REVIEW & OUTLOOK
Enron's Sins
Capitalism is solvent, even if some companies aren't.
A reformed German Communist named Willi Schlamm once said that the "problem with capitalism is capitalists; the problem with socialism is socialism." We've been thinking about that distinction as we try to make sense of Enron's self-immolation.
The story may be fading away as a political scandal. But merely as a business scandal it's a problem for anyone who believes in free markets. The price for Enron's financial shenanigans won't be paid only by its shareholders, auditors and creditors. Politicians will seize on its sins as another excuse to meddle in financial markets, which is all the more reason for market believers to be ruthless in cleaning out our own closets.
We do know this isn't a scandal of the usual Washington variety. Though the press corps seized on White House reports of calls from Enron officials, the story fizzled when it turned out nothing happened. As our Washington bureau wrote this Tuesday, the cold reality is that corporate political donations guarantee little more than a hearing. For all of Enron's political largesse, it couldn't order up a bailout or even the regulatory nod requested by former Treasury Secretary-turned-Enron-lender Robert Rubin. We knew the political scandal had gone poof when the Beltway started using Enron as one more prop for "campaign finance reform." Yawn.
Washington is fascinated nonetheless because of Enron's size and symbolism; Enron's long self-promotion as the vanguard of the New Economy increases the Schadenfreude at its collapse. Above all, this looks like a case of corporate deceit. Whether or not Enron's actions violated any laws, they certainly violated the public trust essential for free markets to work. For that alone its managers deserve the public stocks.
The details of Enron's now famous off-balance-sheet partnerships remain murky. But it's clear they were an attempt to disguise losses from bad investments. The partnerships, backed by Enron shares, moved risky businesses off its own balance sheet. If these businesses worked, Enron booked the profits, which helped pump up its share price. But when the businesses flopped, Enron covered the losses by issuing more of its shares; this worked for as long as Enron's stock price stayed high but it became a kind of Ponzi scheme once its shares began to fall.
This was at the very least deceptive accounting. Adding to their sleazy appearance the partnerships paid fees to Enron officials who were also principals in the partnerships. Former CFO Andrew Fastow earned more than $30 million from this sweet arrangement. Enron can say all of this was reported in its 10-Qs, but the company made its filings as obscure as possible. Financial pros couldn't figure them out, much less employees with their life savings in Enron stock. The point of accounting is transparency, which means writing in something other than hieroglyphics.
Yes, we know, Arthur Andersen was supposed to blow the whistle on all of this as Enron's outside auditor. But as any junior market reporter knows, auditors almost never discover these schemes. Shredding documents is a more serious matter, but auditors can't sit at every CFO's shoulder like a guilty conscience. Even internal auditors rarely discover scams and audit committees of the boards of directors even less often.
We're all for a big debate over corporate governance. But somehow we doubt the early proposals for a new layer of auditors to watch over the old ones is an improvement. As our Holman Jenkins wrote Wednesday, a better idea might be to drop the federal mandate for an annual audit, which has become a phony good housekeeping seal of approval. Let CEOs take responsibility for their own numbers and make a credible audit something of competitive value.
We'd say it's also impossible to understand Enron outside of the moral climate in which it flourished. Those were the roaring '90s, when all of America reveled in the economic boom. They were also the Clinton years, when we learned that "everybody does it." The culture wanted to believe in Enron's promises, which helps explain why 16 of 17 Wall Street analysts rated Enron a "buy" as recently as last October.
Enron's failure reveals the underside of that boom. Human nature being what it is--and capitalists being human--some will lose their moral bearings, others will make mistakes and try to cover them up. Had Enron merely admitted its bad investments and taken a $20 billion write-off the way most companies do, it might still be around. Its managers would no longer be feted as geniuses of the new economy, but that's a better fate than they face now.
The burden on the political and financial system now is to clean up Enron, and learn from its failures, without doing further damage. In the Washington tradition, this may mean burning some people or companies at the stake, but maybe in this case they deserve it. We are sure going to find out.
In all of this, we should add, the Bush Administration has so far shown the right instincts. President Bush called early for investigations that are now taking place, both civil and criminal. His advisers seem to be following the ancient political wisdom, ignored during the Clinton years, that telling all early is the best defense.
A Republican Administration, with its alleged sympathies for markets, has a special burden to police capitalists who abuse their freedom. If the Bushies do this the right way, they can restore trust in markets and ensure that Enron's sins will do less permanent damage to capitalism.
