28th November 2001 The Collapse of Enron


"The Smartest Guys in the Room"

The collapse of US energy and trading conglomerate, Enron, played out over several months in 2001 but we choose to note its passing today. For it was on November 28th, 2001 that the scale of the deceit and fraud perpetrated by the Enron management became apparent to the world. On the morning of the 28th, even as Linda Lay – wife of Enron’s Chairman, Kenneth – was offloading over a million dollars in company stock, the last ditch attempt to save one of America’s largest corporations was unravelling. A couple of weeks earlier Dynegy, another Houston-based energy company, had met with Ken Lay and offered the ailing Enron a lifeline in the form of a 9 billion dollar buyout. Over the course of the subsequent two weeks however, Dynegy unearthed some rather startling facts in their examination of the company accounts and withdrew their offer, bringing to an end any hope of hiding the crimes of Enron.

The men behind Enron, “the smartest guys in the room” according to their own mythology, had been at the vanguard of lobbying for deregulation in the energy markets. Indeed, they lobbied vigorously for deregulation across all markets and thanks to powerful political friends and a prevailing culture of increasingly neoliberal values, they got their way. Obsessed with short-term profit, the daily fluctuations of their share price and driven by an all-consuming greed, these people were effectively given carte blanche to write the rules of the trading systems they set up… systems that bought and sold everything from oil and gas to coffee futures, broadband and “weather risk management”. That’s right, they even managed to find a way to make money buying and selling the weather.

Except they didn’t of course. Most of the schemes developed by Enron were as absurd as they sounded. And all the pseudo-economic jargon in the world could only hide that fact for so long. With the complicity of the world’s largest accountancy firm (Andersen Accounting, which also collapsed as a result of Enron’s fraud, having famously managed to shred over a ton of relevant documents in the course of one single day) and the apparent backing of major international banks, the company simply hid mounting losses from the stock market. Claiming ever-increasing profits while generating ever-increasing debt.

Enron would announce a major energy project in, for example, India. They would agree to invest a billion dollars in a new gas-fired power plant. Enron analysts would estimate that they’d make a 5 billion dollar profit from the power-plant over the course of 10 years. So once the contracts were signed, the company announced the 5 billion as profit. Brazen as you like. Right there in the quarterly returns. Which naturally resulted in a rise in the share price. Top brass were primarily paid in stock options and would regularly liquidate these shares. By the time the fraud was finally uncovered, some Enron executives had made two to three hundred million dollars in this fashion.

The problems began to arise when the contracts failed to pay off. The power plant in India never made a profit. The spectacularly profitable broadband investments… well, they weren’t. In fact over and over again, Enron announced huge profits that literally amounted to the most optimistic estimate from their analysts. Meanwhile, even as they sold millions of dollars in shares based upon these ridiculous estimates, the Enron bosses conducted a huge publicity campaign to convince others to invest in Enron shares. The fraudulent profits were wheeled out to hoodwink first the employees of Enron, and then the wider community, into investing their pension funds in Enron. This drove the price even higher, allowing the people at the top to award themselves even more bonus stock options and effectively funnel these pension funds into their own pockets.

When the massive losses – initially reported as massive profits – began to overwhelm even the abilities of creative accountancy to hide, the company finally began to topple. Later investigation would reveal dozens of holding companies created by Enron’s Chief Financial Officer to which losses and debt were transferred. Remarkably this practice went on for years while Enron remained one of America’s largest and most visible corporations (winning Fortune Magazine’s “America’s Most Innovative Company” Award six years in a row, and with a chairman tipped for political office).

Eventually the Enron collapse cost tens of thousands of jobs and literally billions of dollars in pensions funds belonging to ordinary workers. It exposed the dangers of allowing large corporations to write their own rules; a warning we clearly failed to heed, as demonstrated by the current banking crisis. And it demonstrated once again the corruption and arrogance of power.

Yet all this pales in comparison to the final desperate act of survival employed by the collapsing Enron. Aware of the need to stave off the rising losses, Enron’s energy brokers in the California electricity market collectively decided to provoke a major crisis from which they could profit. Controlling large sections of the California grid, Enron traders ordered a number of power plants to simultaneously shut down. The consequences were predictable, with the lights going out across large parts of the state. The blackouts created massive spikes in electricity demand on the now completely deregulated markets driving the price sky high. At which point the Enron traders would order their plants back online to sell at the artificially inflated levels. These rolling blackouts were to continue for weeks, ultimately forcing the governor from office and, economically-speaking, all but bringing the state of California to its knees.

Enron was not merely profiteering from a state of emergency, it was manufacturing that state of emergency precisely that it might profit from it.

It’s been said – most notably of course, by Karl Marx – that capitalism contains the seed of its own destruction. For Marx, it was the tendency of capitalism to produce such great social inequality that made it unsustainable; while in recent decades it has come under scrutiny from an ecological perspective with serious doubts cast upon global capitalism’s ability to manage natural resources, and the effect it’s having on the wider environment. But the lesson of Enron seems to be that even when class struggle or the limits of growth fail to intervene, the internal dynamics of capitalism are irredeemably flawed. The pursuit of profit, when left unregulated, will drive people – and companies – mad. Mad enough to plunge millions into darkness.

Today, with the IMF and the ECB stalking Europe like hungry lions, this tendency of capitalism to lash out at the powerless in order to protect themselves from their own losses is again finding form. So we should heed the warning of Enron. We should remember that the institutions of international capitalism will happily inflict pain upon the masses whenever it’s to their advantage. And we should bear in mind that just like Enron, they are optional.

[Written by Jim Bliss]

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