Volume , Number 0
Crime & Punishment
American Journalism: A Class Act
The United States in the â€¦
Stephen R. Shalom
Patriotism Is An Olympic Event
Differing Agendas in South Asia
Bryan g. Pfeifer
Bryan g. Pfeifer
Psychiatric Medications, Illicit Drugs, & â€¦
Martin Glaberman: 1918-2001
There are no articles.Culture
There are no articles.Features
Ruth hubbard and Stuart newman
There are no articles.
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The Rise And Fall Of Enron
Global capitalism as usual
Six months ago, the Enron Corporation was riding high. In a little over a decade it had grown from a relatively small gas pipeline company to one of the leading energy corporations worldwide—7th on the Fortune 500 list of top U.S. companies and one of the 100 largest corporations in sales worldwide. Enron's diverse businesses, from energy trading to Internet infrastructure equipment to water systems, spanned the globe. Its Dahbol Power Project outside Bombay was the single largest foreign investment in India. Enron controlled the Brazilian electricity distributor Elektro Eletricidade e Servico. It had investments in Asia, Latin America, Africa, and the Middle East. In the past two years, Enron handled more than $1 trillion in transactions, and in 2000 it reported sales of over $100 billion. On Wall Street Enron was seen as a capitalist “success story”—a model of operating in today's leaner, meaner, more competitive global capitalist environment.
Yet with dizzying speed, Enron collapsed. On December 2, 2001, it became the largest U.S. company in history to file for bankruptcy.
EnronOnline has stopped doing business and Enron's market value has fallen from more than $80 billion to just $220 million. Its once-powerful gas and power trading operation has been taken over and other capitalists are circling like sharks, hoping to buy Enron's assets at bargain-basement prices. Enron stock, which had risen to almost $90 a share, was last selling for 68 cents.
Every day seems to bring new revelations about Enron's operations—tax evasion, insider trading, fraudulent accounting, secret off-the-books partnerships, shredded documents, and frantic calls to high-level government officials. The company had extensive financial connections to the Democratic and Republican parties and was the largest contributor to George W. Bush's presidential campaign.
When commentators talk about the Enron scandal, they have mainly been discussing the deceit and deception practiced by Enron in its dealings with other capitalists. But a monumental rip-off of ordinary people is taking place. Enron has already laid off 5,000 employees—a quarter of its workforce —giving its U.S. employees only $4,500 as severance. Many of Enron's 20,000 employees, as well as thousands of other small investors, had much of their life savings and retirement in Enron stock. One news report talked of families going to grief counseling instead of celebrating Christmas. No doubt thousands of others who worked for Enron or its subsidiaries outside the U.S.—particularly in the oppressed countries—have suddenly been thrown out of work, many with no way to survive.
Financiers and banks worldwide have also been stunned by the speed and magnitude of Enron's collapse and there are concerns about a possible “domino effect.” Dozens of banks lent money to Enron and many more had outstanding trading positions or investments in Enron ventures. J.P. Morgan Chase and Citigroup alone had lent Enron $900 million and $800 million respectively. Others have loans amounting to over $2.3 billion. Banks in India lent Enron $1.4 billion for its Dahbol Power Project. These banks and financial institutions will be lucky to collect cents on the dollar. According to the “BBC News,” “the collapse of Enron could cost four Japanese financial institutions that held Enron bonds about $8 billion.”
The Securities and Exchange Commission, Congress, and the Justice Department have all launched investigations of the company and Enron faces numerous civil lawsuits. The Bush administration is denying any responsibility for the crisis and attempting to distance itself from Enron. The smell of political scandal and in-fighting within the ruling class is in the air.
But Enron greed, fraud, and mismanagement are only part of this picture. The hidden story behind all this is that Enron's operations were typical of how transnational corporations operate and the whole affair reveals much about the ruthless workings of the global capitalist system.
The hallmarks of Enron's operation—worldwide exploitation of workers and resources, rapid expansion into many different markets, cut-throat competition, massive speculation, and “creative accounting” to inflate stock prices—are all characteristics, to one degree or another, of the entire Fortune 500. The undoing of Enron vividly illustrates the fragility and volatility of the global economy and the speed with which a corporate bankruptcy or collapse can occur, even for a company that appears to be doing well, witness the subsequent bankruptcies of Kmart and Global Crossings.
Riding the Wave of Deregulation
Enron was founded in 1985 by the merger of two gas pipeline companies, but the new company soon shifted its attention to the newly deregulated and potentially more profitable business of trading natural gas and electricity: buying from producers and selling at a mark-up. Enron essentially assured buyers it could deliver supplies to them, often at a guaranteed price. The New York Times called Enron a “giant energy hedge fund, making bets on energy prices.”
