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Deregulation - December, 2001 - Page Two
Enron's Connections With BushSan Jose Mercury News – by Molly Ivins – December 15, 2001
HAIL and farewell, o Enron! What a flameout. The Establishment media, sucking its collective thumb with unwonted solemnity, is treating us to meditations on two themes: ``How the mighty have fallen,'' and, ``Who would have thunk it?'' Pardon me while I snort, in lieu of ruder noises, and offer two themes of my own: ``What took so long?'' and, ``Anyone with an ounce of common sense.''
If you want to know what this story is about, pretend Bill Clinton is still president. Pretend Clinton's long-time, all-time biggest campaign contributor, a guy for whom Clinton has carried water for over the years, a guy with unparalleled ``access,'' a shaper of policy -- imagine that this guy's worldwide empire has tumbled into bankruptcy in just three months amid cascading reports of lies, monumental accounting errors, evasions, iffy financial statements, insider deals, a board of directors rife with conflicts of interest, top executives bailing out with millions while regular employees see their life savings shrink to nothing -- imagine all this back in the day of Bill Clinton. We'd have four congressional investigations, three special prosecutors, two impeachment inquiries and a partridge in a pear tree by now. Republicans would be drumming their heels on the floor in full tantrum.
But this is not President Clinton, it is President Bush -- so of course different standards must apply. The fact that Ken Lay, Enron's chairman, has been Bush's chief money man since he first went into politics is mentioned only in passing. The media don't want to be impolite.
The main problem with Enron is that it has never produced much of anything in the way of either goods or services; it has not added a single widget to the world widget supply. Enron is in the business of ``financializing,'' making markets, trading in wholesale electricity, water, data storage, fiber-optics, just about anything.
Enron started as a gas pipeline company that went into trading natural gas, and even then the company's critics claimed Enron was making profits by stoking volatility in gas prices. The same charge showed up again in spades with the newly deregulated electricity markets. Enron had lobbied for utility deregulation relentlessly, formidably and very expensively at both the state and national levels. The company seemed to spend more time influencing government than doing business.
Just a few spiffy eye-openers on Enron's connections:
Connect the Enron Dots to BushLos Angeles Times - by Robert Scheer - December 14, 2001
Enron is Whitewater in spades. This isn't just some rinky-dink land investment like the one dredged up by right-wing enemies to haunt the Clinton White House--but rather it has the makings of the greatest presidential scandal since the Teapot Dome.
The Bush administration has a long and intimate relationship with Enron, whose much-discredited chairman, Kenneth L. Lay, was a primary financial backer of George W. Bush's rise to the presidency.
It was Enron that provided the model for the administration's trickle-down attempt to revive an economy that's been in steep decline during Bush's tenure. That model gives the fat-cat corporate hotshots everything they want in return for bankrolling political campaigns. Not to worry about the rest of us because, hey, what's good for Enron is good for America.
That it hasn't been is now painfully clear.
What did Enron get in return for its contributions? It got its way on deregulation, for one thing. Remember when the administration refused to assist California and other states during the energy crisis, and consumers paid the steep price?
So greedy was Enron that it locked its own workers into a pension plan based on inflated company stock values and suspect hidden partnerships, while the top leadership led by Lay made out like bandits.
Bush should be called as a witness in the congressional hearings scheduled to unravel this mess. One thing that should come up in the hearings is then-Gov. Bush's October 1997 telephone call on behalf of Lay to then-Pennsylvania Gov. Tom Ridge to help Enron crack into the tightly regulated Pennsylvania electricity market. "I called George W. to kind of tell him what was going on," Lay told the New York Times about the 1997 phone call, "and I said that it would be very helpful to Enron, which is obviously a large company in the state of Texas, if he could just call the governor [of Pennsylvania] and tell him [Enron] is a serious company, this is a professional company, a good company."
Since we now know Enron lacked those virtues, it's clear Bush was used to sell a bill of goods to the unsuspecting Pennsylvania folks.
