randy Herschaft contributed to this story.

Global Deregulation Takes a Hit

Associated Press – January 25, 2002

SINGAPORE - Cronyism, cooking the books, nepotism - when it comes to corrupt business practices, Asia is infamous.

With reports of corruption swirling around the bankruptcy of Enron Corp., many around the continent are chuckling at the energy giant's failure to practice what it and other American companies preach - good corporate governance, deregulation and freewheeling competition.

The scandal is immediately affecting Enron subsidiaries in Asia's energy sector. Moreover - on top of the California energy crisis - the Enron debacle has led many in the region to rethink the American path of energy deregulation that Asian nations had begun to adopt.

``Obviously what's happened with Enron is going to affect the way that regulators think,'' said Rohan Dalziell, a Hong Kong-based power analyst with ABN Amro. ``It will cause regulators to go back and review criteria. It will slow down the process.''

Asia's power generation has historically been closely guarded by governments, and many operations were bloated and inefficient. But Asian governments had been embracing Enron's creed: open up power sectors to competition in hopes of higher investment returns and lower consumer costs.

Now, a slower deregulation process will likely mean more years of power monopolies and possibly higher prices for consumers throughout Asia.

Immediately, the future of some of Enron's power plants and other assets in Asia remains uncertain, analysts say.

The company's trading office in Singapore has filed for bankruptcy, as have Enron Japan Corp. and its three Japanese affiliates. Enron's stake in a joint venture in South Korea is for sale, and the Philippines government is thinking of taking over Enron's stake in a venture there.

A dlrs 2.9 billion electricity plant in India raises questions about Enron's dealings there. Enron subsidiary Dabhol Power Co. - the largest foreign investment project in India - already was at the center of a dispute between Enron and India.

The plant, which operated briefly and has yet to be fully built, triggered charges of bribe taking on both sides.

Enron claims the plant's sole customer - the Maharashtra State Electricity Board - failed to pay its bills and the Indian federal government did not honor payment guarantees.

The electricity board claims that Enron's prices were too high and the contract needed to be renegotiated. The government has a claim against Enron because it stopped providing electricity.

Some in Asia see the Enron scandal reflecting on the whole business ethic that Americans have espoused for the rest of the world.

``The United States will no longer be able to preach about crony capitalism or corporate governance,'' read a recent editorial in India's Business Standard newspaper. ``And while there's little doubt that we have no dearth of cronyism in India, for the moment, at least, it is those who supported Enron's Dabhol misadventure who are squirming.''

In Asia, Enron had a cult following and its business methods were widely studied.

Indy Sarker, a Hong Kong-based energy analyst with Deutsche Bank AG, says too may people ``went gaga over Enron'' and foolishly admired its high-risk investment strategies.

Enron's large appetite for risk was not restricted by American regulators, and analysts say that Asian regulators are likely to be more conservative after the Enron collapse.

ABN Amro's Dalziell says Asian regulators may also feel lost because they will have to create a new model for deregulation.

``Everybody right up until the beginning of last year was following the American model of competition,'' he said. ``But then you had two things ... the California crisis where energy prices were forced through the roof and companies (were) close to bankruptcy. Secondly you had the Enron collapse.''

Asian state-run power companies are generally not working well either, he says, because they're ``producing very low returns.''

Vijay Sethu, a former Enron official in Singapore, agreed regulators will likely come up with a more conservative plan for Asian energy and - in the absence of Enron - will have a hard time salvaging the free-market dogma.

``When it came to deregulation and competition, it was Enron,'' he says. ``They were the real champions.''

Enron’s Smoking Gun

Salon – by Anthony York – January 24, 2002

Jan. 16, 2002 - Remember the California energy crisis? As the implications of the collapse of Enron spiral ever wider, increasing attention is being paid to the close connections between the White House and the Texas energy trader. So far, there has been no evidence that Bush officials tried to stave off the Enron disaster. But the real smoking gun for Enron could be its role in the California energy deregulation debacle.

