The Rise And Fall Of Enron


Leonard Innes


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.