That Lay was instrumental in Bush's rise to the presidency is indisputable. Since 1993, Lay and top Enron executives donated nearly $2 million to Bush. Lay also personally donated $326,000 in soft money to the Republican Party in the three years prior to Bush's presidential bid, and he was one of the Republican "pioneers" who raised $100,000 in smaller contributions for Bush. Lay's wife donated $100,000 for inauguration festivities. As governor, Bush did what Enron wanted, cutting taxes and deregulating utilities. The deregulation ideology, which George W. long had adopted as gospel, allowed dubious bookkeeping and other acts of chicanery that shocked Wall Street and drove a $60-billion company, seventh on the Fortune 500 list, into bankruptcy.
This emerging scandal makes Whitewater seem puny in comparison; clearly there ought to be at least as aggressive a congressional inquiry into the connection between the Bush administration and the Enron debacle. Facts must be revealed, beginning with the content of Lay's private meeting with Vice President Dick Cheney to create the administration's energy policy.
What was Lay's role in the sudden replacement of Curtis Hebert Jr. as Federal Energy Regulatory Commission chairman? As the New York Times reported, Hebert "had barely settled into his new job this year when he had an unsettling telephone conversation with Kenneth L. Lay, [in which Lay] prodded him to back ... a faster pace in opening up access to the electricity transmission grid to companies like Enron." Lay admits making the call but in an unctuous defense of his influence peddling said, "The final decision on [Hebert's job] was going to be the president's, certainly not ours." Soon after, Hebert was replaced by Texan Pat Wood, who was favored by Lay.
Other questions: Was there any conflict of interest in the roles played by key Bush aides? Political advisor Karl Rove owned as much as $250,000 in Enron stock. And economic advisor Larry Lindsay and Trade Representative Robert B. Zoellick went straight from Enron's payroll to their federal jobs.
There are other Enron alum in the administration, including Army Secretary Thomas White Jr., who, as an Enron executive, held stock and options totaling $50 million to $100 million.
We have a right to know whether the Enron alums in the administration were tipped off in time to bail out with profit the way Lay and the other Enron top execs did, while their workers and stockholders--and eventually U.S. taxpayers--are being left holding the suddenly empty bag.
Cause of Death: MistrustWashington Post - by Peter Behr - December 14, 2001
Enron Corp., weakened by billions of dollars spent on bad investments outside its traditional energy markets, finally collapsed because its customers and investors no longer trusted its word, according to the head of the company that abandoned a rescue bid for the onetime energy giant.
Chuck Watson, chairman and chief executive of Dynegy Inc., said in an interview that he, too, lost confidence in Enron, which filed the largest bankruptcy petition in American history last week.
"This company was questioned all along, from 90 bucks a share to zero," Watson said, referring to the downward plunge of Enron's stock from its high last fall. "Every time they were challenged, they were not up to the task and they revealed something that was not revealed before."
Many of the questions were about what Watson called Enron's use of "creative financing tools" to try to move debt from its poorly performing investments -- which included water and fiber-optics-cable trading and overseas power plants -- off its balance sheet and into controversial partnerships.
When Enron disclosed in October that the shift of assets to the partnerships had violated normal accounting rules, leading to a $586 million overstatement of its earnings over the past four years, its credibility was fatally compromised, investors and traders agree.
"When people lose confidence and they don't believe you and they question your integrity, they question your character," Watson said. "You're toast."
Auditor Tells Panel Firm Must ChangeThe Wall Street Journal - - December 13, 2001
WASHINGTON, Dec. 12 — The head of Enron Corp.’s longtime auditing firm told Congress the tragedy of the company’s collapse shows that the accounting firm and the entire profession will have to change.
“What happened at Enron is a tragedy on many levels,” Joseph Berardino, the chief executive of Arthur Andersen LLP, said Wednesday in testimony prepared for two House Financial Services subcommittees. “Andersen will have to change ... the accounting profession will have to reform itself. Our system of regulation and discipline will have to be improved.”
