Enron, WorldCom, Xerox, who will be next? One by one some of the world's largest companies have collapsed like castles made of cards, revealing astronomical debts. And overnight tens of thousands of workers have found themselves without a job as a result.
Officially this is blamed on "lack of transparency", "fiddles" or even "fraud"! However these are nothing but bad excuses designed to avoid having to blame capitalism itself.
For the tricks used by these companies to dress deficits into profits are, and have always been, common practice. And which shareholder, accountant or auditor would object to such tricks as long as dividends and fees keep flowing and share prices keep going up? When everyone gambles on ever-rising profits, who among them would criticise "gimmicks" that can help share prices to increase even faster?
The real problems started with the downward slide of the so-called "high-tech" shares, which began in the second half of the year 2000. When the going gets tough on the stock markets, lenders and shareholders begin to look at the small print with suspicion. Suddenly the past "good financial practices" were exposed as fiddles or fraud by those whose capital was at risk. And once the apparent affluence had gone, what remained were the unsavoury leftovers of the "high- tech" speculative bubble.
The truth is that to one degree or another most, if not all the companies involved in this frantic speculation, have the same problems. Many will collapse (or have already collapsed) with the bubble, a few will survive. This is why the claim that "it cannot happen" (in Britain) is nonsense. In fact it has already happened with Marconi, BT, Invensys, for example - only the scale was different.
The past few weeks show, however, that these US companies are big enough to rock share markets across the world when they collapse. The "high-tech" speculative bubble fizzled out relatively slowly over many months, without a brutal crash. But its ripple effect on such companies could potentially trigger such a crash. And this is a real danger in the present situation.
The article published here first appeared in the American Trotskyist journal Class Struggle, published by the group Spark. Although it deals specifically with the case of Enron, much of it is applicable to the other collapsed US companies.
Enron declared bankruptcy on December 2, 2001. Six months earlier, Enron had been listed number 7 on the Fortune 500, and its executives were speaking practically anywhere, anytime about the glories of the "free market." Enron itself was singled out as the harbinger of the future, the company which had turned the internet into a commodity marketplace and which had led the way in turning a profit on buying and selling, practically eliminating production of commodities. Employee benefits - and particularly, their pension money which sat in a so-called "401k" plan rather than a traditional pension account - were held up as the symbol of the coming of a new age of "popular capitalism": with every worker a stock-owner. Just a year before, almost to the day, Enron's top executives were making plans for the big inauguration gala they were organising to welcome their man into the White House, having provided a large chunk of money not only for George W. Bush's campaign, but also for his appeals in the Florida recount. Enron's top man, Kenneth Lay, and "W" went way back, being long time buddies, with close financial and political ties. Enron was riding high, the highest flyer among a new generation of high-flyers.
With the bankruptcy, the largest ever in US history, Enron and its executives were suddenly in free-fall and Enron employees discovered that the money they had counted on for retirement had disappeared. What has happened since has provided a small glimpse of the smoke and mirrors Enron had used in its meteoric rise: among other things, at least 2832 subsidiaries, used to hide Enron's growing debt, 874 of which were offshore companies, through which billions of dollars were funnelled into the outer space of Caribbean tax havens; manipulation of stock, electric power, and natural gas prices; very, very close ties to the Texas and federal regulators charged with overseeing activities; and, finally, large contributions to vast numbers of politicians (at least half of the current government representatives and senators received donations from Enron or its executives).
Almost as soon as bankruptcy was declared, there came the inevitable comparisons to the 1920s "Teapot Dome" scandal and to the electric power pyramid schemes of the same period. When the "Teapot Dome" scandal broke, it revealed cronyism and corruption linking the highest levels of government and the oil industry - government land with vast oil reserves was handed over for a song to the oil industry in exchange for "gifts" from that same industry bestowed upon members of the Warren G Harding administration, including Harding himself. The "pyramid" schemes, by which the privately-owned electric power companies took over public utilities and then created layer upon layer of fictitious subsidiaries to drain off large sums of money, ultimately led to spectacular bankruptcies too. Those bankruptcies, which pulled after them bankruptcies of big financial banks, contributed to the 1929 collapse. On this point, all the commentators hasten to remark that there is little to worry about today - although, if truth be told, the Enron affair certainly does exhibit remarkable similarities to the speculative waves which ended in the crash of October 1929.
