Enron Outrage

Let me be the first (or the last) person in America to offer some sympathy for Enron. Various executives of the company became hundred-millionaires while most employees lost the value of their options and the equity in their pension funds. That’s the basis for popular outrage. But it seems worth noting that this is not terribly different from what happened in the dot-com meltdown (where, to my knowledge, there are no indictments forthcoming).

We are told that Enron is guilty of using “aggressive” accounting practices, also called “off-balance-sheet” accounting – hiding, or obscuring, or putting a better spin on, the amount of money you owe. This seems wrong – at least everyone is acting like it is very wrong – but most of us would be hard-pressed to say whether this is a common business practice, or, if it’s aggressive, how aggressive? (“Enron’s colossal collapse has prompted a growing number of corporations to take a hard look at practices and relationships that might create similar problems,” according to the Times, implying that a company may not know if it is Enronish.) Indeed, at what point does an aggressive business practice become too aggressive? Was Enron’s “financial engineering” different from all the other financial engineering in corporate America? Did Enron’s investment banks, consultants, accountants, law firms do something different from what other investment banks, consultants, accountants, law firms do? (Enron, after all, was using the same investment banks, consultants, accountants, law firms that many other big businesses use.)

According to Business Week, “Even if Enron and its high-priced auditors and lawyers can ultimately show that they followed the letter of the law, it matters little.” Well, it matters little because the company is already bust, but it would seem to matter a lot in terms of figuring out what all this means – scandal? Incompetence? Or plain bad luck? – and who is to blame and what moral we should draw. (“No one knows for sure whether the actions that led to the collapse of the company constituted financial crimes,” added the Times.)

We know that President Bush (struggling mightily to avoid the moniker “the President From Enron”) nicknamed Enron chairman and CEO Kenneth Lay “Kenny Boy” (but perhaps this was said, as it sounds, in a dismissive or mocking fashion). We know that Enron was one of the largest contributors to the Bush presidential campaign (even that Enron hired right-wing political op Ralph Reed on Karl Rove’s suggestion, becoming a kind of off-campaign-balance-sheet means of hiring for the Bush campaign) and, further, that the company gave money to almost any influential person who would take it. This suggests, if not outright conspiracy, then a lesser sort of conspiracy – log-rolling and back-scratching among the elite. On the other hand, this is also called P.R. and lobbying.

One contrary result of passing around all this money is that many of the people who have taken it (more than just taken money, really – more like having joined the Enron club), including the president, now feel compelled to damn and distance themselves from Enron. Peggy Noonan, the influential Republican speechwriter, memoirist, and Wall Street Journal columnist, says she took, “if memory serves,” between $25,000 and $50,000 (why won’t she say exactly what she took?) to write a speech for Ken Lay. As part of her mea culpa, she said she really didn’t know much about business – the implication being that it was easy to fool her – and anyway, she met only with underlings, but nevertheless, now she understands that Enron deserves a “big Texas whippin’. ” The Times op-ed columnist Paul Krugman also took money from Enron – 50 grand (he took the money, he points out, before he joined the Times – but when he was writing for other publications). And while this may look bad (“What was I doing there? Beats me,” he confesses cheerfully, if not helpfully), Krugman feels his current fierce attacks, as opposed to the nice things he wrote when he was on their payroll, should balance the ledger (the conservative columnist Andrew Sullivan is obviously pleased to have found a Democrat caught in the Enron tide and is mounting a campaign to have Krugman return the $50,000).

We know, too, that Enron was trading as high as $90 a share, and that – although few understood what it did – it was widely thought to be a crown jewel of corporate America (as so many failed companies of the nineties were thought to be crown jewels). “The GE of the new economy,” said one analyst. And then, suddenly, it wasn’t. It did not, however, lose its value because of the scandal but rather became a scandal because it lost its value. In other words, just as long as what it was doing worked, everyone was pretty happy. (“Companies with highflying stocks tend to get positive coverage; those whose stocks slide tend to provoke critical assessments,” noted the Times, which had often spoken highly of Enron.)

Enron, even though the legal issues surrounding its collapse are vague, and the exact nature of the chicanery almost impossible to explain (the sheer complexity of its bookkeeping has become part of the indictment), has clearly been demonized. (Obviously, having one of its executives commit suicide doesn’t help the situation.) It has transcended ordinary business failure, or even roguish financial scandal, to become the symbol of something rotten in America – a cancer at the heart of entrepreneurial capitalism. On the basis of Enron’s possible duplicity, entrepreneurial capitalism itself may be, we seem to be concluding, the cancer. Newsweek’s Jonathan Alter went so far as to say Enron made him fear for American capitalism.

