Thursday, January 17, 2002

The Republican story on Enron is pretty clear at this point. First, on California, the problems were with flaws in the deregulation plan, which didn't deregulate things enough, and since Enron went broke, they can't have been doing anything wrong. (I guess they think you can't go broke running a scam. Which seems odd --- just look at Ponzi, Boston's uniquely dubious contribution to twentieth century high finance. But I digress). And on Enron's bankruptcy, the story is that the Administration offered them no aid once the problems were clear, and before that, they knew nuffink, nuffink about what was going on, despite ten years of getting to know the principals. Call it the Sergeant Shultz defense.

The Democratic line, to paraphrase Reagan, seems to be that with all the crap, there has to be a scandal in there someplace. But so far, they're focusing on connections to the current administration, which didn't even enter office until Enron's stables were fouled beyond salvation, which leads to a certain credibility gap.

(And then there are the Republicans who are trying to blame it all on Clinton. It seems to be some kind of Pavlovian reflex for them --- the bell rings, the dog drools, and the Republican spews bile about Hillary's lost Rose Law Firm billing records. Which, when found, turned out to contain nothing the least bit incriminating. But you still hear them muttering from time to time about how she must have had some dark, sinister motive for "hiding" records which demonstrated, in immensely tedious detail, that she was not a crook. But again, I digress).

These rationales may all be starting to thin just a bit. What's becoming clearer is the extent to which Enron's way of business depended on twisting laws and regulations in its own favor, and how they would lean on just about anyone to do it, regardless of region or party affiliation.

Let's look first at California. Surely, we can't blame Enron for the flaws in the California deregulation plan. Unless, that is, they resulted directly from lobbying by Enron.

Salon has a "premium" article up entitled "Enron's California Smoking Gun". It doesn't live up to the title --- there's nothing like the direct evidence of market gaming that exists for other energy companies. But there is this account of Enron's role in the lobbying around the writing of the bill:

Lenny Goldberg, lobbyist for the Utility Reform Network (TURN), says Enron played a key role in setting up California's broken marketplace. "Unlike the market in Pennsylvania, which is transparent and works, Enron was pushing for a pretty murky, nontransparent, easily gameable market. They wanted much less authority and power in the [Independent System Operator], so it would be much easier to manipulate the market."

The ISO was designed to be a central command station coordinating the scheduling for the delivery of power so that everyone would get the power they needed. But Goldberg says Enron's insistence that the coordination be conducted essentially in private helped energy producers artificially manipulate the market.

During hearings before the Public Utilities Commission, as the state was crafting its deregulation plan, Enron argued for establishing a separate power exchange, or PX, to serve as a sort of clearinghouse, a place where competitive forces would lower the price of power for California electricity consumers.

"Their argument was that you don't want utility-like people running a market," says John Rozsa, an aide to Sen. Steve Peace, who played a key role in the Legislature's first attempts at electricity deregulation. "It gave them the ability to arbitrage between markets, and that's what their business was. What Enron really wanted was a dark market -- contracts that were not subject to any regulatory scrutiny."

In short, Enron didn't want a market that was transparent and efficient. They wanted a market they could game, and game in secret. And they intervened with the government --- specifically, the legislative boiler room run by Democrat Steve Peace --- to get one. (The bill had a harbinger of sorts in Peace's career before entering the legislature, a highlight of which was his scriptwriting credit on Attack of the Killer Tomatoes, which he also coproduced. But again, I digress).

This perhaps adds a new shading to Enron's subsequent interaction with the Bush administration, in which Ken Lay evidently got the chairman of the Federal Energy Regulatory Commission bounced because he wouldn't agree with Lay's policy prescriptions on electricity deregulation.

But, latter-day defenders of Enron, take heart. Enron's revenues from the California market were less than they appeared to be. Much less. And thereby hangs a tale. It seems Enron accounted for revenues differently from traditional brokers:

Because Enron operated in a largely unregulated arena and because of the way energy trading firms are allowed to account for their operations, the company recorded revenue that made the economic status of its business appear larger than it really was. Under accounting rules, when an energy trading company trades electricity or gas, it can count as revenues the whole amount of every transaction rather than simply the profit or loss, as a brokerage firm does.

