"The Very Nature of Profit-Based, Market Capitalism"
Despite the conviction of a couple of bad apples at Enron, its top
management is not the real culprit in this case. The real culprit is a bad idea:
deregulation of the natural gas and electric power industries.
Kenneth Lay and Jeffrey Skilling, the former chairman and CEO respectively,
can be said to be just "sharp traders," businessmen who did what the
free market demands of rational players: take advantage of every loophole they
could find to make a profit.
Early in 2004, Jacqueline Lang Weaver, a professor at the University of Houston
Law Center, wrote, "In competitive electricity markets, participants can
exploit legal loopholes or use market power to make millions of dollars in profits
in a very short time period, and there is every reason to expect them to do
so; it is the very nature of profit-based, market capitalism."
Enron played a unique role in deregulation, Weaver said, and the company’s
subsequent collapse was, in some important respects, a product of its genius
in creating "a business model that tracked the opening of deregulated energy
markets…and was accompanied by a powerful and well-financed political
lobbying arm that worked to push government regulation out of the markets."
This point was echoed earlier this month when Robert McCullough, an independent
analyst of the electric power industry who is a consultant to many of the agencies
that were victims of Enron’s trading schemes, testified before the U.S.
Senate Policy Committee and described in detail the consequences of what he
called "an unfortunate policy decision" made by the Commodities Futures
Trading Commission (CFTC) in 1993.
"At the urging of Enron and other energy companies," he said, "CFTC
relinquished control of energy-based forward transactions…The purpose
of Enron’s various market manipulation schemes was to promote an increase
in long term prices—an increase that returned over a billion dollars in
earnings on an enormous forward position that Enron accumulated just before
the onset of the Western [California] Market Crisis."
McCullough did not mention that the CFTC’s 1993 decision was made at
the urging of its chairwoman, Wendy Gramm, who is an economist and the wife
of then-Sen. Phil Gramm, R-Texas. Almost immediately after the vote of the commission
to forego regulating electricity trading, Mrs. Gramm resigned from the commission
and joined the board of Enron where she remained until just after the bankruptcy
Another key aspect of the Enron story described by both McCullough and Weaver
is the role of EnronOnline, which handled nearly one-quarter of all gas and
electric trades by the end of the 1990’s, making it the largest e-commerce
system in the world.
Weaver said EnronOnline did not match up buyer and seller for a fee like most
commodity trading exchanges. Instead the company was a counterparty to each
trade, meaning that it bought products for sale if the price was right and then
re-sold them, a business strategy that requires billions of dollars in cash
to handle the float.
This need for large amounts of cash for trading, she said, combined with some
disastrous deals in hard assets like building a huge power plant in India and
overpaying for a water utility in England, neither of which generated any cash
flow, sent the company far into debt. It was Enron’s use of the accounting
gimmicks called Special Purpose Entities to keep this debt off its books that
finally caused the bankruptcy.
Weaver concludes her report by saying that the darker side of the market system
is that it is controlled by and primarily benefits two "power elites…the
elected political elite and the managerial elite that control business enterprises.
However, between the two, corporations have the upper hand, because they must
be induced with incentives to produce and provide jobs and tax revenues to society.
he corporate elite have a privileged position of power in the political system,
and political leaders will act to provide business with whatever it says it
needs to do its job."
The ultimate danger, she said, of this "enormous influence of the business
elite on the legislative policies at all levels of government seriously distorts
the democratic nature of our society."
And the ultimate irony is that Enron collapsed by choking on the apple of deregulation
which it tried to swallow whole, and that Lay and Skilling, the corporate cheerleaders
for deregulation, are victims of their own delusion.
Wallace Roberts is an independent journalist writing on
public policy issues. His work on deregulation of the electric power industry
was assisted by a grant from the Fund for Investigative