Meanwhile, at a creditor’s meeting in New York Wednesday, Enron executives said they plan to maximize value for creditors and salvage what was once the nation’s largest energy-trading company. The company said that it aims to reduce its management by one third by year’s end and that it hopes to reorganize within 12 months.
In Washington, Robert Herdman, chief accountant of the Securities and Exchange Commission, which is investigating Enron, said in his prepared testimony that a recent spate of accounting irregularities by big corporations “may shake investors’ confidence in our system of financial reporting and our capital markets.”
Congress is investigating the failure of Enron, whose swift downfall left countless investors burned, thousands of employees out of work with decimated retirement savings and the once high-flying company in federal bankruptcy court.
At the House hearing, lawmakers called the Enron debacle the biggest corporate failure in recent history and heaped criticism on its executives for enriching themselves while running the company into the ground. Company officials were “just having too much fun,” said Rep. Richard Baker (R., La.), chairman of the Financial Services subcommittee on capital markets. “We must make the careful determination of whether we are dealing with a case of outright fraud and violation of existing securities laws.”
The huge energy-trading company declined to send any officials to the congressional hearing. Enron’s former chief financial officer, the lead architect of complex partnerships that are under government scrutiny, scheduled a New York news conference for later in the day.
Amid the company’s strife, nearly 600 employees deemed critical to its operations received more than $100 million in bonuses last month as Enron faced a merger that unraveled and then bankruptcy.
The SEC is examining Enron’s use of questionable partnerships that allowed the company to keep some $500 million in debt off its books, and it has issued subpoenas to Andersen related to its auditing of Enron’s accounts. Enron, which only months ago was the nation’s seventh-biggest in revenue, has acknowledged that it overstated profits for four years…
Enron Officials Avoid CongressAssociated Press – by Marcy Gordon - December 13, 2001
(12/11/01) - Enron Corp., whose stunning collapse is being investigated by federal regulators and Congress, is declining to send any officials to a hearing Wednesday by two House panels. And investigators for another committee are trying to locate Enron's former chief financial officer.
``I don't think they want to, or are not prepared to answer some very pointed questions about what went wrong,'' Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee, said Tuesday in a telephone interview.
The hearing is being conducted by two subcommittees of the panel. Joseph Berardino, chief executive of Big Five accounting firm Arthur Andersen LLP, which was Enron's longtime auditor, and Robert Herdman, chief accountant of the Securities and Exchange Commission, are appearing as requested by the lawmakers.
Asked whether the committee planned to issue a subpoena to Enron officials to compel an appearance, Oxley said that would not happen immediately. However, he added, ``We can certainly contemplate that at a later date.'' Additional hearings are planned on the subject.
The House Energy and Commerce Committee, which is conducting its own probe, has given Enron's former chief financial officer, Andrew Fastow, until Dec. 21 to meet with committee investigators or face a subpoena to testify at a hearing. ``Quite simply, he cannot be found,'' said Ken Johnson, a spokesman for Rep. Billy Tauzin, R-La., the panel's chairman. ``We are troubled by his unresponsiveness.''
Committee investigators sent a letter to Fastow's attorney in Houston. A Fastow lawyer recently denied rumors that his client had fled the country, saying Fastow is in the United States, though he rarely appears in public because he and his family have received death threats since his ouster from Enron in October. Wednesday's inquiry is designed to help Congress and the public ``understand as best we can what structurally went wrong, what mistakes were made and what mistakes were not noticed,'' Oxley said. Subjects to be examined include accounting practices by the company and Andersen, and potential securities law violations, and Enron's handling of its employees' 401(k) retirement investment plans, he noted.
At Enron's headquarters in Houston, spokeswoman Karen Denne said neither Chairman and Chief Executive Kenneth Lay, who was invited by the lawmakers, nor any other Enron representatives will testify Wednesday.
``We don't believe we would be able to adequately serve the interest of the committee while at the same time trying to serve the interest of our credit shareholders and our current and former employees,'' Denne said.
