An Inclusive Litany

2/18/02

In the wake of the sudden collapse of Enron, America's largest energy futures firm, Senator Joe Biden (D-DE) told NBC's Tim Russert on "Meet the Press" that "if there was any, any [government] involvement because of the incredible help the Bush campaign got from Enron here, it will be... devastating."

Both Commerce Secretary Don Evans and Treasury Secretary Paul O'Neill said that they were contacted by Enron chairman and CEO, Kenneth Lay, as part of an effort on Enron's part to keep its fraudulently inflated stock price from collapsing, but both officials refused to intervene. Speaking on CBS's "Face the Nation," Senator Joe Lieberman (D-CT), who chairs a Senate committee investigating Enron, called O'Neill's comments pledging not to prop up Enron "outrageous," and warned the Bush administration may be investigated in the matter.

Bill Allison of the Center for Public Integrity, an ethics watchdog group, said that administration officials "were tied at the hip to Enron," and that Enron's campaign contributions made it hard for the administration to subsequently intervene on their behalf. "The appearance would have looked terrible," Allison observed. "They felt that they couldn't act on behalf of Enron because of the political fallout."

Absurdly, the Enron scandal fortified efforts to pass sweeping "campaign finance reform" legislation prohibiting certain kinds of "soft money" contributions directly to political parties—a provision that favors incumbents—and banning much political "issue" advertising on television within two months of an election. (Even its supporters admit some of its provisions may be unconstitutional, and few honestly believe that it will do any more than divert the flow of political funds.) Various politicians such as Sen. John McCain (R-AZ) came forth to ritually confess that they had also accepted Enron contributions and thus had been "tainted." And of course, proposals to tighten accounting standards came long after the market pummeled other companies suspected of similarly dubious practices.

What's more, critics simultaneously denounced fraudulent accounting practices that inflated the company's worth, while expressing concern over the economic effects of the nation's supposedly largest bankruptcy (not adjusted for inflation, that is). This, despite the fact that Enron had only 19,000 employees—less than one quarter that of Arthur Andersen, its accounting firm, and far less than that of K-Mart, which went bankrupt under less remarkable circumstances at about the same time.

The hardest-hit Enron investors engaged in one of two fundamental errors: failure to diversify (investing no more than 10 percent or so in any one company), and failure to invest for short-term needs more conservatively, typically by buying bonds rather than stocks. Employee stockholders—intoxicated by prior high returns and enjoying generous company stock-matching rates (50% up to 6% of earnings) as part of their 401(k) plans—loudly complained that they were not apprised of Enron's dire financial status in time to unload their stocks onto other suckers. Such a private disclosure would be morally questionable, perhaps even qualifying as insider trading. And if such a damaging disclosure were widely publicized, it would have violated the executives' fiduciary responsibility to company stockholders, inevitably bringing forth lawsuits. Employees also complained that they were not able to unload their stocks while their 401(k) plan was being transferred, even though this "lock-down" period had been announced the previous year, long before any doubts were raised over Enron's future. By the time the lock-down commenced, Enron's stock had already lost most of its value prior to its final nosedive.

Lastly, many critics took the collapse of Enron as evidence of the folly of Social Security reform, which would presumably lead more people to play the stock market. Social Security is, of course, a case study in questionable accounting practices that by its continued existence has destroyed immeasurably more wealth than Enron ever did by collapsing. Although its defenders compare the program to a conventional private pension fund, Social Security taxes are not invested, but rather are directed towards various government commitments as part of general revenue, on a pay-as-you-go basis. This is why it subsequently becomes a problem when too many baby-boomer retirees are supported by too few younger baby-bust workers, leading to calls to increase the payroll tax or the retirement age, both of which further cheat taxpayers or retirees. What's more, tax dollars are simultaneously counted as a decrease in the government's deficit and an increase in the Social Security "Trust Fund," even though the mythical fund's "assets" are merely paper notes backed by the promise of future tax dollars, and money owed from one government agency to another is not counted as "debt." Aside from the fact that Social Security has all the fiscal soundness of a chain letter and a criminally low yield, its accounting practices alone would land its administrators in jail if it weren't a government program.

No comments: