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The trouble with Enron

Paul Krugman's column in yesterday's New York Times came closer to what seems to me is the real danger of Enron-like situations than anything else I've read so far.

After the initial round of speculation about scandal and "Enrongate," some in the media now seem to be reacting skeptically to the outrage, citing the Bush Administration's apparent refusal to try and bail out their supposed buddies as evidence that everything was on the level.

But the issue isn't just what happened after Enron began to collapse — it's more about the impropriety of government officials having vested interests in a company, and the fact that those interests conflicted with those officials' responsibility to their offices and their constituents. And this conflict existed long before Enron actually collapsed.

Is it likely, for instance, that a company like Enron would be objectively regulated and scrutinized by the appropriate government agencies? (As Krugman writes, "[Enron CEO Ken] Lay allegedly told the head of the Federal Energy Regulatory Commission that he should be more cooperative if he wanted to keep his job. (He wasn't, and he didn't.)") Would a government official who suspected inappropriate behavior have the guts to speak up, and, if he or she did, would his suspicions be thoroughly and responsibly investigated?

Moreover, could government officials objectively and responsibly determine if Enron was in fact an appropriate corporation with which to consult on policy, or contract with for services? Doubtfully. But, of course, as Krugman notes, Enron was closely consulted on Dick Cheney's energy plan; Krugman goes so far as to say that that plan "certainly looks as if it was written by and for the companies that advised his task force."

The question isn't, Did Bush & Co. break any laws to try and save their good friends and sponsors at Enron. The question is, Can corporations buy state sponsorship, in practice even if not in principle? And, What can we do about it?

Update: Frank Rich has also written a very good opinion piece on the subject, with some interesting details.

January 16, 2002 3:13 PM

Comments (and TrackBacks)

Nice analysis. What is similarly and perhaps more troubling is Arthur Anderson's role in this mess. Enron's money bought not only politicians, but accountants. If the verity of financial reports are capable of being this compromised, it would rightly give pause to anyone who would invest in stock. So here you have a company that is largely unregulated (because it owns politicians), helps frame the debate on public energy policy (because it owns politicians), and is supported by money that is gained fraudulently (because it owns accountants). It sounds like a swell life for an ambitious corporation. I certainly wonder how many others have figured out this magic formula?

Posted by Dan "The Voice of Piedmont" Phillips on January 16, 2002 4:13 PM

these are the issues no one's talking about:

1) why haven't any enron execs been arrested or their assets frozen in this case?

2) a decade of encouraging public trust in the stock market is shattered by pathetic SEC enforcement of accounting rules.

Posted by q on January 16, 2002 7:32 PM

The accounting issue is perhaps even more troubling, I agree. Accounting rules are the only standards that enable the public (including investors, of course) to measure companies, both relatively and absolutely.

The thing is, accounting rules are stretched regularly. The reason industry analysts and Wall Street go so hard on companies that miss estimates is because they know that a company's accountants will wring every possible penny out of the books, twisting and reinterpreting every rule and regulation they know to maximize profits. So when a company can't meet expectations, it's not like things just slowed down a little -- something probably went wrong.

But these abuses only became so costly to the public because so much money was flowing into the stock market in the '90s, and it's only relatively recently that the resulting profits (for investors, executives and accounting firms alike) turned to losses and shame.

Something needs to be done, but this is a new development, I think, and it will take some time to sort out and properly address.

Posted by M on January 16, 2002 7:57 PM


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