Monday, January 14, 2002

The Enron scandal, so far, is a bit of a disappointment. There's lots of ugly stuff going on, but so far, none of the political connections seem definitively uglier than you'd expect from any peek inside the sausage factory.

Mind you, I'm not quite sure I'd agree with Patrick Ruffini that

So far, no one has been able to establish the merest scintilla of evidence of any untoward contact between Enron executives and the Administration.

The General Accounting Office may have concluded that there was nothing actually criminal about the way Ken Lay was dropping hints last spring that Curt Hébert, Bush's original chair of the Federal Energy Regulation Commission would need Lay's "support" to keep his job, and that support would not be forthcoming unless Hébert toed Lay's line on electricity deregulation. But to me at least, "untoward" seems to cover it, particularly after Hébert got bounced for a good old boy from Texas who had worked on the Bush/Lay electricity deregulation plan.

(That GAO report is a hoot, by the way. Half the GAO's argument is that Lay's political support was not a "tangible or intangible" "thing of value", within the meaning of applicable laws and ethics guidelines --- hey, it was only Hébert's job. The other half comes straight from Lay, who says that just because they were talking about his political support for Hébert, and just because Lay's decision on whether to grant that support hinged on Hébert changing his policies, and just because that was all clear to everyone concerned, that doesn't mean that he was asking for a quid pro quo. You couldn't make this stuff up).

So, Lay may have been able to bounce a regulator whose policies weren't to his taste --- which may be the most troublesome thing I've seen so far about Enron's interactions with the federal government. But, as the Republicans will be fond of pointing out, this had nothing to do with the problems that drove Enron into bankruptcy, which had to do with flaws in the company's fiscal foundations, which were laid long before Bush entered the White House.

And when Lay called to ask if the administration would kindly arrange a bailout along the lines of the one that the allegedly incorruptable Allan Greenspan had earlier swung for the rocket scientists who sank a multibillion dollar hedge fund at Long Term Capital Management, Enron was properly turned down flat. (And, as it happens, Greenspan turned them down, too). And Ashcroft's recusal from investigations of the matter may be the first thing he's done as Attorney General that I don't have a problem with.

Besides, as many folks (particularly Josh Marshall) are starting to notice, there's at least as much action in Congress. By which I'm not even referring so much to campaign contributions as, shall we say, more direct connections. Consider, for instance, the ties between Enron and Phil Gramm, senior Senator from Texas, which in this case seem to go in some measure through his wife. Of course, his wife is an interesting story in her own right:

In 1987 The New York Times described her as "one of the Reagan administration's most vigorous deregulators." President Reagan called her "my favorite economist," naming her chairman of the Commodity Futures Trading Commission, the powerful regulatory agency which oversees the nation's commodities and futures exchanges.

Her dual roles as CFTC head and Senator's wife put her in a difficult position. There were times when Senator Gramm sought the support of some of the same agricultural and business interests that she was regulating. On trips to Texas during his 1989 Senatorial campaign she worked both on CFTC business and for her husband's reelection. After leaving the CFTC in early 1992, Wendy Gramm accepted lucrative directorships on the boards of several corporations she had regulated. Several of these corporations were also financial supporters of her husband's Presidential campaign. One of the boards on which Mrs. Gramm sits is Enron Corporation, a Texas natural gas company, which has given almost $35,000 to Phil Gramm over the years. She was named to the company's board, just five weeks after stepping down from the CFTC, which around the same time, exempted Enron and a group of other oil and gas companies from federal regulation on some of their commodities trading. The move was a big financial boon to Enron.

Given all that, Wendy's $22,000 board fees (plus $1250 per meeting) have a faint odor of payment for services rendered. And it's also worth noting that those payments, which must add up by now to more than a quarter of a million dollars, went into the bank account which she presumably shared with her husband, the Senator --- not as campign contributions, but straight into his wallet. And in 2000, as has been well chronicled by now, the Senator (according to just about everyone on the Hill except his own spokesman) showed his appreciation, by helping to push through provisions of the Commodity Futures Modernization Act, as a rider known to some as "the Enron provision", which carefully defined energy trading operations amazingly like Enron's as being beyond the regulatory scope of either the Commodities Futures Trading Commission or the SEC.

But on the Hill, these days, this stuff is SOP. Cash is the universal lubricant of politics; everyone gets greased, and everyone's a conduit. Heck, Linda Daschle has a lobbying business in which she delivers campaign contributions to Republican Senators.

The libertarian view of this, apparently, is to say that this is the problem with letting the legislature mess with the economy --- to describe all the problems as flaws in the markets, or regulations that someone failed to eliminate, or something. There are a lot of peculiar things about this analysis. For one, in the Enron case, the biggest problems to date seem to have been accounting fraud committed in violation of federal reporting rules; eliminating those regulations would have just made the fraud more brazen. For another, more generally, this analysis doesn't acknowledge that some regulations can create useful markets that wouldn't exist otherwise, like the market for pollution allowances, or just about anything that falls under the rubric of "intellectual property".

But mostly, to me, it ignores history. In the late 19th century, when the federal government didn't regulate things nearly as much as it does now, the capitalists of the day screwed up markets perfectly well on their own --- a famous example being Rockefeller's deal with the railroads, in which the railroads paid Rockefeller a portion of the fees they got for moving anyone else's oil.

It was also an era of monopolists in other fields. The railroads were collusive even beyond their natural, regional monopolies. Merchants in markets other than oil had tacit and not-so-tacit arrangements. Banking was dominated by a few players in New York, who were dominated in their turn by J.P. Morgan. And as one wag put it, the name "Edison" wasn't on all those power companies just for tribute.

(And in this connection, we might as well mention the evidence that during the recent California crunch, several power companies gamed the market, by ramping down the output of their own plants to run up prices of the spot market, then ramping them back up, even during power alerts, and even when that rapid cycling risked damage to the equipment. (Remember all those power plants which were mysteriously offline for maintenance?) But, as I've mentioned before, I've never seen hard evidence of such shenanigans pointing directly at Enron either, though they clearly benefited from the runups regardless).

Which all brings us back to the old sage's observation, from not long past the dawn of laissez-faire, that

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

For the public to secure the benefits of open, free, competitive markets, someone has to serve the public interest in keeping them open, competitive, and free. In America, that pretty much has to be the government. Not for nothing was antitrust regulation originally a Republican program.

Which is why, by the way, that I'm skeptical of Andrew Hofer's argument that regulation isn't necessarily good, and we ought to evaluate the situation in that light. I guess the same argument applies to the FERC business as well. But much of the regulatory structure we have, particularly regulations on corporate reporting and market operations, was originally put in place as a guard against the repetition of very real, past abuses. And if you're going to have regulations at all, then there are obvious problems with allowing one market player to kick out a recalcitrant regulator, or to get what Hofer's bête noir, Paul Krugman, calls "one-eyed bearded man with a limp" exemptions from rules that apply to everyone else.

So, what does this all add up to? Perhaps the Michael Kinsley saw that Jim Henley keeps citing, that the scandal is what's legal. Consideration of which would lead to exactly what's wrong with the system, and whether it can be fixed, or whether it's simply in the nature of Congress to be the greatest deliberative permanent floating crap game for our pork. But that's another rant, for another time, I'm afraid. No conclusions, for now; I'm just thinking out loud.

(By the way, Brian, I'm not Chucky, but I know him. His bride says hello).


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