Vice President Cheney has already admitted that he and Enron CEO Ken Lay discussed the California situation in some of their six meetings last year, leading some critics to believe that Bush's hands-off policy toward California was done at Enron's bidding. Lay was also instrumental in replacing the chairman of the federal commission that regulates energy issues with his own nominee, after the original chairman refused to kowtow to Enron's wishes on electricity deregulation. A California state Senate committee is currently calling for depositions of Enron and Arthur Andersen officials to find out if the former energy giant or its auditors willfully destroyed documents that were under subpoena from the committee. And an ongoing criminal investigation by California Attorney General Bill Lockyer is still looking into allegations that energy producers and traders, including Enron, artificially manipulated the price of energy to profit off of California's poorly constructed energy deregulation plan.

Enron officials once took pains to note that California's problems could not be blamed on energy producers but on not having deregulated enough. But it's now becoming apparent that Enron was as responsible as anyone for the shape of that deregulation plan. As the Enron mess continues to heat up, California could prove to be the company's biggest political embarrassment…

Enron Shredded Too

Associated Press – by Pete Yost – January 23, 2002

WASHINGTON -- Enron shredded boxes of documents at its Houston headquarters weeks after the federal government began investigating the company - possibly as recently as last week - lawyers representing Enron investors said Monday night.

"They even shredded on Christmas Day," said William Lerach, an attorney who is suing Enron. He said he would take some of the documents to court today to demand court custody of relevant papers. Robert Bennett, a lawyer representing Enron, issued a statement saying Enron is investigating the reported destruction.

On Monday, former Enron executive Maureen Castaneda went on ABC News and displayed a box of shredded documents, saying the shredding began after Thanksgiving on the 19th floor in an accounting office and continued through at least mid-January. Paul Howes, an attorney involved in a class-action lawsuit against Enron, is expected to file court papers saying as much today.

"From what we have learned, destruction of evidence at Enron was open and notorious and widespread," said Lerach, who is involved in the same lawsuit.

The Securities and Exchange Commission began looking into Enron in mid-October. Congressional committees began asking for documents in mid-December.

Howes said Castaneda was laid off from her job as a project manager Jan18 and, in the weeks just prior to her departure, "there was an increase in the volume of shredding."

Howes said some of the shredded Enron papers "included those clearly marked Jedi II and Chewco," references to partnerships through which Enron might have hidden the massive debts that led to its seeking bankruptcy protection - the largest business failure in U.S. history.

The allegation Enron destroyed documents comes days after Enron's auditing firm, Arthur Andersen, admitted some auditors destroyed documents related to Enron's financial condition.

Andersen said it ordered shredding stopped after the Securities and Exchange Commission started an investigation. But Castaneda said Monday that Enron's shredding included documents dated November and December.

The same day, the chairman of the congressional panel investigating the shredding by Andersen said he will not seek immunity from prosecution for any witnesses, out of fear it might jeopardize later Justice Department charges rising from the giant energy company's downfall.

Rep. James Greenwood, R-Pa., who heads the investigations subcommittee of the House Energy and Commerce Committee, said the Enron debacle revealed unethical conduct.

"We're going to find out if it was illegal," he said.

Greenwood's subcommittee will hold a hearing Thursday to question current and former employees of Andersen about a flurry of activity last fall, when Andersen auditors deleted e-mails and destroyed documents related to Enron accounts.

The destruction occurred after federal regulators requested financial data from Andersen about the sinking energy company. It stopped shortly afterward, when regulators issued subpoenas for the documents. "We want to get to the bottom of it," Greenwood said. "Did they destroy documents pursuant to normal protocols, or for the purpose of covering up?"

Greenwood said committee investigators have been consulting the Justice Department, which is conducting a criminal investigation. He said he and his subcommittee's chief counsel have agreed not to ask the full committee to offer protection from prosecution to any witnesses.

"This is a case where if any immunity is granted, it should be granted by the Justice Department," Greenwood said.

The committee, however, might have trouble snaring its star witness - David Duncan, the former head of Andersen's Enron auditing team who was fired last week amid revelations he ordered documents destroyed. Duncan's lawyer, Robert Giuffra of Sullivan & Cromwell in Washington, said: "The committee should defer Mr. Duncan's testimony. It's premature to require him to testify at this hearing at this time."