Now, I am sympathetic to Enron only in a most reluctant way. It was, in any conventional sense, an illusion – like so many other companies of the boom era. On the other hand, I was sitting in a CNBC green room the other day with former SEC enforcer Ira Sorkin (if Enron becomes a long-running cable-talk-show drama, Sorkin, with his deep scowl and stained trench coat, will be a much sought-after guest) when he demanded, rhetorically, of me and the green-room production assistant, “Where were the outside directors and the auditing committee? What were they thinking?”

I thought: I know what they were thinking.

They – that is, virtually all of the financial, corporate, and legal professionals associated with the company – were thinking they had it under control. They were thinking they were engaged in, and on top of, a very advanced form of business strategy – and theory. After all, business is, they might have argued, a sleight of hand, a piece of theater, a construct, a good face, a show of bravado, rather than a careful calculation. Business is, they would surely agree, the ultimate existential struggle between being and nothingness. And they were quite likely thinking that they were among the few people who could play this very challenging financial and philosophical game (far from everyone can – it takes special talents).

They were masters of the universe, big swinging dicks, whatever.

And indeed, they were playing this game because Wall Street wanted them to play it.

A $90 share price, a valuation of $35 billion, was the reward not for value but for virtuosity. For genius. Enron created a grand illusion not only of solvency but of inevitability. Enron CFO Andy Fastow, the financial mastermind who created the complex, almost-impossible-to-follow network of partnerships and off-balance-sheet mechanisms, was the brains; everybody else was cheerleader and salesman.

And believer.

They were messianic about deregulation, commoditization, derivatization, about turning everything they touched into financial instruments.

Their off-balance-sheet m.o. may prove to be, in some literal sense, fraud, but it was also religion. What a New Economy company does is fight against the tyranny of the balance sheet. New Economy evangelists believe that a balance sheet reflects only a single moment in time and so cannot tell the whole story of a company’s fortunes and true value and real potential. A New Economy company, therefore, has to distance itself from the balance sheet – subvert it, even.

A year ago, Arthur Andersen, knowing everything that the company had done, fully familiar with the grandness of the illusion it had helped create, mindful of the dangers, aware that Enron posed “significant risk,” weighed getting out and thereby protecting itself. Instead, it rolled the dice. The accounting firm was betting that Enron would be able not only to maintain the illusion but to make it real. To make it big with one of its visionary schemes – bandwidth futures, for instance. Make gentle the aggressive accounting. Make good on that $1.2 billion of outstanding debt instead of having to write it off so tragically and clumsily this past October.

And indeed, after months of lobbying by the technology industry, the Wall Street Journal just reported, “Both President Bush and Senate Majority Leader Tom Daschle are preparing ambitious programs to give more Americans fast Web connections …”

Might that have done it?

Can you imagine how reading that must have pained Messrs. Lay, Skilling, and Fastow? If only they could have held on a few months longer, their bandwidth-futures bet might have paid off big-time.

American business, from the plundering of the S&Ls to the reign of Michael Milken to the age of the dot-coms, seems to exist in two realities. Unfettered, unregulated, unsupervised; free of logic, rationality, and criticism; adored by the media and by politicians. Or besieged by literalist prosecutors (is there any other kind?), outraged politicians, and a moralizing press.

In the case of Enron, when its stock was at its high, it would have been difficult to find anyone who’d have wanted to doubt the logic or probity of its financial structure (those who did were ignored). Even within Enron, it’s reasonable to assume that someone weighed the options: You could take all the debt onto the balance sheet and thereby reduce the value of the company by half or two thirds or more, or you could take an aggressive posture toward the debt and maintain the company’s value. Which option would investors and employees and even lenders prefer?

But now someone has to pay not only for Enron’s failure but for the vast bitterness, and deep embarrassment, left by the bursting of the larger New Economy bubble. Someone has to pay not least of all because that’s the way others – politicians and members of the media, for instance – avoid being implicated.

Enron, because we don’t know what it did, or even exactly why it failed (or before that, why it succeeded), and also because it has entangled so many well-known people with it, and possibly, too, because its name is so opaque, became the ideal catchall.

What we mean when we say Enron is that it is scary that we don’t know how companies work, and that we feel guilty about having been blinded, or drugged, by high share prices, and angry about having lost what we once thought we had gained, and that we suspect powerful people were getting their hands greased at our expense. And, of course, when we say Enron we mean that the little guy always gets screwed.

This has little to do with truth or logic or law, but it probably has something to do with balance. Absurd wealth is followed by righteous punishment, which in turn is followed by the creation of even greater wealth and again more punishment. This might make some sort of sense.

E-mail: michael@burnrate.com

Enron Outrage