Rep. Bernard Sanders, I-Vt., a member of the Financial Services Committee, said he wasn't surprised that Enron's chief was ``too cowardly'' to face a congressional hearing.
``The people who have run Enron are crooks who have ripped off American consumers, they ripped off their employees and they're now in line for a welfare payment'' from tax breaks in the economic stimulus package before Congress, Sanders said in an interview.
The SEC is examining Enron's use of questionable partnerships that allowed the energy-trading company to keep half a billion dollars in debt off its books, and has issued subpoenas to Andersen related to its auditing of Enron's accounts. The company, which only months ago was the nation's seventh-biggest in revenue, has acknowledged that it overstated profits for four years.
Enron filed for bankruptcy protection from creditors on Dec. 2, following a six-week downward spiral, and also filed a $10 billion lawsuit against smaller rival Dynegy Inc. for scrapping a proposed buyout. It was one of the largest corporate bankruptcies in history.
The company laid off about 4,000 of the 7,500 employees at its headquarters the day after filing for bankruptcy with a promise that each would receive a $4,500 severance payment. At the same time, nearly 600 employees deemed critical to running its prized energy trading business received more than $100 million in bonuses last month.
Enron also is under investigation by the Justice Department and by the Labor Department for its handling of its employees' retirement benefit plans. Before filing its bankruptcy petition, Enron prohibited its workers for several weeks from selling stock held in voluntary retirement plans while the share price plunged.
Laissez Not FairThe New York Times – by Paul Krugman - December 13, 2001
Last week the Web site SatireWire.com ran a mock news story: "Enron Admits It's Really Argentina." It was pretty funny, though quite unfair — unfair, that is, to Argentina.
And yet the satire was more on point than its authors realized. Not long ago Argentina, like Enron, was a darling of the financial community. And like Enron, Argentina was held up as a role model, to a large extent by the same people — Argentina's monetary system, in particular, was lauded in the pages of Forbes and The Wall Street Journal, and feted at libertarian think tanks.
Why did the same people tend to admire Enron and Argentina? Because in their different ways, both the company and the country tried to turn back the clock to 1913. Both were experiments testing the libertarian credo: that the great expansion in government's role between the two world wars was unwarranted. Both were supposed to demonstrate that government activism is unnecessary, and that radical laissez-faire works.
The Enron experiment was, in essence, about doing away with regulation — regulation of prices, regulation of financial trading. Most of these regulations had their origin in fear that consumers, workers and investors would be exploited by those whom Theodore Roosevelt called "malefactors of great wealth."
Enron used its political clout to create what one of its own executives called a "regulatory black hole" in which it could operate freely. Just last December Senator Phil Gramm pushed through one-eyed-bearded- man-with-a-limp legislation that essentially exempted Enron (whose board of directors — and audit committee — included one Wendy Gramm) from the rules that govern other commodity traders. Readers may recall that Senator Gramm also helped the banking industry block measures to curb money laundering.
What Enron's admirers believed was that experience would demonstrate fears about unregulated markets to be unjustified. Unfortunately, what disappeared into that black hole was not bureaucratic clutter but billions of hard-earned dollars, including those of Enron's own employees. Or maybe it wasn't a black hole, but rather a wormhole, and those billions of dollars emerged in some other universe — say, overseas bank accounts. For it turns out that malefactors of great wealth do exist, and some of them were running Enron.
If Enron was an experiment in doing away with regulatory activism, Argentina was an experiment in doing away with monetary activism. After generations of mismanagement, Argentina returned to a colonial-era monetary system, a "currency board," which took government out of the loop. No more lurching from crisis to crisis, no more disruptive government interventions: Argentina would provide sound money, and leave the rest up to the free market.
Though Argentina attracted the usual opportunists, I'm pretty sure that both the creators of its monetary system and many of its admirers sincerely believed that they were working in everyone's interest. (Contrary to what some may have inferred from a previous column, no staff members at the Cato Institute are in the currency-regime consulting business.) Alas, these particular good intentions paved the road to hell. Like Enron's employees, Argentina's citizens are bewildered by their reversal of fortune, wondering what happened to their economic success story.