Duncan told committee investigators last week he followed the instructions of Andersen lawyers. Andersen auditor Michael Odom forwarded to Duncan an Oct. 12 e-mail from company lawyer Nancy Temple that reminded auditors to make sure they complied with company policy when shredding documents.

Asked on NBC's "Meet the Press" Sunday why Temple felt a need to send such an e-mail, Andersen CEO Joseph Berardino said: "Because accountants are pack rats."

An Accountant’s Take

The Charlotte Observer – by Don Hudson – January 23, 2002

Bill James started his Big Five accounting career back in Dallas, Texas, as a financial expert with Arthur Andersen. He met his wife, Julie, another accountant at Andersen, where they worked with clients in Dallas and Houston.

"It was back in the go-go '80s," James said. "The Beamer Age. Where everyone wanted to drive a 325i." James, now a Mecklenburg County commissioner, worked for Arthur Andersen from 1983 to 1987, before accepting a position auditing banks with Price Waterhouse in Charlotte from 1987 to 1996. He has been self-employed since 1996.

The more you hear James talk about the Enron fiasco, the hotter you get.

Certainly, most Big Five auditors are ethical. But the Enron story is showing how much potential there is for abuse from accountants, not to mention Washington insiders.

You expect bias from lawyers. And politicians.

But bean counters? They're supposed to be the bedrock of American life, in charge of important stuff like certifying who wins an Oscar or the Miss America pageant.

Questions abound whether Enron executives sold $1.1 billion in stock while encouraging employees and investors to keep buying. People lost their life's savings in 401-k's as Enron stock plunged from more than $80 in February to 26 cents on Dec. 2, when the company filed for bankruptcy.

On Nov. 8, Enron admitted under-reporting earnings by $586 million since 1997.

"This was a creative scheme to hide debt and to keep it off Enron's books," James said. James was at Andersen at the same time as Enron Vice President Sherron Watkins, the whistleblower inside Enron. James says it's ironic that an Andersen alum working for Enron raised concerns over the shady accounting practices where debts were hidden in auxiliary companies.

Such practices, James alleges, are commonplace. "The last thing a Big Five audit client wants is an audit partner that is truly independent and blunt and direct and no-nonsense."

Big Five accounting firms work closely with their audit clients. As James said, these relationships last for years and are extremely lucrative to the accounting firms. Last year, Andersen earned over $15 million in audit fees from Enron.

James said CPAs in such circumstances are under pressure to do what their clients want. Which raises the question: Why isn't there a governing body of independent auditors to safeguard investors?

Dr. Howard Godfrey, chair of the accounting department at UNC Charlotte, says that while CPAs have strict professional codes, sometimes they miss the mark.

"In general," Godfrey said, "the accounting profession has had problems with auditors not sticking by their guns and insisting that the financial statements reflect reality."

"Never underestimate what a creative auditor in bed with management can come up with," said James, noting that Fortune 500 companies are more likely to get that treatment than Joe Sixpack. "That only applies to the big guys."

Little guys get the shaft.

Deregulation Aids Enron’s Looting

Public Citizen – - January 22, 2002

12/21/01 - WASHINGTON, D.C. — After Enron Corp. used its vast web of political connections to win December 2000 passage of commodities trading legislation that helped the company shield its energy trading activities from government scrutiny, California’s energy crisis suddenly took a dramatic turn for the worse as artificial supply shortages led to frequent rolling blackouts, according to a new Public Citizen report released Friday.

The legislation reducing government oversight of energy trading was muscled through Congress — without a Senate committee hearing — with the aid of U.S. Sen. Phil Gramm of Texas. Gramm was chairman of the Senate Banking Committee, which had jurisdiction over the legislation he co-sponsored, but he chose to bypass his committee, and the bill was quietly tacked onto a "must-pass" appropriations bill late in the session. Gramm’s wife, Wendy Gramm, also aided Enron’s rise to power. As chairwoman of the Commodity Futures Trading Commission, she pushed through a key regulatory exemption on Jan. 14, 1993, just as she was about to leave office. Five weeks later, she joined Enron’s board of directors, where she served on the board’s audit committee and had access to key financial information about the company. On Sept. 4 of this year, Sen. Gramm announced that he would not run for re-election in 2002. Then in November, shareholders and federal regulators learned the extent of Enron’s financial troubles. Since the revelations, the company has filed the largest corporate bankruptcy in history, and shareholders, lenders and Enron employees have lost billions of dollars.