It is similar to the way Priceline .com counted as revenues the whole sale price of plane tickets sold online rather than just commissions, as traditional travel agents do.

That is largely how Enron, a relative newcomer to the trading of commodities and related financial instruments, was able to produce $101 billion of revenue in 2000, up from $40 billion in 1999. By comparison, Goldman, Sachs, a highly regulated firm with a long history of trading in the field, generated $6.5 billion in trading revenue last year.

So, Enron's balance sheet started with something like a revenue soufflé --- mostly hot air. And that, in turn, pumped up the size of the company:

To a Wall Street obsessed not with earnings but with revenue growth, the performance propelled Enron's shares into the stratosphere, enriching executives and investors. "The way these revenues were accounted for at Enron essentially made them pro forma revenues, which have little basis in reality," one institutional money manager said. "Yet the size of the revenues allowed the company to expand its balance sheet by piling on debt. That is why the company unraveled so quickly."

So, here's the history of Enron in a nutshell. They started out as an unremarkable natural gas pipeline company, which got into trading. Taking advantage of a loophole in the rules, they booked misleading revenue figures: buy at $8.10, sell at $8.15, and book as revenue not the five cents you made on the deal, but the whole $8.15. That made them look to Wall Street like much bigger fish than they actually were, and Wall Street, besotted with the fictional high revenues, was happy to give them all kinds of money, which Enron was happy to spend on, among other things, office buildings, dotcom stock deals (Rhythms Netconnections, among others, now bankrupt), baseball stadium naming rights (it's a wonder the team wasn't renamed the Houston Enrons), and of course, the immense collection of gee-whiz, high-tech crap that decorated their trading floor, while expanding their trading operations, and the cooked accounting associated with them, into entirely new markets. When the bills for this stuff, and of course, numerous bad deals in the energy business that was supposedly their core competence, started to add up, they shuffled the debt off their balance sheets into the now-infamous "partnerships" (Raptor, WhiteWing, JEDI, Chewco --- named for Chewbacca), and became famous for dealing with inconvenient questions about their accounting by sneering that anyone stupid enough to ask such a question "just didn't get it." Until, of course, the real answers started to leak out, at which point the seventh largest company in the Fortune 500 disappeared in a cloud of greasy, black smoke.

What got this all rolling was the inflated revenues produced by Enron's unconventional accounting --- which they could get away with because they weren't subject to the usual rules for traders. That gives you some idea of the cold cash value of the rules exemptions which Wendy Gramm secured for them as head of Reagan's Commodity Futures Trading Commission, just before joining Enron's board (for which she has collected, by now, about a half million dollars in board fees, by my rough reckoning) --- and which her husband, Texas Senator Phil Gramm, got written into the law itself, lest another regulator decide to take a closer look.

In short, Enron used its ties to politicians to twist the laws in its favor. If your standard for what's a scandal is illegality, this doesn't amount to much --- but then again, the Clintons' involvement in Whitewater didn't amount to much in the end either. And let it be said that the politicians don't seem, yet, to have been aware of any overt illegality at Enron until this fall, and there's no evidence yet that they did anything improper when becoming aware of it.

But if your standard for scandal is whether people with friends in high places get to enrich themselves improperly at the expense of the public, ratepayers and investors both, then there's already more here than Whitewater. Much more --- hundreds of millions of dollars in profit from sales of puffed-up stock for the executives, and hundreds of thousands of dollars of profit for the politicians, as opposed to tens of thousands in loss. And the use of a targeted rules exemption to generate cooked revenue figures adds a new twist to Kinsley's rule, "the scandal is what's legal."

Lastly, as to the partisan issues --- I didn't say "ties to Republican politicians" because a lot of them weren't. Steve Peace, the erstwhile Tomato-meister, is a Democrat. But no one disputes that Lay and Bush have known each other for years, and for much of that time enjoyed a close personal and professional relationship. What does it say about Bush that he never noticed that Lay was --- as now seems entirely plain --- a crook?


Post a Comment

Subscribe to Post Comments [Atom]

<< Home