Notes from the Editors

The meltdown of Enron, the giant energy trading firm, which recently ranked as the seventh largest U.S. corporation—now its largest ever bankruptcy—is one of the most startling events in U.S. financial history. Only a few months ago Enron was the toast of Wall Street. It was the symbol of the New Economy and of the deregulation of both finance and energy markets. Its former CEO, Jeffrey K. Skilling, promoted the idea that assets were not what made a company valuable. Instead what counted was a corporation’s intellectual capital. He sold the idea of Enron as a nimble, highly-leveraged, “asset-light” company engaged in aggressive internet-based trading. The point is that this huge and highly regarded corporation did not make anything. Nor did it perform a service like distributing energy. It was in essence a purely speculative enterprise, making money through trading made possible by the deregulation of a basic consumer need (electricity). And U.S. business bought it! For six years in a row, the editors of Fortune magazine selected Enron as the “most innovative” among the magazine’s “most admired” corporations. Enron was a principal fundraising source for President George W. Bush’s electoral campaign. It was a big winner in California’s electrical deregulation crisis, which generated skyrocketing electricity prices and huge profits for big energy traders. Enron’s corporate empire was underwritten by some of the biggest U.S. banks, including J. P. Morgan Chase and Citigroup.

And then the bubble burst. Financial analysts are still trying to figure what went wrong, but Enron was clearly an example of a classic Ponzi financial scheme, in which debt was piled on to debt, while assets were few and far between—fewer even than its unsuspecting investors thought. Only a sharp turn in the market was required before Enron suddenly collapsed like a house of cards. It is not suprising that some of the executives and other big investors got their money out first, leaving the workers whose savings were tied up in the company with massive losses. 

What are the lessons to be learned from this? Interestingly enough, the main lessons, according to both the mass media and the business press, go no further than financial mismanagement, corruption, and a lack of financial transparency. Enron’s fall, we are led to believe, has nothing to do with any of those things that it was previously thought to symbolize: the New Economy, speculative finance, internet trading, and deregulation. Enron now simply represents a monstrous accounting error or even crime. The reason for this very consistent, across-the-board establishment response is obvious. Capital is searching for a way to cover up the fragility the New Economy and speculative finance. Enron’s faults, we are assured, were its own, and had nothing to do with the corporate world in general. Enron was simply a bad apple. To even whisper the truth, which is widely in conflict with this, would of course invite a wider meltdown. Meanwhile, the march of financial folly continues.

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