America's Largest Bankruptcy: What Have We Learned?
Houston Chronicle, December 23, 2001
Knight-Ridder/Tribune Media Services, December 20, 2001
San Diego Union Tribune, December 26, 2001
The demise of Enron leaves us with another huge, ostentatious symbol of the once-vaunted "New Economy" going belly up, and the inevitable year-end question: what lessons will be learned? This monster trader of everything from energy futures to advertising space, and producer of very little, went from number seven on the Fortune 500 list of America's largest corporations to a bankrupt failure in a matter of months.
A fall from grace of this magnitude and speed inevitably causes rethinking, with teary-eyed employees who lost their life savings testifying at Congressional hearings, and shareholder lawsuits piling up. There are a number of easy lessons that are likely to result in legal reforms. First, some limits on how much of employees' pension funds can be put in company stock. It was an ugly spectacle: Enron's top executives, some undoubtedly knowing what the company concealed from investors, selling hundreds of millions of dollars worth of company stock while employees lost $1.2 billion, more than half of their retirement savings. This is more than even our normally corporate-compliant Congress can ignore.
Some reforms on financial disclosure, whether they take the form of legal changes at the Securities and Exchange Commission, auditing rules, or enforcement, are also likely. Enron had 3500 affiliates and partners throughout the world, and used at least some of these to hide massive amounts of debt and to inflate its profits. There were conflicts of interest all over the place, including those finessed by the accounting giant Arthur Andersen, which performed both internal and outside audits for Enron. But regardless of who ends up with most of the blame, it shouldn't have been so easy to get away with misstating the company's earnings and hiding so much vital information from investors. Something is likely to be done to make at least some of these deceptions more difficult in the future.
Larger lessons seem more distant, or barely recognized. Enron's co-conspirators grew rich by creating markets where they were not needed, and through deregulation of public utility systems that didn't need to be deregulated. California's energy crisis should have made it clear to anyone who wasn't directly profiting from the chaos (as Enron did) that the old system worked a lot better. For electricity at least, a regulated monopoly is far superior to a "competitive" system in which suppliers are able to gouge consumers and the market doesn't even ensure that there will be adequate capacity to keep the lights on at night.
There are a number of clear economic and technological reasons for that result. But the combination of ideological and pecuniary interests in deregulation was so powerful that the whole debate was badly distorted. Even at the peak of California's troubles, much of the press continued to blame "partial deregulation" for the disaster—as if allowing consumer payments for electricity to rise without limit would have solved the problem created by deregulation.
That brings us to another problem that Enron exemplified: the selling of our government to the highest corporate bidders. Enron was as much a part of the Bush Administration as it is possible for a corporation to be: CEO Kenneth Lay is a long-time friend of the Bush family, raising funds for both father and son, with Enron and its employees contributing $1.3 million to George W. Bush's presidential campaign.
Enron's investment in government was a profitable one, buying crucial support for its deregulatory agenda across the country. Its political influence was also instrumental in choosing members of the Federal Energy Regulatory Commission, which oversees Enron's business, and making Enron a co-author of the Bush Administration's energy plan. It remains to be seen whether this clout will rescue Enron's officers from any federal investigations or prosecution.
Perhaps the most immediate lesson that has yet to be gleaned from the largest bankruptcy in history concerns the stock market bubble that drove the 1990's expansion. Stock prices that are out of line with any plausible story about future profit growth cannot hold. This is still true for the stock market taken as a whole, where the average price is currently 25 times the level of even pre-recession earnings. Compare this to the market's historic average of about 14 to 1, and it is clear that current stock prices cannot be sustained, no matter how fast or furiously our economy recovers.
This reality has yet to sink in. A big bubble named Enron has burst, but much of the "bubble mentality" that drove investors into its fold still remains.