"Millions of people in California paid outrageously inflated prices for electricity because of Enron’s ability to manipulate the markets for electricity and natural gas, and thousands of Enron employees and shareholders have been devastated because of insider dealing and financial trickery," said Public Citizen President Joan Claybrook. "Republicans in Congress investigated Whitewater for years and spent millions of dollars. But that pales in comparison to Enron-gate. Congress needs to turn over every rock and see what crawls out from underneath. They should ask, who knew what and when did they know it? Investigations into any criminal conduct should extend to the political players who aided and abetted this company’s rapacious rampage across America. We should make no distinction between the officers who committed these acts and the politicians who enabled them."

Public Citizen called on Congress to force Wendy and Phil Gramm and Treasury Secretary Paul O’Neill to testify under oath about their knowledge of Enron’s alleged accounting fraud and use of offshore tax and bank regulation havens. Public Citizen also said that President Bush, Vice President Dick Cheney and political adviser Karl Rove should also be required to answer questions about whether administration officials discussed policies involving energy price controls, other energy regulations or tax havens with Enron representatives. Bush adamantly resisted price controls even though California’s wholesale energy costs had almost quadrupled in 2000; at the same time, Enron’s trading revenues nearly tripled.

The Public Citizen report — Blind Faith: How Deregulation and Enron’s Influence Over Government Looted Billions from Americans — details the political connections and government actions that helped Enron become the most prominent energy trader in the world before its recent collapse. The report found that:

From June through December 2000, California experienced only one Stage 3 electricity emergency (which requires rolling blackouts). But following passage of the Commodity Futures Modernization Act, which shielded Enron’s and others’ trading activities from regulators, the state had 38 Stage 3 emergencies — ending only when federal regulators finally imposed price controls in June 2001.

Enron took advantage of lax government oversight and formed a complex web of more than 2,800 subsidiaries — 874 of which were located in offshore tax and banking regulation havens, mostly in the Cayman Islands. Upon assuming office in 2001, Bush — who has accepted $2 million from Enron during his political career and counts Enron chief executive Kenneth Lay as a close personal friend — scrapped plans put into place by former President Bill Clinton to limit the ability of corporations to effectively use these offshore havens. The action came at the height of high West Coast energy prices, which would have allowed Enron to funnel billions in excess profits to offshore accounts.

As a lame-duck chairwoman of the Commodity Futures Trading Commission, Wendy Gramm exempted Enron and other energy futures traders from oversight in response to a request by Enron. At the time, Enron was a significant source of political funding for her husband. Five weeks later, she joined the company’s board and served on the board’s audit committee, where she would have had access to the company’s financial details. The chief executive of Arthur Andersen, Enron’s outside auditor, testified before congressional investigators in December that "illegal acts" may have been committed at the company.

"Buried amid the rubble of Enron’s fallen house of cards are the political ties that allowed this greedy company to rip off the public and its own employees, who saw their retirement accounts vanish overnight — even as top executives were bailing out and walking away with hundreds of millions of dollars," said report author Tyson Slocum, research director for Public Citizen’s Critical Mass Energy and Environment Program. "There’s an object lesson here for those who decry government regulation: Absent a strong regulatory presence, greed prevails and consumers get the shaft. We’ve seen it time and time again."

A Scandal So Good That It Hurts

L. A. Times – by John Balzar – January 21, 2002

"This just keeps getting better and better," Liisa sputters. By that, my wife means worse and worse. Which is what we're all thinking, isn't it?

Before dawn, we are up and tearing into the newspapers at my household. This is terrific, heart-racing stuff.

"Look, Enron paid no income taxes four out of five years!" "Forget Enron, Andersen is being paid by the Justice Department to reorganize the FBI!"

"Get this: Enron had 881 offshore subsidiaries!"

"Wow, a professor who became a New York Times editorial columnist was paid $50,000 as an Enron advisor!"

