The Enron Scandal Revisited: Part 1

The Enron scandal is old news, except for the thousands of employees and investors who were damaged by it. A handful of executives were sent to federal prison, and a big accounting form was forced out of business. The extent of the damage it did to our institutions and even the full extent of what was going on are not known.


Enron Energy Services Corporation declared bankruptcy on December 2, 2001. It was the seventh largest firm in the world, and this was the largest bankruptcy in history. Its collapse was spectacular because it had consistently reported very high earnings, and its stock was a high flyer. There is no way of knowing if the Bush administration knew this was coming.

The evidence is clear that there was a great deal of activity in the administration designed to make Enron more profitable. Some of the activity was unprecedented, as in the case of a special task force to persuade India to bail out the Enron power plant in Dabhol. The full story of the symbiotic relationship between the Bush administration and Enron will never be known. The Justice Department drug its feat for a long time before requesting Enron documents, leaving much time for shredding. Yet there was enough information on the record to indicate that Bush appointees moved heaven and earth to help Enron and others game California energy prices, and then they took multiple actions to prevent a thorough investigation. Congress did little to explore the scandal, with the House under Republican control and corporation-friendly Joseph Lieberman leading a superficial probe.

For five years, the firm massaged its stock price by maintaining a fake trading floor on the sixth level of its Houston headquarters. Meanwhile it was incurring and hiding great losses. Among 22 major losses were $2 billion in broadband communications, $2 billion in a Brazilian utility, 1 billion in water development, and potentially 3 billion in an electric generating plant in India. Once a year, when outside energy analysts visited it was a beehive of activity. Former Enron energy analyst said that there were really no transactions taking place; it was an “elaborate Hollywood production.”

The first signs of Enron wrong-doing turned up in October, 1987, when the SEC brought charges against two officials of Enron Oil Corporation, an Enron subsidiary. These officials, Louis Borget and Thomas Mastroeni, were conducting the firm like a huge pyramid scheme and apparently even writing checks to themselves. The subsidiary kept two sets of books and sometimes used private bank accounts for huge trades. The firm eventually showed a $142 million loss for the subsidiary, but many of its records were destroyed and that figure could not be verified. Their office in Valhalla, N.Y. was closed and they went to prison for sham oil trades and dummy offshore companies to disguise their illicit operations and evade taxes.


Enron chief financial officer Andrew Fastow sat on the board of the Houston Federal Reserve Bank. Fastow developed various means of moving assets and losses off the books. Today, it is assumed that the losses were parked abroad but few liquid assets are hidden in tax havens. But there is no way to know if this is true. Assets and liabilities were mainly placed in subsidiaries and partnerships. The point was to hide losses and inflate earnings data by making profits essentially a function of trading operations. Enron losses were huge and losses included $2 billion in a Brazilian utility, $1 billion water development, another billion n an electricity plant, and $2 billion in supporting broadband communications. Enron’s collapse came when it disclosed it had hidden a billion dollars in losses by not showing them on its financial statements. Profits were inflated by this amount through the use of spin-offs called “special purpose entities” (SPE’s), where assets, transactions, and losses could be hidden. Included in that amount was $340,000,000 on an Indian power plant, where potential losses were far greater. The firm managed to hide more than $1,000,000 in losses over a several year period.

Enron bought good publicity in the press by putting journalists and others on retainer as consultants. The firm “collected visible people,” such as politicians, journalists, and pundits, and placed them on retainer. These individuals were brought to Houston to spend a few days talking with executives in return for checks that were in the five figures. Some of the retainers amounted to $50,000 a year. Among those who received Enron money were Paul Krugman of Fortune, William Kristol of the Weekly Standard, Standard Contributor, Irwin Steltzer, and Lawrence Kidlow of NBC. Kristol was paid a $100,000 a year. They provided favorable press; however, Krugman reversed course when his salary became public. Robert Grady, vice chairman of Resources for the Future wrote a piece for Time in 2001 advocating the trading of greenhouse gas emissions rights. His foundation received $45,000 and the promise of $2,000,000 from the Lay’s foundation to establish a research chair.


Most members of the media required no payments to give Enron glowing reports in the years immediately preceding its collapse. For six consecutive years, Fortune named Enron “America’s most innovative company.” They were as wrong about Enron as they were about the dot.com boom of 1995-2000A few analysts such as Jon Olson of the Sanders Morris Harris Group posted regular warnings about Enron but were ignored. Its many political ties and rosy, but clearly misleading financial statements should have alerted many others. When the firm considered getting into electronic pornography via broadband Internet in 2001, few took notice.

Michael Milken, who went to prison for fraudulent junk bond operations, admitted in 1987 that he had advised Enron on how to structure its debt. After he was released from prison, Ken Lay had Milken address Enron executives. There was also a pattern of using losses to reduce tax obligations while making certain they did not appear on statements that investors and market analysts would see. Much of the debt was hidden in subsidiaries based in places abroad where the US could not get a look at their books.