Virtually all of Enron's trading took place via computer-based or phone transactions from huge trading floors based in Enron headquarters in Houston or via EnronOnline. EnronOnline practically became a financial market in itself, where buyers and sellers could readily engage in transactions. It reportedly “came to control a quarter of all wholesale energy trades among U.S. utilities, independent power producers, and other market players.” A recent Texas Monthly article stated, “Enron would not be a broker but a banker. It would sell the gas itself and assume the risk involved. And Enron would make money on transactions, much like an investment bank would.” Economists lauded Enron as the cutting edge of the “new economy”—a company with both massive “cyber presence” and real assets.
Enron rode the wave of deregulation and privatization in the U.S. and around the world beginning in the early 1980s. The goal was to overcome “stagflation”—the deadly combination of slow growth and inflation—then gripping the world capitalist economy. Deregulation was designed to enable big capital to cut costs, compete more efficiently in the global market, and maximize returns.
Expansion, Speculation, and Fraud
A full accounting of Enron's collapse is yet to be made—partly because Enron deliberately hid the nature of many of its subsidiaries and operations. Even financial analysts are confounded by the intricacy of Enron's shrouded transactions.
Yet a number of key factors have emerged—all of which are common to the operation of the world's principal global financial groups in today's economic environment.
Enron's success as an energy trader, coupled with its necessity to reinvest, make further profits, and strengthen its market position, led its executives to expand their trading and investment activities into a wide range of goods and services beyond energy. By last year Enron was trading nearly 2,000 different kinds of contracts for energy and other commodities, including water, broadband, and exotic new financial instruments, such as financial hedges against bad weather.
Enron was basically engaging in high-stakes gambling on trends in the prices of and demand for energy and a wide variety of commodities and financial instruments. As long as Enron's forecasts of these trends turned out to be largely accurate, they were able to make profits. But if these bets turned out to be wrong, the corporation's financial picture would get bad—as it turned out, very bad. The risks multiplied with each new market Enron entered.
Enron's trading activities were closely linked to establishing positions in a wide range of global businesses—from power plants to water to high-speed data and Internet capacity. Many of these investments tied up billions in capital, yet ended up returning few profits—due in part to the worldwide economic slowdown, the dot-com bust, and the resulting excess in telecommunications capacity. According to Newsweek (January 21, 2002), in the late 1990s, “Enron lost about $2 billion in telecom capacity, $2 billion in water investments, $2 billion in a Brazilian utility and $1 billion on a controversial electricity plant in India.” The New York Times (January 13) reports that $10 billion of Enron investments were “non- performing.”
In the California energy market, Enron and other power producers had gouged the people and made enormous profits. In 2000 and 2001, Enron and other big companies seized on the deregulation of California's electricity market and energy trading nationally to gain enormous leverage in California's market. These big energy producers and suppliers then withheld supplies and drove gas and electric prices sky-high—along with their own profits. Enron's reported wholesale services revenues, for example, quadrupled from $12 billion in the first quarter of 2000 to $48.4 billion in the first quarter of 2001.
But this monopoly power move seems to have ended up adding to Enron's losses. The repercussions from California's crisis prompted some regulation of natural gas and electricity prices in June 2001. According to Public Citizen, Enron may have been “stuck with billions of dollars worth of contracts purchased at a time when Enron assumed it would be able to sell them at any price.”
For a number of years, Enron's shaky investments and overall financial position were obscured by various shell organizations and deceptive accounting practices. Enron developed a complex web of more than 2,800 subsidiaries. Some 881 were located outside the U.S. in offshore tax and banking havens—countries with few, if any, regulations or reporting requirements. Many were partnerships headed and owned, at least in part, by Enron executives.
These partnerships are still shrouded in secrecy, but they seem to have served a number of functions for Enron. For one, they allowed top corporate executives to make tens of millions, thanks to privileged access to Enron's corporate and market information and transactions, while placing Enron at risk for huge losses. Enron's former CEO, Andrew Fastow, who resigned in August just as the collapse was brewing, reportedly made more than $30 million from these partnerships.
The New York Times (January 17) reports that Enron's subsidiaries also enabled it to avoid paying any income taxes for four of the past five years, when its reported profits were at their peak. Instead, Enron was eligible for $382 million in tax refunds.
These partnerships were also used to hide Enron's growing debt. Called “off-balance sheet transactions,” they concealed the real amount of Enron's debts, thus inflating Enron's reported profits and boosting its stock price.
