2002 was the year of the corporate scandal—as company after company was revealed to have claimed "assets" to their stockholders and stakeholders that were actually nothing but vapor. A major corporate reform bill, Sarbanes-Oxley, passed as a result. What have we learned? Not much. Now it's banks like CitiGroup writing down phantom assets. When conservative failures infect the government, it's always corporations gone wild.
Free Market Fundamentalism > Corporate Wilding
On May 25, 2006 a jury in Texas found Enron’s former CEOs Kenneth Lay and Jeffrey Skilling guilty of fraud, conspiracy, and insider trading. Lay and Skilling managed to simultaneously claim that cooking the books was a normal business practice in the go-go new economy, and that they didn't know about any of the bad stuff, anyway.
But until the law caught up with them, it was their very mastery of these questionable techniques that got them hailed as heroes of the global information economy. Enron, at its height the seventh largest company in the U.S., made all the magazine covers for scorning the old ways of doing business—owning pipelines, pumping gas. Instead, it did deals, created markets, bought and sold across the globe. Skilling was hailed as the paragon of the modern manager.
In a way, he was. Their abuses were too often business as usual at the top of the corporate food chain. It wasn’t just Lay and Skilling, it was the other corporate leading lights as well: Bernie Ebbers, Dennis Koslowski, John Rigas, the Arthur Andersen accounting firm, Martha Stewart.
Five years after conservatives reluctantly set up the corporate fraud tax force, there have been 1,063 convictions, including 167 corporate presidents and CEOs and 36 chief financial officers. Literally thousands of companies have “restated” their profits in the wake of new laws that hold executives responsible for the accuracy of their reporting.
More recently, banks have 'written down' billions of dollars of phantom assets, as securities backed by dodgy subprime mortages have proved to be worthless.
The question is whether the conservative policy makers that created the conditions for these crimes in the first place will ever join them at the bar of justice.
Remember the cult of the CEO? Claiming that piranha capitalism would generate growth, jobs and innovation, business clamored for government to free them from regulations, curb trial lawyers, and give them new tools to break labor unions. So the Gingrich Congress passed corporate welfare laws insulating executives, accountants and lawyers from accountability while making civil suits by small investors more difficult to file. Stock options were essentially off the books.
CEOs got a multimillion-dollar incentive to cook the books, to plunder their companies in order to meet short term profit goals—“earnings management” was the euphemism. Too few resisted the temptation to cut corners.
Lay and Skilling may have gone to jail, but Enron conservatives still rule in Washington. They still play dangerous games with stock options. They still seek to insulate executives from civil liability. They still drive deregulation and celebrate an economy in which CEO salaries are soaring, while wages are stagnant and Americans are spending more than they earn. They still dismiss the corporate crimes as a problem of a few bad apples.
Enron was named Fortune Magazine’s “America’s Most Innovative Company” for six consecutive years. Its innovation was not in producing electricity, however. Its innovation was in removing government inspection of trading practices and speculating on the buying and selling of electricity contracts. This was a disaster on every front.
After deregulation in 2000, California experienced significant price spikes in electricity and 38 Stage Three Emergencies requiring rolling blackouts, up from one in the previous year.
Enron’s wholesale services revenues quadrupled — from $12 billion to $48.4 billion – in the same year.
Disdain for Government > Corporate Wilding
It couldn't have happened without the ideology of privatization. Postmortem investigations by state and federal officials concluded that power generators and power marketers intentionally withheld electricity, creating artificial shortages in order to increase the cost of power.
Enron took advantage of lax oversight following deregulation and formed a complicated web of more than 2,800 subsidiaries—more than 30 percent of which were located in officially designated offshore tax and bank havens.
In 2001, Enron restated their books and it was discovered their overall equity was exaggerated by over $2.1 billion from 1997 to 2000. The collapse of the company vaporized 5,600 jobs and $60 billion in company market value.
Arthur Andersen. Arthur Andersen was Enron’s financial auditor. Half of the $52 million a year Arthur Andersen collected from Enron was consulting work—largely advising them how to distort their books to circumvent the tax system. Half was for auditing work—signing off that their books were not distorted. The obvious conflict of interest was ignored. When regulators began closing in, Andersen began shredding documents. By the time the Supreme Court overturned its conviction on obstruction of justice, the company was no more. Andersen’s unethical practices cost 85,000 jobs worldwide.
Qwest. Qwest Communications was the nation’s third large phone carrier service. Former CEO Joseph Nacchio was sentenced to six years in prison for insider trading for selling $100 million worth of Qwest stock in 2001, after being warned months earlier by company insiders that the telephone company could not meet its aggressive financial projections. During his five-year tenure, federal prosecutors and regulators allege Nacchio presided over a $2 billion accounting scandal. Among the transactions in question were a series of deals from 1999-2001 with Enron's broadband division which may have helped Enron conceal losses.
The company ultimately restated $2.2 billion in revenue for 2000 and 2001 after the accounting irregularities came to light, triggering legal action against Qwest and its former executives. Qwest's stock price plummeted from more than $60 a share in 2000 to just $2 a share in 2002, and its near-collapse left thousands of pensioners, including many employees, in financial panic.