A two-bit gas pipeline turns into a billion dollar gusher
Enron's meteoric rise ran parallel to the meteoric rise in the price of electric power in California, starting in 1997, and the two were inextricably connected. The groundwork for both, however, was laid in Texas - or Washington, when the Bush clan occupied the national seats of power. Up until 1992, Enron had been a rather insignificant Texas pipeline company, which also owned a few electric power generating facilities. But the 1992 Energy Policy Act, pushed by the first President Bush, among other things, forced utility companies to get rid of most of their power producing plants, thus forcing them into the open marketplace to shop for electric power. This did not bring Enron to establish more electric power production facilities; in fact, Enron dumped the few domestic facilities it had and transformed itself, instead, into a commodities dealer specialising in the buying and selling of natural gas and electric energy. And it began to establish subsidiaries - which also bought and sold power. This was important because, once the markets were opened up by deregulation, Enron and other companies like it moved in to buy and sell power - and buy it and sell it again, and again, and again, pushing up the price with each trade. In early 1993, Wendy Gramm, then head of the US Commodity Futures Trading Commission, issued a ruling which exempted the kind of trading Enron was doing from government oversight. Coincidentally, when Wendy Gramm, who is also the wife of Texas Senator Phil Gramm, resigned from the Commodity Commission only five days later, she was immediately given a spot on Enron's Board of Directors.
Helped along greatly by the Bush family, father and son, and the Gramm family, husband and wife, Enron was ready to move up to the big league. Over the next five years, it carried on a campaign to get the states to deregulate their electric power industry. Bush junior, having become governor of Texas, began to push other Republican governors to fall in line: California, Pennsylvania, Tennessee and Texas started the ball rolling, but other states soon followed. In the four years between 1997 and 2000, a total of 24 states deregulated their electric power utilities. Enron, according to all accounts, should get the credit for this incredibly rapid change. Using the entrée that the Bush and Gramm families gave Enron, it handed out nearly $2m in contributions to more than 700 candidates in 28 states, the same politicians who then pushed through energy deregulation, opening up markets to companies like Enron. Enron also organised lobbying efforts, including with public advertisements promising lower prices when deregulation brought back competition.
All the rest is history. Not only did the prices not go down, they went sky-high - as Enron bet they would. One piece of information that has now come out relates to Enron's buying patterns during the period leading up to the price "spikes" in California. Expecting that prices would go up, Enron signed contracts to buy way beyond what it needed for its immediate trading needs - but at the low prices then prevailing in the early part of 2000. Enron's traders did the same thing with natural gas. The price of both commodities subsequently shot up. And Enron made an enormous profit on the difference between what the price had been just a few short months previously and what it had become. Just coincidence that the price went up at this very same time? Hardly. Enron had not only been buying up contracts for natural gas and electric power; it had then been buying and selling the same contracts over and over and over again - to itself. One of its subsidiaries would sell a contract for a future purchase to another of its subsidiaries, which would sell it on to yet another, etc. There was a great deal of activity in the markets, but less and less of the electric power or natural gas ended up in the hands of the utilities. This created the shortages which drove the prices up, and Enron made a killing. Its profits increased by more than 300% between 1997 and 2000.
Enron, of course, was not the only company to make a killing in California and not the only one to engage in such trading. El Paso Natural Gas, for example, took a $2bn pipeline and transformed it into a $50bn financial conglomerate in five years, mostly on the enormous profits it made in California. Every company involved in the California fiasco made huge profits. And most followed Enron's lead in setting up a multitude of subsidiaries. Enron may have been in the vanguard pushing for deregulation, but the main difference between Enron and the others is the bankruptcy, which shone a light into all the muck that surrounded the dealings of all these companies.
The Raptors looking for prey
The enormous profits that Enron accumulated in California were being sent to offshore banks in the Caribbean, even while Enron engaged in a shopping spree in Latin America, India, East Europe and Africa, backed by US government loans. According to the Institute for Policy Studies, "Since 1992, at least 21 agencies, representing the US government, multilateral development banks, and other national governments, helped leverage Enron's global reach by approving $7.129 bn in public financing toward 38 projects in 29 countries."
In a few short years, Enron had started dozens of projects around the globe, most of which were "non-performing assets," in many cases, the pipelines, power plants, etc. in other countries that had not yet started producing energy ... or profit. In order to keep its balance sheet in tip-top shape, Enron began to sell off its "non-performing assets" - but not to just anyone. Having done such a good job of selling energy contracts back and forth to itself, via the intermediary of its energy subsidiaries, it now moved to establish another kind of subsidiary which would buy these "non-performing" assets. Appropriately, these later subsidiaries were named after birds of prey - the famous "Raptors." The subsidiaries paid Enron an inflated price, which allowed Enron to show that its income was still on the increase. After it issued its quarterly financial statements, Enron often bought back the same "non-performing" assets from its subsidiaries - only to sell them back again when the next reporting period came. One result of all this trading activity between Enron and the "Raptors" was to inflate the sales figures on Enron's own balance sheets (from which the subsidiaries were excluded). And this kept the price of its stock high, at least for awhile longer.