We're trying not to talk over each other. I'm scribbling notes all over the paper and Liisa is warning me not to make the story illegible. We subscribe to four newspapers. Suddenly it's not enough.

This is the juiciest scandal of our lifetime.

Why? Because this is not about personal indiscretion, not about sleazy partisan politics, not about runaway foreign policy, not about "gotcha."

This rotten barrel of apples is all encompassing. Down at the bottom, in the really contaminated slime, Enron/Andersen/et al. is about what we have allowed our nation to become.

It's about us. It's about winning at any price--not just winning but trouncing--about seeing what you can get away with. It's about greed and the glorification of greed. It's also the football player who deliberately tries to injure his opponent. It's about parents who beat each other up at their kids' sports matches. It's about the hand-to-hand combat of getting your children into the best colleges so they will be the dog that eats instead of the dog that gets eaten. It's about the ugly edge that has crept into our language, so that words such as "intimidation" become virtuous and "honor" a quaint laughingstock. It's about the blue-ribbon professor-cum-economics columnist who acknowledges taking $50,000 from Enron for serving on "a panel that had no function that I was aware of."

Awhile back, we lost sight of the principle that hard work, diligence and some luck made the man.

Inexplicably, we veered from the root ideal of civil in civilization. We took what we could and called it ours. We created the lottery for the instant chance at more. We demanded that every business "grow" rather than serve--which sounds a lot less benign than it became, as we watched ourselves transformed into jackals feeding from our own wounds. We watched as our political system was co-opted for pennies by wheeler-dealers who hollowed out the laws with fancy regulations and hidden legislative favors until our vaunted democracy became the instrument of our own oppression.

We saw simple and honest things devalued. Like the passbook savings account. And employee loyalty--or loyalty of any kind, for that matter.

You could wish you were high-minded in this age, but weren't you looking for 25% gains on your retirement holdings too? It didn't matter if a company made something, only if it made something happen. It mattered less whether a deed was right than whether you were "in" or "out."

Where is the smoking gun?

It's in our hands.

Yes, George W. Bush is culpable: This freight train crashed on his watch. These were his back-slapping buddies. These are the people he entrusted with government. This is the way-of-life philosophy he championed.

Let's not forget that just a few weeks ago he denounced Democrats for stalling on a multimillion-dollar, retroactive tax break for Enron and other giant companies.

Let's remember that his top economics advisor, a former Enron retainer, views the collapse of the company as "a triumph for capitalism." Let's not overlook that his Treasury secretary sees Enron as evidence of the "genius of capitalism." Let's not overlook that his choice to run the GOP has decided to stay on the payroll of a law firm retained by Enron and reserves the right to moonlight as a strategic advisor for the company.

But Bush didn't create the scandal. It's been in the works for years. He's no more guilty than the people who voted for him, or for those many millions who were suckered into this vision of a cutthroat America where values--that shopworn word--mean nothing at all when measured against the bottom line.

Perhaps all boats float on a rising tide. But reach down. Tastes like sewer water now, doesn't it?

I can hardly wait for tomorrow's papers. This is a terrific time. Maybe, finally, at long bloody last, things will get bad enough to make them right.

Crime in the Suites

The Nation – by William Greider – January 21, 2002

The collapse of Enron has swiftly morphed into a go-to-jail financial scandal, laden with the heavy breathing of political fixers, but Enron makes visible a more profound scandal--the failure of market orthodoxy itself. Enron, accompanied by a supporting cast from banking, accounting and Washington politics, is a virtual piñata of corrupt practices and betrayed obligations to investors, taxpayers and voters. But these matters ought not to surprise anyone, because they have been familiar, recurring outrages during the recent reign of high-flying Wall Street. This time, the distinctive scale may make it harder to brush them aside. "There are many more Enrons out there," a well-placed Washington lawyer confided. He knows because he has represented a couple of them.