This past fall other big capitalists became increasingly alarmed by Enron's activities and Enron was forced to include its partnership activities in its balance sheet, wiping out more than $1 billion in equity and contributing to a $618 million third quarter loss. Enron overstated its profits by almost $1 billion over the last five years.
As these disclosures lifted the veil on Enron's finances and activities, other big capitalist investors and lenders lost confidence in the corporation, throwing it into a rapid “death spiral” of investigations, revelations, and collapse.
Arthur Andersen, the firm that did Enron's accounting and signed off on its shady and probably illegal transactions, began destroying Enron-related records in October, shortly after the Securities and Exchange Commission (SEC) announced it was going to investigate Enron. Andersen is now facing huge losses and liabilities.
A Typical Fortune 500 Transnational
Commentators often discuss Enron as if it is some kind of “rogue” company, whose operations were a far cry from the “solid” and “ethical” practices of most capitalist corporations. But while Enron's problems may be worse and its operations more on the edge than some other corporations, its actions cannot be attributed to poor management, a culture of secrecy, or fraud. In reality, Enron's operations are typical of top Fortune 500 transnationals in this era of “faster and faster” global capitalism.
All such corporations are global predators: they engage in a wide range of businesses all over the globe—from production and commerce to all sorts of financial machinations—borrowing, lending, currency trading, investment hedges, and so on. All aim to protect and maximize the profits, power, and strategic position of the top capitalists controlling these firms; all earnings are rooted in the exploitation of wage-labor around the world; all these corporations have ties and influence with high-level politicians and government officials.
Take General Electric, another Fortune 500 company. It started out in electrical equipment but is now one of the Pentagon's 15 largest contractors. It also owns NBC and many other media outlets, is a major player in international money and currency markets, and is one of the biggest consumer lenders in the world.
Enron invested and speculated in hundreds of markets and/or commodities, but it was hardly unique. Such transactions are engaged in, to various degrees, by virtually all major corporations (and countries)—they depend on such transactions. Every day some $1.5 trillion in currency transactions take place, as capital scours the globe for manimum returns. Such transfers are increasingly based on speculation in financial, commodity, and currency markets, which now dwarf trade or productive investment. In 1971, 90 percent of all foreign exchange transactions involved trade and investment, with only 10 percent going toward speculation. Today, the situation is reversed, with speculation now accounting for 85 to 90 percent of all foreign exchange transactions.
Some argue that Enron's mistake was that it got away from its core energy business and invested in too many different ventures. Enron did indeed, but it's hardly alone—witness the current investment glut in telecommunications. The reason? As new technologies develop and markets rapidly open or shift, if a corporation is not aggressively investing, it's missing opportunities to profit, being left behind, and ultimately crushed by competitors.
But what about Enron's outright deception, lying, and fraud? This too is standard operating procedure—in one form or another—for all multinationals.
All big corporations engage in many maneuvers to cut costs, increase profits, prettify their balance sheets and pump up their stock prices. This isn't just window dressing: rising stock prices are a crucial means not simply to make insider profits, but of attracting investors and capital, including to leverage a firm's global economic position and power.
The New York Times (January 14) and Wall Street Journal (January 15) report that many firms use “creative accounting” to inflate stock prices, and capitalist giants, such as Lucent, Sunbeam, Waste Management, Xerox, Rite Aid, and Cendent, have all recently been embroiled in accounting scandals.
Today there is some $800 billion on deposit in offshore, unregulated banks in the Cayman Islands used by Enron and many other corporations. This is twice the amount of money on deposit at all the banks in New York City and equal to 20 percent of all U.S. bank deposits (Public Citizen). The U.S. government, the Bush administration in particular, has fought tooth and nail against any regulation of these tax havens.
The New York Times (January 17) reports that “Enron is by no means alone in not paying income taxes.” A study of half the Fortune 500 found that 24 paid no income tax in 1998. The Wall Street Journal reports (January 15) that one of Enron's shady tax strategies—which “allowed a company to borrow money from a subsidiary and treat the transaction as debt that generates interest deductions for tax purposes—but as equity for its shareholders”—‘has been widely marketed and used: Goldman Sachs Group Inc. pioneered the product... Other firms quickly followed with similar products.”
However mobile, flexible, and far removed from production proper, the machinations of these giant financial groups and corporations are still grounded in real production and the global exploitation of human labor. Z
Larry Everest is a correspondent for the Revolutionary Worker and producer of the video Iraq: War Against the People. Leonard Innes is part of a Revolutionary Worker newspaper writing group in the San Francisco Bay Area.