The subsidiaries were set up by Enron in partnership with some of its executives - or an occasional political friend. But little actual money was used to establish these new companies. The capital to establish them came mostly in the form of Enron stock. The whole scheme worked well, so long as the stock price continued to go up. But, if the Enron stock price were to go down too much, Enron would have to come up with money from somewhere to make up the difference between the stated capital of the subsidiaries and the actual amount accounted for by the stock.
Ultimately, Enron overstepped itself. With new energy shortages hitting California in the winter of 2001 - the season when demand is traditionally low and when there had never before been shortages - the Federal Energy Regulatory Commission (FERC) came under increasing pressure to put a cap on the price of electricity and natural gas. The FERC held off as long as it could, while the Bush administration lectured Californians on their spendthrift ways and on their "unrealistic" ove-concern for the environment. In January 2001, Texas senator Phil Gramm declared, "I intend to do everything in my power to require those who valued environmental extremism and interstate protectionism more than common sense and market freedom to solve their electricity crisis without short-circuiting taxpayers in other states."
Nonetheless, the FERC eventually gave in to the increasing demands coming even from Republican governors in other states being affected by the California crisis. On June 19, 2001, the FERC put a cap on wholesale energy prices in the western states.
This cap interfered with the speculation which had been driving up prices. In fact, spot prices for electric power soon began to drop, even significantly below the cap. Within two weeks, electric power contracts were trading at a price 80% lower than they had been just before the price cap. With that drop, Enron was caught holding a bag full of extra energy contracts - at high prices.
Enron began to bleed money, and this began to bring down its stock price. It needed sizeable loans, and it needed them fast. But to have admitted that it was taking out such enormous loans would have called its whole balance sheet in question, and that would have caused its stock price to collapse.
Not out of the game yet, Enron called in some of the biggest investment banking houses and Wall Street firms in the country - firms that were already tightly involved with Enron. Among them were Merrill Lynch, Citigroup, Bank of America, Credit Suisse First Boston, and Deutsche Banc Alex Brown, Travellers Insurance, Morgan Stanley Dean Witter, and J. P. Morgan Chase. They helped Enron set up still more subsidiaries and in most cases set up their own offshore subsidiaries to disguise what they were doing, that is, loaning money to Enron. Using these new subsidiaries, the banks pretended to buy commodity contracts from Enron. With the loans disguised as commodity trades, Enron was able to construct balance sheets that still showed that its sales figures were continuing to rise.
There is no doubt that the investment banks and Wall Street firms understood Enron's true condition. Enron had brought them all together six months before the end, when its stock first came under serious selling pressure. It provided them with at least partial information on the state of its main subsidiaries, which were haemorrhaging money. Nonetheless, every one of these firms continued to highly recommend Enron stock practically up to the day it declared bankruptcy. Only one of them hedged its recommendation a little, and this only a few days before the end. They all had a vested interest, first given the amount of their money tied up in Enron, but also given the worry that a collapse of Enron could have far-reaching ramifications for all the financial markets.
The end came because Enron's stock tumbled, along with the rest of the stock market after September 11. And this proved disastrous since Enron was forced to come up with still more money to keep its subsidiaries capitalised - either that, or it had to rewrite its own earnings figures. Unable to scare up another loan, at the end of October it revised downward its earning figures for the previous five years. That sent its stock tumbling, which simply made the situation of its subsidiaries even worse.
Enron did not stand - or fall - alone
During its high-flying years, Enron had pulled along behind it one of the biggest auditing firms in the world; most major US investment banks and brokerages; some of the most prestigious law firms; and, of course, almost the whole political class, both Democrat and Republican, not to mention a multitude of government agencies. Some of the top spots in the new Bush administration were occupied by former Enron executives, including Lawrence Lindsey, Bush's top economic adviser, who called the Enron collapse, "a tribute to American capitalism"; Thomas White, Bush's secretary of the army; and Harvey Pitt, his head of the Securities and Exchange Commission. Marc Raciot, the new chairman of the Republican National Committee, had been Enron's top lobbyist.
Today, the whole political establishment is claiming that no one knew what was going on, just as do some of Enron's own executives. But the fact is, what Enron did could not have been done without the knowing collaboration of these people - the top leaders of the business and financial world, the leading politicians of the country and in various statehouses. If Enron was able to gain this support it was not because Kenneth Lay was so persuasive, nor even that the Bush and Gramm families used all their political influence. Enron involved all these major players in its crooked scheme because what Enron was doing was really business as usual - maybe carried out a little closer to the edge, but that is all.
Today, this whole affair is presented as though Enron somehow managed to buy off enough politicians to have its way, as though the issue is simply one of corruption which benefited only one company.
Certainly, the political class in this country is corrupt. And Enron illustrated that clearly - votes were for sale, regulatory decisions were for sale, energy policy was for sale. And, it might appear to a suspicious person that even the current Enron investigation has already been bought and paid for. Of the 11 committees currently investigating Enron, 213 of their 248 members got money from Enron in the past, and every single one of the committees is chaired by someone who got sizeable amounts of Enron money.
There was hardly a major player in Washington who didn't get Enron's money. Some, of course, got more than others. Kevin Phillips, ordinarily a Republican Party supporter, estimates that the two Bush presidents and their close entourage took in between $20 and $30m if you total up political contributions, presidential library donations, speech money, capital gains, consulting fees, director's fees and joint investments.
If this corruption had been harmful to the rest of the capitalist class we would have heard loud complaints about Enron long before now. The fact is, Enron did the spade work that other companies took advantage of. Enron, by itself, could not have cornered the California electricity market, for example. It had partners in the fleecing of California, just as it had the backing of Wall Street and the big banks when things began to turn sour. It did not stand alone when it pushed to eliminate regulatory oversight of the energy and commodities trading fields - all the big corporations were standing right behind Enron when it bulldozed these changes through Congress and the statehouses in a few short years.
Even though today there is finally talk of prosecuting Enron, most commentators say that almost everything that Enron did was "legal." Enron simply squeezed through the "loopholes" that always magically find their way into all the laws regulating business. And it wasn't difficult - those loopholes were big enough not only for Enron to drive a truck through, but big enough for every company in the country to stroll through, walking abreast of each other.
What is striking since Enron did declare bankruptcy is the number of major companies which either decided to "revise" their balance sheets to make their accounting "more transparent" or whose stock prices fell based on reports of Enron-style accounting. Among them were Xerox, IBM, Adelphia, Qwest, GE, World Com, AT&T, Qualcom, EMC, Cisco Systems, Lucent, Circuit City.
Behind the revisions of their balance sheets is undoubtedly hidden more such Enron-like accounting, that is, the phony trades and swaps with subsidiaries and partnerships set up off the books, to siphon off money and/or to hide their debts. And their newly- admitted debts are enormous. GE, alone, has $220 bn debt, most of it in short term notes, which will shortly become due.
These companies are not just upstarts, like Enron. They are the cream of the crop, including top blue chip companies. GE, which saw its stock plunge after the Enron scandal broke, had the highest stock valuation in the world. Qwest is one of the Baby Bells, AT&T is the most widely held stock in the country. Cisco Systems and Lucent are the top providers of telecommunications equipment.
Of course, it is impossible to know how far and how deep these practices go. But even what is known - given the breadth of the companies involved and their solid ties into the financial structure - shows that the boom of the 1990s was phony, even in their own terms.
What was feared after Enron collapsed - that is, that it would lead to a rash of collapses - has not happened. But there have been some important ones. For example, K-mart, Global Crossing and DCT, a major auto parts supplier, all went under in the last few months.
Pensions: a thing of the past?
In all these cases, workers suddenly found themselves not only without a job, but also without pensions, medical care and, in the case of DCT, owing sizeable amounts of money for doctor's bills which had not been paid because DCT had not turned in the money deducted from workers' cheques for their medical insurance. It was a replay of what had happened at Enron, only on a smaller scale.
What was most striking about Enron was the fact that at the very moment when its executives were taking every last cent they could get out of Enron, last autumn, they transferred the employees 401(k) plan over to another administrator - effectively, by this manoeuvre, preventing the employees from selling any of their stock, freezing them out until the price of the stock had dropped down to only a few cents a share. Some of the higher-up employees may have been wheeler-and-dealer traders, but there were all the others, the majority of the 15,000 Enron workers, who suddenly found themselves without a job or a pension.
Enron, like so many other companies, provided retirement money by setting up 401(k) plans ("personal investment accounts") in place of a regular pension fund. And, as is the case with most companies, the vast majority of the stock in the Enron workers' accounts was in the company's own stock, so when the company declared bankruptcy, two-thirds of the money in the fund disappeared almost overnight.