The rot in America's financial system is structural and systemic. It consists of lying, cheating and stealing on a grand scale, but most offenses seem depersonalized because the transactions are so complex and remote from ordinary human criminality. The various cops-and-robbers investigations now under way will provide the story line for coming months, but the heart of the matter lies deeper than individual venality. In this era of deregulation and laissez-faire ideology, the essential premise has been that market forces discipline and punish the errant players more effectively than government does. To produce greater efficiency and innovation, government was told to back off, and it largely has. "Transparency" became the exalted buzzword. The market discipline would be exercised by investors acting on honest information supplied by the banks and brokerages holding their money, "independent" corporate directors and outside auditors, and regular disclosure reports required by the Securities and Exchange Commission and other regulatory agencies. The Enron story makes a sick joke of all these safeguards.

But the rot consists of more than greed and ignorance. The evolving new forms of finance and banking, joined with the permissive culture in Washington, produced an exotic structural nightmare in which some firms are regulated and supervised while others are not. They converge, however, with kereitzu-style back-scratching in the business of lending and investing other people's money. The results are profoundly conflicted loyalties in banks and financial firms--who have fiduciary obligations to the citizens who give them money to invest. Banks and brokerages often cannot tell the truth to retail customers, depositors or investors without potentially injuring the corporate clients that provide huge commissions and profits from investment deals. Sometimes bankers cannot even tell the truth to themselves because they have put their own capital (or government-insured deposits) at risk in the deals. These and other deformities will not be cleaned up overnight (if at all, given the bipartisan political subservience to Wall Street interests). But Enron ought to be seen as the casebook for fundamental reform.

The people bilked in Enron's sudden implosion were not only the 12,000 employees whose 401(k) savings disappeared while Enron insiders were smartly cashing out more than $1 billion of their own shares. The other losers are working people across America. Enron was effectively owned by them. On June 30, before the CEO abruptly resigned and the stock price began its terminal decline, 64 percent of Enron's 744 million shares were owned by institutional investors, mainly pension funds but also mutual funds in which families have individual accounts. At midyear, the company was valued at $36.5 billion, having fallen from $70 billion in less than six months. The share price is now close to zero. Either way you figure it, ordinary Americans--the beneficial owners of pension funds--lost $25-$50 billion because they were told lies by the people and firms they trusted to protect their interests.

This is a shocking but not a new development. Global Crossing went from $60 a share to pennies (as with Enron, the market had said it was worth more than General Motors). CEO Gary Winnick cashed out early for $600 million, but the insiders did not share the bad news with other shareholders. Workers at telephone companies bought by Global Crossing had been compelled to accept its stock in their retirement plans. (Winnick bought a $60 million home in Bel Air, said to be the highest-priced single-family dwelling in America.) Lucent's stock price tanked with similar consequences for employees and shareholders, while executives sold $12 million in shares back to the failing company. (After running Lucent into the ground, CEO Richard McGinn left with an $11.3 million severance package.) There are many Enrons, as the lawyer said.

The disorder writ large by the Enron story is this regular plundering of ordinary Americans, who are saving on their own or who have accepted deferred wages in the form of future retirement benefits.

Major pension funds can and do sue for damages when they are defrauded, but this is obviously an impotent form of discipline. Labor Department officials have known the vulnerable spots in pension-fund protection for many years and regularly sent corrective amendments to Congress--ignored under both parties. In the financial world, the larceny is effectively decriminalized--culprits typically settle in cash with fines or settlements, without admitting guilt but promising not to do it again. If jailtime deters garden-variety crime, maybe it would be useful therapy for corporate and financial behavior.

The most important reform that could flow from these disasters is legislation that gives employees, union and nonunion, a voice and role in supervising their own pension funds as well as the growing 401(k) plans. In Enron's case, the employees who were not wiped out were sheet-metal workers at subsidiaries acquired by Enron whose union locals insisted on keeping their own separately managed pension funds. Labor-managed pension funds, with holdings of about $400 billion, are dwarfed by corporate-controlled funds, in which the future beneficiaries are frequently manipulated to enhance the company's bottom line. Yet pension funds supervised jointly by unions and management give better average benefits and broader coverage (despite a few scandals of their own). If pension boards included people whose own money is at stake, it could be a powerful enforcer of responsible

