BY EVA CHENG
"We followed him like lemmings into the sea", said Deborah De Fforge, one of the bankrupt Enron Corporation's 22,000 employees, as she recounted how the workers' trust in Enron CEO Kenneth Lay's sweet words had been bitterly betrayed.
At the first signs of Enron's trouble last August, Lay vehemently assured workers at an all-employee meeting that the company — the seventh largest in the US — was just doing fine other than going through a few bumps. Most of the 12,200 workers who collectively put nearly 60% of their retirement savings in Enron stocks accepted Lay's words in good faith. In doing so, they lost the chance to rescue their life savings.
Within weeks, the company announced a third-quarter loss of US$618 million and that it had overstated its profits since 1997 by US$580 million. It had also hid US$500 million worth of debts from its public accounts, which eroded its capital base by US$1.2 billion. Moody's, a credit-rating agency, immediately slashed Enron's rating, which triggered a stream of mandatory repayments to creditors. This caused Enron's share price to plummet.
A rescue "merger" with a rival firm then fell through, leading to the company's inevitable filing for bankruptcy protection on December 2. Though the company may still be resurrected on a reduced scale, the loss of most of the jobs and workers' retirement savings is permanent.
With a market valuation once peaking at US$68 billion, Enron's demise ranks as the world's largest corporate collapse. It was also the largest energy company in the US, based in President George Bush's home state, Texas, where it thrived under his pro-business policies.
Not all workers trusted Lay and could have sold their Enron shares earlier had they not been barred from doing so for weeks after mid-October under the excuse that the administration of the retirement savings plan was being changed. Yet during this same period, Enron's top executives and directors were able to exchange hundreds of millions of dollars for their Enron shares. Between 1999 and mid-2001, 29 executives cashed out US$1.1 billion.
Were those insiders abusing privileged information? This and other related questions are now the subject of at least eight government and congressional investigations, including a criminal probe by the US justice department. Various lawsuits, including a class action by Enron workers, are also underway.
Money-greased politics
One line of investigation is whether the government officials aware of Enron's troubles could have acted to protect the interests of Enron shareholders, creditors and workers. Chairperson of the Federal Reserve Board, Alan Greenspan, was informed on October 26; Lay called treasury secretary Paul O'Neill two days later and again on November 8; Enron president Lawrence "Greg" Whalley followed this up with Peter Fisher, the treasury's undersecretary for domestic finance, "six to eight" times during late October and early November; and commerce secretary Donald Evans also received calls from Lay.
Enron's chiefs were clearly soliciting special favours from government allies to pressure the banks and debt-rating agencies on their behalf. Questions remain whether other favours have been granted.
Other questions have been raised over Lay's influence over the Bush administration's energy policy. The White House energy task force, headed by vice-president Dick Cheney, met Enron representatives six times over a seven-month period last year. The General Accounting Office (GAO), Congress's investigative arm, has been seeking more information since April about this task force but Cheney has refused to cooperate. Independently, the National Resources Defence Fund and the Judicial Watch have both filed suits against the Bush administration seeking documents related to the task force.
The fact that many Enron executives were recruited from past Republican administrations and regulatory watchdogs made the questions even more pressing.
It surprised no-one that the Democrats have been particularly keen on this line of investigation. For them, while pinning down any officials would be good, catching the real "big fish" — George Bush — would be particularly rewarding. His presidency could be endangered if substantive dirt linking him to Enron scams come to light.
After all, that Lay is one of Bush's and his family's closest mates is hardly news. Nor is the fact that Lay and Enron have been some of the largest donors to Bush and his Republican Party. Enron and its executives and directors, according to the Centre for Public Integrity, had given Bush US$623,000 since 1993. Lay, as well as a mate of George Bush senior, has backed Bush junior ever since his unsuccessful bid for Congress in 1978.
Bush has tried to distance himself from Lay, pointing out that Lay supported Ann Richards, the former Democratic governor of Texas, in the 1994 election campaign. He also quickly set up reviews on retirement fund rules and corporate disclosure regulations.
Another line of investigation targets the role of Enron's auditor firm, Arthur Andersen. The revelations that Andersen has been on "an expedited effort" to shred documents related to Enron, destroying thousands of items between October 23 and November 9 were explosive. That period coincided with the first announcement of a Securities and Exchange Commission enquiry into Enron and the SEC's subpoena to Andersen for Enron's records. The obvious question is: what has Andersen got to hide?
Andersen sacked a partner on January 15 and ordered three more to take mandatory leave, but the firm's responsibilities did not end there. As external auditor, Andersen's role is to scrutinise Enron's accounts and ensure they represent a "true and fair view" of the company's affairs. But it fell short of that by a huge margin.
A key problem is the US$500 million in debts stashed away in "special purpose entities", out of the public accounts. This resulted in a gross misrepresentation of Enron's financial affairs and helped push up its profits. Andersen's explanation seems to change every other day: in December it said that "there is no requirement to disclose [those items]" and it has no power to force the company to disclose them; a later response was that the firm had made an "error of judgement" for allowing the debts to not be disclosed; and even later Andersen complained of having been "misled".
Whether Andersen has been fraudulent remains unanswered but what's clear is that the business-friendly corporate law in the US is structured to allow an accounting firm to play conflicting roles. Not only has Andersen been Enron's external auditor for more than a decade, it also conducted Enron's internal audit between 1994 and 1998. In addition, Andersen also offers Enron consulting and advisory services.
The latter services often involved advising how to be "tax efficient". An external auditor should independently scrutinise these schemes, but asking one and the same firm to perform all these roles is a sure way to build a scandalous "time bomb". Enron has just blown up, and there will be more.
The farming out of various roles among different firms will do nothing to stop the institutionalised practice of accountants "legally" helping capitalists to dodge taxes at working people's expense.
Meanwhile, workers are also systematically ripped off in many other ways with the government as a willing accomplice, as the Enron case clearly illustrates. The promise of retirement security not only helps to dampen workers' perceived need to defend their wages and conditions, such schemes in the US also offer employers generous tax breaks.
Like Enron, many US companies only contribute to these plans in the form of company shares which reduce their actual costs. Like Enron, many US companies disallow workers from selling the company's contributions before they reach the age of 50 or so, thus creating for the company a stable base of sympathetic shareholders.
Nortel Networks, Lucent Technologies and Global Crossing, just to name a few, have also imposed similar schemes on their workers — and they have been devastated recently.
Workers' misplaced confidence in companies have enticed many to also invest their own contributions in shares. Enron said this accounted for 89% of the Enron stocks in those schemes, with the rest coming from the employer's contributions.
While conventional defined-benefit retirement schemes generally limit investment in any one stock to about 10% to diversify risk, such a plan is not offered by most big US employers.
A recent Institute of Management and Administration survey of 219 of the largest defined-contribution schemes found that 20% have more than half their portfolios in the employer's stock.
Dallas Salisbury of the Washington-based Employee Benefit Research Institute was upfront about the role of the defined-contributions schemes. He told the January 2 London Financial Times that those plans are designed to help workers retire with company stock, not to provide a diversified investment portfolio for retirement.
Any hope that the Democrats are any freer from the money-greased politics is misplaced. Nearly half of the members of the current US House of Representatives and almost three quarters of US senators have received donations from Enron, according to the Centre for Public Integrity. Enron ranks only 36 in total political donations, far outstripped by jumbo corporate donors such as AT&T, Microsoft, Philip Morris and Lockheed Martin.
From Green Left Weekly, January 23, 2002.
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