In the last few weeks, the bitter irony of Argentina's situation has become almost too much to bear. The country's monetary system was introduced in the name of laissez-faire. Now, in its desperate efforts to save that system from imminent collapse, the Argentine government has imposed drastic restrictions on economic freedom. Most notably, residents are now limited to withdrawing $1,000 per month from their bank accounts. Volkswagen is running ads in Argentina that declare, "At least when you put your money in the garage you can take it out whenever you want."
Now don't get me wrong. I'm not one of those people who think that markets are evil, that the profit motive is always wrong. On the contrary, I believe that markets are very good things indeed. But the great economic lesson of the 20th century was that to work, a market system needs a little help from the government: regulations to prevent abuses, active monetary policy to fight recessions. The twin debacles in Houston and Buenos Aires demonstrate that this great lesson has not lost its relevance.
Electricity Deregulation Hurts ConsumersPublic Citizen - www.citizen.org – December 13, 2001
WASHINGTON, D.C. -- An electricity bill scheduled for hearings in the House on Wednesday and Thursday would replace consumer protections with unregulated corporate control over energy markets, potentially leading to the kind of price-gouging that plagued California consumers after deregulation, Public Citizen said today.
No consumer groups were scheduled to testify at the hearings before the House Energy and Commerce Committee's Subcommittee on Energy and Air Quality, chaired by Rep. Joe Barton (R-Texas). Public Citizen sent a written request to Barton on December 5.
"It is wrong that only supporters of electricity deregulation - the Federal Energy Regulatory Commission (FERC) and energy corporations - were invited to testify, but consumers were not," said Tyson Slocum, research director for Public Citizen's Critical Mass Energy and Environment Program. "Millions of consumers are paying higher prices because of deregulation's failure in California, Montana and other states. Consumers have a right to have their voices heard in this important debate."
Barton's bill ends FERC's authority to review utility mergers and power plant sales, in addition to repealing the Public Utility Holding Company Act.
"After the California debacle, the last thing consumers need is for Congress to remove controls over market power ― but that's what Barton does by repealing PUHCA and ending FERC's merger review authority," said Tom "Smitty" Smith, director of Public Citizen's Texas office. "Removing these important consumer protections allows greed to go unrestrained, resulting in skyrocketing prices and energy company bankruptcies. As we begin deregulation in Texas, consumers outside urban areas don't have much choice - and only one or two companies are serving them. If we remove the merger and anti-trust protections, we will have no controls to prevent price-gouging."
Barton's legislation also limits state regulatory oversight by transferring state jurisdiction of transmission lines to FERC. In addition, it strips electricity markets of transparency and accountability by forcing the creation of Regional Transmission Organizations, ending the ability of state regulators to regulate transmission.
"Rep. Barton promises his constituents that he supports private property rights," said Katy Hubener, director of a Dallas-based air quality group, the Blue Skies Alliance. "But his bill eliminates the ability of property owners to protest transmission line projects in their neighborhood. Because Texas doesn't fall under FERC jurisdiction, our citizens have the right to protest such projects. By transferring authority away from other state and local officials, Barton is saying, 'What's good for Texas isn't good for America.'"
California's Fading Power CrisisCox News Service – by Bob Keefe – December 10, 2001
Across the country, executives and government leaders alike still mock the state for its bungled power deregulation program, and even inside the state, the fiasco still stings.
"I think it's fair to say deregulation has been the biggest disappointment in the history of electric power," said Freeman, who served as energy adviser to President Carter and has run power agencies in Texas, Tennessee and New York. From 1986 to 1990, he was general manager of the Lower Colorado River Authority in Austin, Texas.
"Nuclear power was a disappointment too, but at least that came over a number of years," he said.
"This deregulation stuff turned out to be just the exact opposite of what everybody said it would be."