Sunday, Jul 6, 2008
Ironically, only one thing could have saved the now-imploding corporate poster child for deregulation: Tougher regulations requiring more financial "transparency."
Nov 9, 2001 | It's never a good sign when a pack of Wall Street Journal reporters start nipping at your heels, rending your financial filings into tiny shreds and howling at every daily downgrade in your stock price and bond credit rating. But such has been the fate of Enron Corp. over the past two weeks: The company that Wall Street and the financial press lauded above nearly all others at the turn of the century is suddenly teetering on the brink, desperate for infusions of capital, seeking a "white knight" buyer and suffering from the unwanted attentions of a formal SEC investigation.
As the world economy sinks ever further into recession, stories of high fliers brought down to earth are hardly unusual. But Enron's abrupt transformation into dot-com blow-out wannabe deserves special attention -- and for those of us who live in California, impels the kind of schadenfreude that you can't shake, no matter how hard you try.
Enron is the natural gas, electricity, pulp, paper and bandwidth trader named by Fortune Magazine's readers as the most innovative corporation in the land six years in a row. Enron's leader, Ken Lay, is a close friend of the Bush family, and was the largest single campaign donor to George W. But even though the business press was anointing Enron's every move during the late '90s with capitalism's finest holy water, the company didn't penetrate the wider public consciousness until the California energy crisis.
Then, as Enron raked in billions of dollars of profits on its electricity and gas trades nationwide while blackouts plagued Californian citizens, Enron suddenly became the perfect symbol of the new "robber barrons" -- the Texas energy companies who were supposedly taking California to the cleaners (although Enron itself played a much smaller role in California's crisis than other companies). Not everyone saw Enron as villain. Sure, to many Californians, Enron was a greedy price-gouger making hay off environmentally obsessed yuppie SUV drivers; but from a free-market point of view, Enron was the perfect avatar of deregulation -- a company that profited by being smart, ruthless and constantly on the lookout for new markets.
Ken Lay, who at one point was considered for the post of "energy czar" in the Bush administration, did take every opportunity to use California's woes to push his particular political line. The problem with California's "flawed" deregulation plan, he noted, was that it wasn't deregulated enough. And not only did California need more deregulation, he said in interviews with the likes of CNBC and Thestreet.com and anyone else who would listen, but it also needed more "transparency" -- by which he meant that energy consumers, producers and traders needed clearer information on demand and pricing, and more freedom to move power around wherever it was needed.
Far be it from me to defend California's electricity deregulation plan in any way, shape or form -- "flawed" is a particularly limp word to use to describe a strategy that was cooked up by Republican appointees to the state's Public Utilities Commission at the behest of California's own energy utilities but ended up driving those very utilities to bankruptcy and beyond. But it is interesting to contemplate, in light of recent Enron developments, this call for "transparency."
Because "transparency" is precisely what Enron has long been dead set on preventing with regard to its own operations -- not just for competitors and consumers, but also for its investors, Wall Street analysts and now, belatedly, the federal government. When the going was good, and Enron was reporting mind-blowing profits, few people cared that they couldn't make head nor tail of Enron's accounting tricks, or that no one outside of the company could figure out exactly how Enron was making its money. But once Enron started to report losses, the emperor's clothes fell off with impressive quickness.
Although it's still far from clear precisely what kind of games Enron's executives were playing with their own numbers, the more we learn suggests that it was precisely the kind of classic three-card-monte hide-the-money finagling that true "transparency" would have prevented. Now the company appears to be in big trouble -- on Thursday, it restated its earnings for the last five years, and according to reports in the Wall Street Journal and the New York Times, it may be on the verge of being purchased by a much smaller competitor, Dynegy.
One wonders if Enron could have avoided such an unhappy fate if it had benefited from some stricter government supervision, or, dare we say, regulation?
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