So far, 2002 is turning out to be a bust. We haven’t found bin Laden yet. Argentina has collapsed and Latin America seems poised to follow. The President of Harvard University has been forced to capitulate to his Department of Racial Opportunism d.b.a. the Afro-American Studies Department.
And then there’s Enron–where most of the focus so far has been on “Who’s to blame?” rather than “What can we (the U.S.) or anyone do about it?”
Actually, that’s not quite accurate. In the case of Enron, much of the focus, certainly in the media, seems to be “Is there any way we can blame this on George W. Bush?” In other words, “How can we turn Enron into W’s Teapot Dome?”
The New York Times has led the yelping pack. On Monday, Jan. 14 alone, two front-page stories, two Op-Ed columns. I don’t recall the Long-Term Capital Management “crisis,” a Clinton-Greenspan bubble phenomenon by any definition, being given the headline attention that Enron has gotten, with the emphasis on the possibility of dark connections between the big energy-trading company and the White House. Bob Herbert, who clearly hasn’t got the slightest idea what’s going on, keeps saying that Enron shaped the Bush energy policy and herein lies the problem. But Enron got into trouble trading stuff like bandwidth, prompting me to ask, “Hey, Bob, where’s the B.T.U.’s?”
Moreover, when the big banks and investment-banking houses began to panic over LTCM and called Washington, they got action: a Fed- cum -Treasury-encouraged and implicitly backed private-sector (sic) restructuring. This time, Wall Street (in the form of then-Treasury secretary, now Citigroup executive committee chairman Robert Rubin) again called the Fed to ask the central bank’s assistance in this second impending failure of a big derivatives firm (from a substantive business viewpoint, there’s little to differentiate Enron and LTCM). The point of Mr. Rubin’s call had to be what I interpret as tantamount to a conspiracy to commit mail fraud at the highest level: the enlistment of Uncle Sam in the subornation of out-of-court perjury by the credit-rating agencies, by persuading them to “rethink” their imminent, fatal downgrade of Enron’s paper.
But this time the Street was told to go fly a kite. At this point, it appears there will be no federal bailout, no Penn Square/Continental Illinois, Chrysler, S.&L.’s, LTCM, Mexico once, Mexico twice, not even the private sector equivalent of the Bush-O’Neill Band-Aid for Argentina. This correspondent regards the deal offered to the airlines in the wake of 9/11 as more “emergency disaster relief” than bailout. For Enron, why should there be a bailout? There was no threat to any “system,” as the Fed alleged for LTCM, no likelihood of “contagion.” Accordingly, no handout. Nor have I seen any persuasive evidence that anyone in the administration did Enron any special favors, disbursed any public capital to it, sold it any federal lands or pork on the cheap under the table.
Which argues strongly that the present administration cannot be held accountable for Enron, much as many people would like to see that be the case. This is not to say that W, as Governor of Texas, may not have facilitated certain intrastate deregulatory measures that can be said to have helped Enron inside the Lone Star State.
As I’ve written in this space before, Enron is the product of the Houston business culture, which at its worst is capable of an arrogance and hubris that guarantees disaster. This culture was splendidly anatomized by Texas Monthly writer Mimi Swartz in a Times Op-Ed piece that appeared on Christmas Day and which no one on 43rd Street appears to have read. Ms. Swartz’s views corroborate my own observations going back to 1963, when as a junior associate at Lehman Brothers I accompanied a partner, the late James W. Glanville, on a business trip to Houston and began a quarter-century acquaintanceship with the River Oaks-Coronado Club-La Mar Hotel coterie that decides who gets what down there.
The Enron scandal is, as noted in this space earlier, a typical example of that stage of competitive evolution at which share of market, and/or the anticipated earnings growth essential to propping up stock prices, can only be maintained by giving the arithmetic native to a given line of business a bit of help. Since–in an uncolluded market–trades and commissions are priced competitively, the only way to do this unilaterally is to crank up the leverage and start trading for one’s own account. It is through this transition, from commission agent to principal, that financial empires are more often than not brought low.