The last two years have seen a real move away from the traditional pension plan, under which a company contributes enough money to guarantee a pension to every worker, its amount conditioned on years of service and, sometimes, age. Today, only 7% of the workforce enters retirement with this "old- style" pension - that is, the expectation of a definite amount of money regularly payable on retirement until death. This is down from 15% ten years ago, and down from almost half 25 years ago. By contrast, 27% of the work force today has only "individual stockholding accounts, a very rapid increase since 1982, when the first such account was set up. Another 15% combine the two forms. But in general, this combination is held only during the intermediary period while a company is gradually getting rid of its pension plan and replacing it with a 401(k) plan.
The shift has come under the aegis of the so-called "Pension Reform" act of 1978. The way the law was written gave a very big encouragement to companies to set up these "personal investment accounts" - the so-called 401(k) accounts, designated by the section letter in the law which refers to them. Companies could simply issue more of their own stock and deposit it to the account of each employee, expending very little, if any, actual cash money on them. Moreover, the law required employees themselves to contribute at least half, if not more of the money themselves.
For the corporations, this was a perfect scheme. Not only could they contribute stock instead of actual earnings and then take a tax write-off for it, but the amount contributed as stock was significantly less than what the same corporation used to pay into a pension fund.
Interestingly enough, even though the corporations and many politicians touted these plans as a replacement for the pensions, they were not willing to guarantee them in the same way that traditional pensions are guaranteed by government money. They obviously knew something they forgot to mention.
For nearly a decade, the appreciating stock market allowed the business press to rave about these "personal investment accounts." They were the new future, when every person could become a capitalist. For workers who never had the wages that allowed them to save much money, these accounts gave the illusion that they were accumulating quite a lot of money. Even apart from the problem of what happens to these accounts when the market falls - as it has lately - or when a company collapses, these funds don't begin to provide the money needed for retirement. Estimates today are that people holding these accounts who are near retirement have only enough to live on for two or three years at their current standard of living.
Today, the steam roller aimed at privatising Social Security, throwing it into 401(k) style individual accounts, may have been slowed down a bit by this whole Enron affair. But the proposals have not been scrapped. And Bush has even recently proclaimed that the Enron affair had made him more determined than ever to push through the changes - to protect the workers, no doubt! Obviously, Wall Street continues to covet that great big Social Security fund, something that up until now it has been unable to touch. And battered as it has been by Enron et al, its appetite for a new infusion of money is growing.
Some pay the consequences, some enjoy the fruits
Treasury Secretary Paul O'Neill, former head of Alcoa, had this to say about the Enron collapse: "This is the genius of capitalism. People get to make good decisions or bad decisions, and they get to pay the consequences or to enjoy the fruits of their decisions. That's the way the system works."
"Good decisions"? Oh, is that what allowed Enron executives to enjoy the fruits of capitalism - even while Enron was collapsing?
In August, five days after Kenneth Lay received the famous Sherron Watkins letter warning about the problems, he cashed in $3.5m. Over the next two months, he apparently cashed in about $40m of stock options. In October, just before the final big nosedive, Jeffrey Skilling resigned as CEO, cashing in $60m worth of stock options. Andrew Fastow, the whiz kid who is credited with the scheme to set up all those thousands of subsidiaries, left with an admitted $30m - and who knows how much more, in the offshore banks he favoured. Former Enron executive and current Secretary of the Army Thomas White, who had delayed selling off his Enron stock for months after Bush appointed him to his army post, suddenly cashed in almost all of his stock options in October, raking in $12m. As for the trustees of Enron's 401(k) funds, those charged with protecting the workers' money, they did nothing. To be more exact, they did nothing about the stock in the fund, nor did they issue any warnings. But the chairman of the fund's trustees did cash in $1m worth of his own personally- owned stock options in June, as the situation of Enron began to deteriorate. According to papers filed in one suit now pending against Enron executives, 29 top Enron executives and directors made a total of $1.1bn in the months after Enron's fortunes had clearly begun to go sour. And even just two days before the bankruptcy filing, Enron's top management awarded itself a total of $55m in bonuses.
"Good decisions"? What O'Neill calls "good decisions" are nothing but capitalism's drive for profit at the expense of the population. The Enron affair, like so many other things before it, demonstrates how much we have an interest in getting rid of this system whose rapacity does not even stop at devastating the last years of life of the people whose work enriched it.
April 14, 2002