Time to revisit Enron: ask why, asshole.Posted: June 6, 2012
I’ve just finished watching ‘the smartest guys in the room’ a documentary which goes through the detail of exactly what happened at Enron before it went bust. I’m surprised on so many levels, but perhaps mostly by how little I had understood of the scandal’s DNA, from the coverage at the time and since.
In my mind it had been an accounting scandal, the lunacy of mark to market combined with Arthur Anderson’s complicity and some market rigging of the Californian electricity markets. It was more than that though. Enron’s position as the poster boy of free market ideology (something I had missed) was a causal factor, not an accidental correlation as many seem to believe.
The scandal is also a testament to that ultimate human frailty, the happy decision to proceed with stupidity, largely because someone told us to, and everyone else was.
There is also a wider lesson here, something that resonates with the challenges that we currently face.
Those challenges can be stated as a question; how should we structure capitalism today?
To help answer that question it is instructive to ask exactly what Jeff Skilling did to get to the top? Jeff was an ideas man. The idea he introduced was this.
When faced with the difficulty of making sufficient returns on the production, sale and distribution of power (originally the market Enron played in was gas, electricity came later) Skilling took the company in a different direction. They became traders in the energy markets. This is easy to misunderstand because, of course, they always were trading in the energy markets.
The indication here is that we are talking of 2 different meanings of the words trader / trading.
Enron originally was a trader in the sense that they sourced, extracted and distributed the raw materials (gas) of energy production. They pulled it out of the ground and sold it.
Skilling added a 2nd, but wildly different, sense of the word trader. He turned them into a company that traded power in markets. Enron traders became traders in the sense that the stock exchange floor is populated by traders.
To be clear. They reduced the focus on creating a product and selling it to their, and their customers advantage, and became a drain instead, making money as a by-product of trades of energy commodities.
They became a financial company, instead of a company that makes products.
It is past time that this approach to wealth creation is removed from the ascendant position it currently occupies as the primary and most significant driver of western economies. Effecting this change is one of the most significant challenges facing modern capitalism.
We don’t need to lose the bankers. We don’t need the bankers to be put in the poor house. We just need to get them into a support role for production capital, rather than expending their energy in endless schemes to create new money without any real underpinning wealth and value. The zero sum game needs to stop, and it needs to stop NOW.
Analyst: You are the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings…
Jeffrey Skilling: You, you, you… Well, uh… thank you very much. We appreciate it… asshole.
That quote was from a public earnings call with analysts. Skilling, the CEO, could not explain how Enron made money and publicly called the analyst an asshole for asking a very reasonable question. That is probably worth repeating.
The CEO could not explain how they made money and publicly called the analyst an asshole for asking a very reasonable question.
Enron was a black box. In one end went desires, out the other end came a set of what we now know were fraudulent earnings statements. And that’s before we even start to examine the horrendous rigging of the Californian electricity market and the actions of the CFO in hiding losses.
The documentary uncovered tapes of the Enron traders talking about the market manipulations in California.
The concept of arbitrages, as used here, is quite vital to the situation. Essentially California had been experimenting with deregulation of the energy markets. Arbitrage was the process whereby loopholes were found, within the remaining regulations, and exploited. Even though this seemed legal to the traders, on paper, it is clear how they actually viewed these practices.
“He just f—s California,” says one Enron employee. “He steals money from California to the tune of about a million.”
“Will you rephrase that?” asks a second employee.
“OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day,” replies the first.
There is evidence that they asked producers to turn off production to create artificial supply shortages resulting in artificial increases in price.
“If you took down the steamer, how long would it take to get it back up?” an Enron worker is heard saying.
“Oh, it’s not something you want to just be turning on and off every hour. Let’s put it that way,” another says.
“Well, why don’t you just go ahead and shut her down.”
And then there are the comments that show just how little concern these people had for the impact of what they were doing, which, for what it is worth, and in my opinion, was behaving like a pack of feral little shits.
“They’re f——g taking all the money back from you guys?” complains an Enron employee on the tapes. “All the money you guys stole from those poor grandmothers in California?”
“Yeah, grandma Millie, man”
“Yeah, now she wants her f——g money back for all the power you’ve charged right up, jammed right up her a—— for f——g $250 a megawatt hour.”
Free market ideology and deregulation have been the corner stone of western economic policies since the days of Thatcher and Reagan. The economic theories of Carlota Perez show that these policies, that favour finance capital over production capital do indeed have a time and a place. I am not discounting their use in appropriate circumstances, but for now, in this part of the cycles their day is done and we need to urgently move on. If nothing else surely the Enron debacle proves such a point.
The last time we saw this changeover of ascendancy between finance and production capital was after the depression of the 1930’s. It took 13 years and a world war to complete. Let’s not be so stupid this time too.