Thursday, December 26, 2002

To the extent that Enron still has defenders, their line has to be that the company started off with a sound, or at least plausible, business plan, but then overreached. That was certainly the line taken by Ken Lay and an amazingly friendly reporter in his recent Forbes interview, where they tell...

...the tale of a company that was great before it was guilty, of a man who championed the deregulation that ought to outlive this scandal. Having covered Lay on and off for much of the past 20 years, I met with him again recently to talk about all of this. The one condition: We wouldn't thrash over recent history. Far from seeming defensive or defeated, he was relaxed and upbeat, confident that history would exonerate his work.

But it now seems that questionable accounting went all the way back to the founding of the company, when one oilpatch company, called InterNorth, bought another, Houston Natural Gas, and for some odd reason paid several billion dollars more than HNG's market value. Management of the combined company explained the purchase by applying "fair value adjustments" to the book value of some of HNG's assets --- for example, a pipeline with an estimated book value of $800 million, which was carried on Enron's books as a $4 billion asset. After which, quoth the Times:

... as the years passed, Enron sold parts of Houston Pipeline. Since no acquirer was willing to pay the value that had been assigned to the system, accounting rules normally would have required Enron to record a loss on those sales. To avoid that outcome, Enron shifted billions of the fair value adjustment from the pipeline itself onto a storage area associated with it.

Though the assumptions that had allowed Enron to inflate the pipeline system's value were ultimately undermined, the company never restated the value of the assets, people who have examined the company's financial records said. The exaggerated value represented several billion dollars worth of the $14 billion write-down that Enron's new management said would be appropriate.

At the time of the merger, Enron management proffered a mumbo-jumbo explanation of the pipeline valuation, saying that it would become much more valuable as the hub of a network. But particularly in light of subsequent events, it seems perhaps more reasonable to conclude that Enron's accounting involved billions of dollars of fraud from the get-go.

On another topic, there are also folks who are still trying to deny that Enron was particularly close to Dubya's administration, or its principles. Well, on the now-famous Enron party tape, the same one that features Enron executives joking about fraudulent accounting, George Bush Sr. tells Enron's outgoing president, anent George Jr., "You have been fantastic to the Bush family. I don't think anybody did more than you did to support George."

Which says something about Dubya and his associates, but also something about Enron. Remember that Ken Lay's career before Enron was largely as a lobbyist, and while he and the company were perhaps a bit loose in monitoring their money, they tended their political connections closely, to the extent of constructing a computer system which Josh Marshall memorably described as the "influence peddlotron", to try to figure out how best to exploit their political pull. Which raises the question --- did Ken Lay, Dubya's good friend "Kenny Boy", found a company which then took advantage of loose regulation, or was he first a Washington player who deliberately created a regulatory vacuum, and then structured a company to exploit it?


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