To keep the leverage flowing, however, you need to keep any potential messiness off your balance sheet. By “messiness” I mean contingent liabilities arising from a fall in the value of commodities you now own, an increase in interest rates, or direct or indirect indebtedness, including guarantees, that will get the wind up at rating agencies and credit providers. The trick is to find ways that you can sell your accountants on, the accountants being the investing and lending public’s last line of defense against cooked books. It’s a shaky line in the best of times. I once served on the board of a company whose previous management had actually deceived its “public” accountants by retagging and moving the finished-goods inventory literally overnight from one facility to another in order to get it counted twice for “cost of goods sold” purposes. The accountants never twigged.
If you have a major book-cooking exercise in mind, however, you can’t depend on ignorance or opacity. You’ll want to get yourself a firm of accountants you can “work with,” as they say in Houston.
Nowadays, that’s not hard. Most of the big accounting firms have become ethically pliable over the past 20 years, as the preponderance of their revenue has shifted from auditing fees to consulting income. Peter looks the other way; Paul makes out like a bandit; they split the take.
Andersen Accounting was clearly a firm Enron could “work with.” Anxious for the business. Don’t forget that Andersen Accounting is one-half of an extremely acrimonious split-up of the old Arthur Andersen & Co. The bean-counters were out to strut their stuff, maybe make enough to sponsor their own TV golf tournament like the glamourous folks over at Andersen Consulting.
What appears to have taken place is that a bunch of off-balance-sheet partnerships were created into which Enron could shove a mass of trading activities which carried huge contingent liabilities. As long as a small portion of these partnerships’ equity was owned by third parties, the accountants permitted Enron to leave them off its financial statements. Specious but not–I suppose–technically illegal. None of this relieved Enron of its ultimate liability to make good the indebtedness of these partnerships. This problem was allowed to be kept off the books, I’m guessing, by some sort of arrangement that permitted Enron to meet these liabilities with stock instead of cash, provided the stock stayed at a certain level or above . When the stock began to tank, the game was over.
What all this adds up to may be a massive securities fraud. Everyone involved, whether intentionally or out of sheer cupidity or stupidity, must pay–in cash and with their jobs and reputation. Enron’s officers should be stripped of their insider stock profits and go to jail; its directors should be judicially censured, possibly bankrupted. The stockholders of the big banks that got into this mess should demand that heads roll, and not the heads of clerks only, but “players” like J.P.Morgan vice chairman Marc Shapiro, the Texas Commerce Bank (red flag!) alumnus Enron “worked with” at the big New York bank. Andersen, whose admission of document-burning sounds like a prima facie confession, should be compelled to pay 50 percent of its profits for the next 25 years into a fund for the relief of Enron’s 401(k) victims and others similarly defrauded. Where Wall Street can be shown to be complicit, Wall Street must also ante up. Same for the “inside” law firms who sanctified the book-cooking recipes. But not a nickel of public capital–taxpayer money, taxpayer full faith and credit–should be disbursed.
The administration should take the lead in this. President Bush should appoint a special commission to look into Enron (how about Rudolph Giuliani, who brought Milken & Boesky to book, as chairperson?) and prosecute where justified, as he should have already sent a commission of top smart people to Buenos Aires to see what can be done about and for Argentina. He should take the initiative back from the chattering classes and from politician publicity hogs like Sen. Joseph Lieberman and Rep. Henry Waxman who–being out of their depth in muddy waters–can be depended upon to further blear the lens of public understanding as they thrash about. Which is not to say that Sen. Lieberman doesn’t have a point when he criticizes Treasury Secretary O’Neill’s market-driven endorsement of the Enron collapse as “cold-blooded … of the 18th century, not of the 21st.” If this is a victory for free-market economics, it is as Pyrrhic a win as I can recall. A few more triumphs like this and Hayek, Schumpeter et al. will be out of business!
Finally, I think the President must make forthrightly clear, and not merely inferentially, through the denials of subordinates, where he stands. He has got to show the electorate that he does not view the White House as simply an enhanced or expanded version of the state capitol in Austin. Mr. Bush might do well to consult Henry IV , part 2, act 5, scene 5. He may even know it, since I believe they still taught Shakespeare at Yale when he was there.
It is the passage in which Prince Hal, now King Henry V, turns away from his old companion Falstaff. In what is as wrenching a scene as I know in all literature, the new king declares: “Presume not that I am the thing I was; / For God doth know, so shall the world perceive, / That I have turned away my former self; / So will I those that kept me company.”
Texans are loyal, often to a fault. This won’t be easy. But it goes with the territory. I say to Mr. Bush: You wanted to be President, so be one!