The corporate transgressions could not have occurred if the supposedly independent watchdogs in the system had not failed to execute their obligations. Wendy Gramm, wife of Senator Phil, the leading Congressional patron of banking's privileges, is an "independent" director of Enron and supposedly speaks for the broader interests of other stakeholders, from the employees to outside shareholders. Instead, she sold early too. With notable exceptions, the "independent" directors on most corporate boards are a well-known sham--typically handpicked by the CEO and loyal to him, even while serving on the executive compensation committees that ratify bloated CEO pay packages. The poster boy for this charade is Michael Eisner of Disney. As CEO, he must answer to a board of directors that includes the principal of his kids' elementary school, actor Sidney Poitier, the architect who designed Eisner's Aspen home and a university president whose school got a $1 million donation from Eisner. As Robert A.G. Monks and Nell Minow, leading critics of corporate governance, asked in one of their books: "Who is watching the watchers?"

Do not count on "independent" auditors, as Arthur Andersen vividly demonstrated at Enron. While previous scandals did not involve massive document-shredding, Andersen's behavior is actually typical among the Big Five accounting firms that monopolize commercial/financial auditing worldwide. Andersen already faces SEC investigation for its role in "Chainsaw Al" Dunlap's butchery of Sunbeam and has paid $110 million to settle Sunbeam investors' damage suits. A decade ago Andersen fronted for Charles Keating's notorious Lincoln Savings & Loan, which bilked the elderly and then collapsed at taxpayer expense--despite a prestigious seal of approval from Alan Greenspan (Keating went to prison; Greenspan became Federal Reserve Chairman). But why pick on Arthur Andersen? Ernst & Young paid out even more for "recklessly misrepresenting" the profit claims of Cendant Corporation--$335 million to the New York and California public-employee pension funds. Cendant itself has paid out $2.8 billion to injured investors, but hopes to recover some money by suing Ernst & Young. PriceWaterhouseCoopers handled the books at Lucent, accused of inflating profits by $679 million in 2000 and prompting yet another SEC investigation.

The corruption of customary auditing--and the fact that an industry-sponsored board sets the arcane accounting tricks for determining whether profits are real or fictitious--is driven partly by the Big Five's dual role as consultants and auditors. First they help a company set its business strategy, then they examine the books to see if management is telling the truth. This egregious conflict of interest should have been prohibited long ago, but the scandal has reached a ripeness that now calls for a more radical solution--the creation of public auditors, hired by government, paid by insurance fees levied on industry and completely insulated from private interests or politics. Actually, this isn't a very radical idea, since the government already exercises the same close scrutiny and supervision over commercial banks. Because that banking sector lost its primary role in lending during the past two decades, the same public auditing and supervisory protections should be extended to cover the unregulated money-market firms and funds that have displaced the bankers. Enron is unregulated, though it functioned like a giant financial house. So is GE Capital, a money pool much larger than all but a few commercial banks. Mutual funds and hedge funds are essentially free of government scrutiny. So are the exotic financial derivatives that Enron sold and that led to shocking breakdowns like the bankruptcy of Orange County, California.

The government failed too, mainly by going limp in its due diligence but also by withdrawing responsibility through legislative deregulation. The one brave exception was Arthur Levitt, Clinton's SEC commissioner, who gamely raised some of these questions, but without much effect because he was hammered by the industry and its Congressional cheerleaders. Corrupt accountants and investment bankers now have a friendlier commissioner at the SEC--lawyer Harvey Pitt, whose firm has represented Arthur Andersen, each of the Big Five and Ivan Boesky, whose fraud case was settled for $100 million. Pitt blames Arthur Levitt's inquiries for upsetting the accounting industry's self-regulation. Given his connections, Pitt should not just recuse himself from the Enron case--a crisis of legitimacy for the SEC--he should be compelled to resign. Similarly sympathetic cops are scattered throughout the regulatory agencies. At the Federal Reserve, a new governor, Mark Olson, headed "regulatory consulting" in Ernst & Young's Washington office. Another new Fed governor, Memphis banker Susan Bies, has been an active opponent of strengthening derivatives regulation.