In the three years before the firm went belly up, twenty-nine top executives exchanged stock for $1.1 billion in cash. Enron executives were unloading stock while preventing employees from doing the same with shares in their tax sheltered retirement plans. It turned out that it had concealed huge losses and that the Arthur Andersen accounting firm had given its blessing to the firms shoddy bookkeeping practices. In addition to auditing, Andersen was receiving large payments for offering financial advice. In March 2002, Andersen was indicted by a federal grand jury for violations of securities legislation. The firm had shredded many documents relating to the case and had approved dishonest bookkeeping practices. The Justice Department had no choice but to ask for an indictment because Andersen had been involved in a case involving Waste Management, Inc. in which dubious accounting practices had led to inflated statements of profits. Andersen had signed to avoid wrongdoing.

The collapse of Enron was covered more as a financial than a political scandal. One observer suggested there was a media “smoke screen to keep the political leaders web of Enron connections from scrutiny. They overwhelmed the footage on nightly news shows of former Enron employees in T-shirts dragging focus trees from their offices down the steps of the two gleaming corporate skyscrapers on Houston’ Smith Street.” Andersen was found guilty of obstructing justice.

There was also a political side to the story as Enron had unusual access to politicians and people in the Bush administration. Chairman Ken Lay had called Secretary of the Treasury Paul O’ Neill and Commerce Secretary Don Evans in October, asking for help. They offered none. By that time, the energy giant’s fate was sealed; nothing could be done to help. The Bush administration emphasized that it did not respond positively to these two calls, suggesting that large campaign contributions had purchased nothing.


Enron executives made huge donations to politicians, and the vast majority of its contributions went to Republicans. George W. Bush was a major recipient of their largess. Kenneth Lay, Enron board chairman, was a close friend of George W. Bush, who called him “Kenny Baby” and his largest political contributor. His firm, through individual executives, gave 73% of their contributions to Republicans and 27% to Democrats. In return for that largess, Congress and the administration placed a provision in the Bankruptcy Act of 2002 that would bar creditors from pursuing offshore accounts. Enron had almost 900 off the books operations. Many of these partnership arrangements were centered in off shore accounts, most of which were in the Cayman Islands and Caribbean. Other corporations had joined Enron in obtaining protection for their offshore bank accounts. It has been suggested that many of Enron’s concealed losses were associated with these off-the book partnerships handled through off shore accounts. Some Enron executives made huge profits on these operations, while it was eventually reported that the same operations incurred the losses that brought bankruptcy to Enron. Clifford Baxter, a ranking Enron executive, was found dead due to a gun shot wound one week before he had agreed to testify before Congress. Baxter had shown interest in hiring a bodyguard, but the death was ruled a suicide by a coroner with a checkered past. Police said they were continuing the investigation.


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President George W. Bush attempted to distance himself from Ken Lay, claiming he only got to know him in 1994. The president claimed that Lay supported Governor Ann Richards in the 1994 race even though records demonstrated that Lay contributed far more to Bush than to the Democratic incumbent. Lay was close to the younger Bush’s father in the 1980s, and it is likely they were well acquainted then. In March, 2002, an article in The Nation forced Bush strategist to admit that George W. bush was involved in an oil deal with Enron in 1986, but Rove added that the president had “no recollection of this specific deal.” At the time, Bush was operating Spectrum 7, a company that was not doing well until the joint venture paid off. It was soon be acquired by Harken Oil. Ken Lay was then head of Enron Oil and Gas, but Bush has claimed that he did not come to know Lay until 1994. Later, evidence turned up that Bush had been a partner of Enron in 1985 well-drilling project in Martin County, Texas. ( ) In 1997, then-Governor Bush attempted to persuade his friend Governor Tom Ridge of Pennsylvania that Enron was a solid company and that the Keystone State would do well to adopt the kind of electricity deregulation advocated by Enron. ( )

While Bush was claiming he had no special ties to Lay and Enron, it was revealed that Bush aid Karl Rove arranged for Enron to put Christian Right consultant Ralph Reed on its payroll . The conservative Judicial Watch announced it was going to court to learn if this was a method of concealing a campaign expense. The Nation Magazine resurrected a story reporting that George W. Bush had pressured the Argentine government to give Enron a contract in the late 1980s, but the story received no play elsewhere. Young Bush was then running for governor of Texas when the story came out. His campaign denied that he had discussed a pipeline contract with an influential former energy minister in Argentina. Enron built that line when Carlos Menem, president of the senior Bush, became president of Argentina. After George Bush, Sr’s successful Gulf War, Enron was employed by Kuwait to rebuild its Shuaiba power plant even though the cost of Enron-supplied power was projected to exceed those associated with other bids.
Karl Rove, the president’s friend and assistant, met with officers of several corporations in which he held stock. The meeting was a possible violation of federal law. It was reported briefly in the press and dropped. Had that been a Clinton assistant, it would have received much greater play in the press and Congressional Republicans would have demanded at least a Justice Department investigation. At little later, it came to light that Rove had lied about ownership of a political consulting firm. This was only reported in a few papers.( ) Alberto R. Gonzales, White House counsel, found it necessary to admit that Rove had also participated in formulating Bush administration energy policy while he still held Enron shares and stock in other energy firms.


Sherman has written African American Baseball: A brief History, which can be acquired from LuLu Publishing on line.