The federal government gives tax subsidies and regulatory breaks to favored businesses or to favor certain business behavior. In some cases, it can subsidize important advances. In many cases, it’s just a gift. Pay-to-play politics are another example of the fallout of conservative ideologies in practice.
The companies that benefit most from deregulation work hardest to game the political system in order to achieve it. They contribute to political campaigns and enjoy revolving-door access to positions of public trust. President Bush was the number-one recipient of Enron's campaign contributions—in the neighborhood of $1.2 million. He then filled his administration with former Enron consultants, lawyers, advisers, officers and shareholders. And the cronies delivered.
Under President Clinton, the SEC proposed rules barring accounting firms from providing consulting services to companies they were also auditing. It's a conflict of interest, after all, to have the same company advising a client on how to distort their books to circumvent the tax system, and signing off that their books were not distorted. But Clinton’s proposal was defeated by a lobbying campaign funded by the accounting industry, spearheaded by a man named Harvey Pitt—who President Bush promptly appointed to head the SEC.
Ken Lay, Enron’s CEO, was a “Pioneer” for the Bush campaign, raising more than $100,000 in contributions. The Bush-Lay correspondence reads like the letters of two old friends—an intimacy stunning for a business whose success depends on how well it can game the regulatory system.
In December 2000, Texas Senator Phil Gramm muscled a bill through Congress that deregulated energy commodity trading. The bill contradicted the recommendations of President Clinton's Working Group on Financial Markets, which is composed of representatives from the Department of Treasury, the Board of Governors of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working Group expressly recommended against deregulating energy commodity trading because the traders would be in strong positions to manipulate prices and supply.
Phil Gramm was the second largest recipient in Congress of Enron campaign contributions, receiving $97,350 since 1989.
Phil Gramm’s wife, Dr. Wendy Gramm, was chair of the Commodity Futures Trading Commission (CFTC), which exempted Enron’s trading of futures contracts in response to a request for such an action by Enron in 1992. Six days after she provided the exemption, she resigned her position at the CFTC. Five weeks after her resignation, Enron appointed her to its board of directors, where she served on the board’s audit committee. She was compensated with between $915,000 and $1.85 million in salary, attendance fees, stock option sales and dividends from 1993 to 2001.
Wendy Gramm’s service on the audit committee made her responsible for verifying Enron’s accounting procedures and other detailed financial information not available to outside analysts or shareholders…until after their fall from grace.
Miscast Morality > Corporate Wilding
With conservatives, immorality is only judged against individuals, never against corporations. When it comes to business, the most basic rules of ethical and moral conduct fly out the window. After Republicans lost the November 2006 elections, President Bush announced that executive agencies' regulatory policy offices would be run by political appointees, not by civil servants and scientific experts as in years past. The business community is already enthusiastic about the rule change.
Then, in June 2007, former Enron employees took another slap to the face. Treasury Secretary Henry M. Paulson arranged for President Bush to directly weigh in on a Supreme Court case. This case challenged the precedent that when securities laws are violated, only those who actually broke the law, not outside advisers or others who did business with the company—like the banks that set up the fraudulent deals—may be sued. As it turns out, Treasury Secretary Paulson is a former chairman of Goldman Sachs, and a named defendant in the Enron case. He was also one of George Bush’s backers in his rise to the presidency.
Should this conspiracy against victims of corporate wilding succeed, Enron’s former employees will be completely unable to recuperate their losses, maintaining the renewed gilded age economics of the last 30 years.
How Conservatism Caused This Failure...
Fair market competition requires referees—exactly the kind of government function conservatives can't stand. So they fired the referees—and the results were predictable. read more »
In the 1990s, California's conservative governor Wilson's partially deregulated electricity—only the most notorious of the privatization frenzy that set the conditions for the corporate wilding of the Bush years. read more »
Corporate wilding is a natural when the only morality the governing conservative coalition cares about is the sexual morality of individuals—not the behavior of the most powerful institutions in society. read more »
To conditions for the Enron scandal were set by a Republican corporate giveaway to the energy companies—Pete Wilson's partial deregulation of electricity, which forced public utilities to sell off significant parts of the power generation to largely unregulated private companies. read more »
The Bush-era corporate scandals would never have been possible without the relaxation of accounting standards—which let accounting firms provide consulting services to very companies they were also auditing. read more »
The man who would end up as one of the worst corporate malefactors in U.S. history, Ken Lay, was a Bush "Pioneer"—one of his top fundraisers. His executives were instrumental. Lay then advised Vice President Cheney on whom to pick for his top-secret energy task force, and included himself as one of the members. read more »
After Republicans lost the November 2006 elections, President Bush announced that executive agencies' regulatory policy offices would be run by political appointees, not by civil servants and scientific experts as in years past. read more »
One of the sickest spectacles of the corporate scandals of the Bush administration was the Versailles-like estates that the corporate wolves lived in while they were fleecing the lambs—just desserts for their bootstrapping hard work, according to the ideology of conservatism. read more »