But the heart of the scandal resides in New York, not Washington. The major houses of Wall Street play a double game with their customers--doing investment deals with companies in their private offices while their stock analysts are out front whipping up enthusiasm for the same companies' stocks. Think of Goldman Sachs still advising a "buy" on Enron shares last fall, even as the company abruptly revealed a $1.2 billion erasure in shareholder equity. Goldman earned $69 million from Enron underwriting in recent years, the leader among the $323 million Enron paid Wall Street firms. Think of the young Henry Blodget, now famous as Merrill Lynch's never-say-sell tout for the same Nasdaq clients whose fees helped fuel Blodget's $5-million-a-year income (Merrill has begun settling investor lawsuits in cash). Think of Mary Meeker at Morgan Stanley Dean Witter, dubbed the "Queen of the Net" for pumping up Internet firms while Morgan Stanley was taking in $480 million in fees on Internet IPOs. The conflict is not exactly new but has reached staggering dimensions. The brokers whose stock tips you can trust are the ones who don't offer any.

The larger and far more dangerous conflict of interest lies in the convergence of government-insured commercial banks and the investment banks, because this marriage has the potential not only to burn investors but to shake the financial system and entire economy. If the newly created and top-heavy mega-banks get in trouble, their friends in power may arrange another cozy government bailout for those it deems "too big to fail." The banking convergence, slyly under way for years, was formally legalized in the 1999 repeal of Glass-Steagall, the New Deal law that separated the two sectors to eliminate the very kind of self-dealing that the Enron case suggests may be threatening again. We don't yet know how much damage has been done to the banking system, but its losses seem to grow with each new revelation. JP Morgan Chase and Citigroup provided billions to Enron while also stage-managing its huge investment deals around the world and arranging a fire-sale buyout by Dynergy that failed (Morgan also played financial backstop for Enron's various kinds of trading transactions). Instead of backing off and demanding more prudent management, these two banks lent additional billions during Enron's final days, perhaps trying to save their own positions (we don't yet know). Instead of warning other banks of the rising dangers, Chase and Citi led the happy talk. Both have syndicated many billions in bank loans to other commercial banks--a rich fee-generating business that allows them to pass the risks on to others (federal regulators report that the volume of "adversely classified" syndicated loans has risen to 8 percent, tripling the problem loans since 1998). These facts may help explain why former Treasury Secretary Robert Rubin, now of Citigroup, called an old friend at Treasury and suggested federal intervention. Rubin's bank has a large and growing hole in its own loan portfolio. Could Treasury please pressure the credit-rating agencies, Rubin asked, not to downgrade Enron? Though he styles himself as a high-minded public servant, Rubin was trying to save his own ass. Indeed, he called the very Treasury official who, as an officer of the New York Federal Reserve back in 1998, had engineered the cozy bailout of Long Term Capital Management--the failing hedge fund that Citigroup, Merrill and other major financial houses had financed. Gentlemanly solicitude for big boys who get in trouble connects Washington with Wall Street and spans both political parties.

In this new world of laissez-faire, when things go blooey, the government itself is exposed to risk alongside hapless investors--if the commercial banks are lending federally insured deposits along with their own investment plays or are exercising what amounts to an equity position in the failed management. This is allegedly forbidden by "firewalls" within the mega-banks, but when a banker gets in deep enough trouble, he may be tempted to use the creative accounting needed to slip around firewalls. "A bank that has equity shares in a company that goes south can no longer make neutral, objective judgments about when to cut off credit," said Tom Schlesinger, executive director of the Financial Markets Center. "The rationale for repealing Glass-Steagall was that it would create more diversified banks and therefore more stability. What I see in these mega-banks is not diversification but more concentration of risk, which puts the taxpayers on the hook. It also creates a financial sector much less responsive to the real needs of the economy."

The fallacies of our era are on the table now, visible for all to see, but the follies are unlikely to be challenged promptly--not without great political agitation. The other obvious deformity exposed by Enron is the insidious corruption of democracy by political money. The routine buying of politicians, federal regulators and laws does not constitute a go-to-jail scandal since it all appears to be legal. But we do have a strong new brief for enacting campaign finance reform that is real. The market ideology has produced the best government that money can buy. The looting is unlikely to end so long as democracy is for sale.

Deregulation - 2002 - Page 6