Connections: A Free-Market Parable

The latest instructive example (as if more were needed) of the wondrous, self-governing free-market economy failing to govern itself is the Enron implosion, which has led to the largest business bankruptcy in history. A presumably impregnable company, number seven among the Fortune 500, the leading natural-gas and electricity marketer in the nation, and the exemplar of go-go capitalism, has gone belly-up. In the process, thousands of employees have lost their jobs and retirement savings, and thousands of investors have seen their stock holdings dissolve; company executives, meanwhile, have escaped with their golden parachutes intact.

Technically, this result was brought about by shoddy or illegal accounting practices, questionable management decisions, too much debt, and excessive expansion in too short a time. Fundamentally, however, it was the outgrowth of an attitude that has become dominant in our time: When it comes to economic competition and business practices, the Devil take the hindmost. And, in our laissez-faire economy, the Devil is, as they say, a player. The beneficent "invisible hand" of Adam Smith's unfettered marketplace, which in theory should have created serene societal balance out of the self-seeking aggrandizement in Houston, has turned out to be a mailed fist hammering the gullible, the unwary, and the unprotected.

We don't yet know how the Enron mess will ultimately play out. For now, it's fun to watch, unless you're one of the aggrieved parties. Enron, after all, is the same energy-trading monolith that put California through an economic ringer last year by boosting wholesale power prices into the stratosphere, while its friends in the White House and on the Federal Energy Regulatory Commission (FERC) looked the other way. So, there is a certain poetic justice being applied here. On the other hand, Enron did not operate in a vacuum, and the company's troubles can be expected to ripple through the rest of the economy. Like the concentric circles of disturbed water produced by a thrown rock, the effects will eventually reach the far end of the pond.

This would be a minor problem if we still had the mixed, regulated economy of a generation ago, but that's no longer the case. Americans are about to experience some of the downside of the interconnected, yet unsupervised free-market economy created over the past 20 years. The immediate fallout concerns Enron's creditors, including New York-based financial giants like JP Morgan Chase and Citigroup, which can't collect on their estimated $900 million in unsecured loans. It's hard to feel sorry for arrogant mega-banks run by multimillionaire CEOs, such as Citigroup's politically connected James Rubin, but their suddenly endangered stock is indirectly held by thousands of ordinary individuals through 401(k) mutual fund investments now put at risk by Enron's chicanery.

Also financially exposed are thousands of state workers whose public-employee pension funds were partially tied up in now-worthless Enron stock. Affected states include Arizona, Georgia, Rhode Island, Florida, Washington, California, and Ohio, and combined investment losses total at least $1 billion. State attorneys general are scrambling to recoup by filing lawsuits, but you can't get blood from a stone. Most of the money, unfortunately, is probably gone forever.

Then, there is Enron's suspected partner in crime, the once-esteemed accounting firm of Arthur Andersen & Company, whose careless or compromised auditing procedures allowed Enron to stay at the dance past the midnight hour. Lack of federal rules prohibiting accountants from simultaneously serving as business consultants for the companies they audit -- rules presciently but futilely requested of Congress by President Clinton's first-rate Securities and Exchange Commission Chairman Arthur Levitt -- allowed obvious conflicts of interest to develop unhindered; the temptation to "cook the books" to please Wall Street appears to have been overpowering at Enron. This has already led Connecticut Attorney General Richard Blumenthal to investigate Arthur Andersen's involvement with companies in his state. And if it turns out the Andersen modus operandi is shared by other major accounting firms, a Pandora's box of mindboggling proportions may have been opened.

The ripple effect of the burgeoning scandal goes far beyond pension funds and stock ownership, however; it extends to the nation's suddenly imperiled electric-power system. The sad fact is that the mostly deregulated US energy sector is now firmly in the hands of freewheeling wholesale-marketing firms like Enron, which raises the question: How many other interstate power marketers are doing business the same way? Enron itself controlled fully one-quarter of the American electricity market prior to its collapse, and its bankruptcy instantly rendered a wide swath of energy consumers vulnerable across the country. In the state of Maine, for instance, 600 commercial and industrial customers (a quarter of statewide businesses) depended on the Houston-based middleman for their power supply, a supply now in jeopardy and subject to price hikes if existing contracts have to be renegotiated.

It's important to draw the right lessons from the upcoming Enron soap opera set to run in prime time over the next several months. Vested interests have already begun to stake out positions, generating protective "spin" to deflect criticism and ensure that the public arrives at the desired conclusions. The Republican Party, for example, will be at pains to deny that the Bush White House has had even the remotest connection with Enron. Don't believe a word of it. Several key members of the administration, we now know, either worked for Enron, held Enron stock, or were grateful recipients of Enron's lavish campaign contributions.

The president himself referred to his good buddy and chief financial supporter Kenneth L. Lay, the company's recently abdicated CEO, as "Kenny Boy;" you don't give cuddly nicknames to casual acquaintances.

So far, there is no smoking gun, but there was a quid pro quo of sorts. For its political money, Enron gained regular input into the deliberations of the secretive Cheney task force on energy and broad influence over what became the Bush energy policy. It also obtained effective veto power over the chairmanship of the FERC and ultimately obtained a fervent proderegulation chairman who was sympathetic to its interests.

This brings us to the ideologues of the free market, another interested party in the Enron case. They will try to claim that the unfolding debacle has nothing whatever to do with electrical deregulation, that the chaotic power system being put in place is fundamentally sound, and that a few bad apples in Houston don't spoil the barrel. But the truth is Enron couldn't have gotten away with what it did without deregulation, and knowing this, the company was in the forefront of the movement to loosen government controls. It lobbied heavily for the respective 1992 and 2000 congressional acts that deregulated wholesale power distribution and energy trading in commodities markets, and it led a thankfully unsuccessful effort to impose federally mandated retail deregulation on the various states. Right up to the end, Enron was working overtime to ensure there were no regulatory cops on its beat. There's a lesson here for Washington policymakers, if they choose to see it.

Wayne O'Leary is a writer in Orono, Maine.

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