A philosophical investigation into Enron
books.guardian.co.uk
As lawyers pick over the carcass of the energy giant
which became a byword for corporate greed and
mismanagement, what could Wittgenstein teach us
about its spectacular rise and fall? Quite a lot, actually,
writes Donald MacKenzie in our latest LRB essay
Monday May 26, 2003
The Guardian
Pipe Dreams: Greed, Ego and the Death of Enron by
Robert Bryce. Public Affairs, 394 pp., £9.99, November 2002, 1
903985 54 4
Enron: The Rise and Fall by Loren Fox. Wiley, 384 pp.,
£18.50, October 2002, 0 471 23760 4
The Four Seasons hotel, Houston, January 20 2000. The
investment managers and analysts packed into the ballroom are
paying only partial attention to the presentation by the Enron
Corporation. On the New York Stock Exchange, Enron's shares
have been rising all day, by as much as $2 an hour.
It is now mid-afternoon, New York is about to close, and the
members of the audience know that the moment to profit will
have passed if they wait for the dramatic announcement they all
suspect is coming. Out come the mobile telephones. "They
weren't even leaving their chairs, they were calling their traders
and saying, 'Buy it, I don't care what the price is, buy it,' " one
attendee told Robert Bryce.
As New York closes, the announcement comes. Enron, which
began by owning pipelines carrying natural gas, is going to
organise the trading of "bandwidth" (capacity) in pipelines that
carry information, the fibre-optic cables of the Internet. At the
end of a tumultuous day, Enron's stock price has risen by 26%.
The Waldorf Astoria, Manhattan, November 19 2001. This time,
the audience is Enron's bankers. Any mobile telephones will
have been used to say "sell", but they probably won't have been
needed. All those present already know that Enron is in
potentially fatal difficulties. The previous month, it had
announced "non-recurring" losses of $1.01 billion.
Some had been incurred in the bandwidth business it had
entered so triumphally the previous year, but Enron had also
admitted large losses from its dealings with a "special purpose
entity" (of which, more later) with the unrevealing name of LJM2
Co-Investment, LP. Despite this warning of trouble, the scale of
what the bankers are told on November 19 is remarkable.
Enron's balance sheet for the third quarter of 2001 had reported
debts of $13 billion.
Now, the audience learns of an additional $25 billion of
previously undisclosed debt. Appeals to the bankers are of no
avail, just as calls to the Federal Reserve and the Bush
Administration fail to produce a rescue. On December 2 2001,
Enron files for bankruptcy protection, at that point the largest US
corporation ever to do so.
Though caught up in the Internet boom, Enron was not a
stereotypical dot.com, all hype and no substance. It was a
serious and imaginative firm. Every year from 1996 to 2001,
Fortune magazine ranked it the US's "most innovative"
company, and the award was given in earnest: Fortune isn't big
on irony.
Enron combined expertise of two types. One was in managing
physical assets such as pipelines, electricity generating plant
and water systems (in the UK it owned Wessex Water). It was
often very good at this. For example, the Teesside co-generation
plant, built by an Enron-led consortium, processes natural gas,
generates around 3% of Britain's electricity and turns what
would otherwise be waste heat into steam for ICI's nearby
petrochemical complex. The plant was widely regarded as
exemplary when it opened in 1993.
Owning physical assets was, however, seen by Enron largely as
a lever for an ever more important second kind of expertise in the
burgeoning area of energy trading. First in the US and then
elsewhere, industries such as gas, electricity and water were
liberalised in the 1980s and 1990s, making it possible to create
markets where none previously existed.
Enron positioned itself between the producers of energy and its
consumers by, for example, offering large industrial consumers
of natural gas the security of long-term fixed-price contracts. It
then "hedged" the risk of such contracts, for example by buying
the gas "futures" that the New York Mercantile Exchange began
to trade in 1990 - a "future" being a standardised contract to buy
or sell a set quantity of a given asset at a set price on a given
future date.
Enron's ambitions were huge, and lay in areas in which
government still called the shots. Accordingly, it built links to
political power. Its connections to George W Bush have
attracted much attention. They were indeed longstanding, with
deep roots in Houston's local politics, and went beyond financial
contributions: in 1986, Enron was involved in joint drilling with
Bush's company, Spectrum 7. Enron's chairman, Kenneth Lay,
seems to have developed a joshing intimacy with Bush. Loren
Fox reproduces Bush's 1997 birthday letter to Lay: "55 years
old. Wow! That is really old. Thank goodness you have such a
young, beautiful wife."
Political links outside the US were also important, particularly in
India, where Enron's massively expensive Dabhol electricity
generating plant, the first such privately owned project in the
subcontinent, was mired in controversy, and viewed as
inappropriate by the World Bank. Local protesters were
allegedly beaten up by the police and subjected, according to
Amnesty, to arbitrary arrest. The then US ambassador to India,
who condemned the plant's cancellation (soon to be reversed)
by the state government of Maharashtra, later joined the board of
Enron Oil and Gas.
Bush's critics have failed to find the "smoking gun" in his links to
Enron that might threaten his presidency. He, other Republicans
and many Democrats would often have wanted to provide the
free-market conditions that Enron sought, even if funding had not
flowed in their direction from the corporation. Bush did not grant
Enron the single decision it perhaps most desired: for the US
administration to withdraw its objections to the Kyoto Protocol
limiting greenhouse gas emissions.
If it seems odd that the corporation was in favour of Kyoto,
remember Enron's commitment to making money by creating
markets. If an effective system of global control of carbon
dioxide emissions is ever created, it will most likely involve a
system of tradeable permits. Companies or countries that can
reduce their emissions cheaply, or that do not need their full
carbon dioxide quotas, will be able to sell emissions permits.
Other companies or countries will then buy them if that works
out cheaper than cutting emissions.
Economists reckon that emissions trading will make it possible
to achieve necessary reductions in greenhouse gas emissions
at minimum cost. It's not a silly idea: in the US, sulphur dioxide
permits have successfully been traded by Enron and many
others since the start of the 1990s. Tradeable greenhouse gas
permits could even be egalitarian. If permits were issued on a
simple per capita basis, the consequence would be a huge
transfer of resources from rich to poor countries, though
preventing benefits simply being absorbed by elites in the latter
is a difficult issue.
Greenhouse emissions trading is, however, a prospect to make
any trader drool. Carbon dioxide permits would quickly be
supplemented by "derivatives" of the kind in which Enron had
great expertise: carbon dioxide futures, carbon dioxide options
and so on. (An "option" is a contract that gives the right, but -
unlike a future - not the obligation, to buy or to sell a set
quantity of an asset at a set price on or up to a given future
date.)
It might well all add up to the biggest market in history, and
Enron badly wanted to be at its centre. So did the British
government, which wanted the market to be based in London,
not Houston. Chicago, the historic home of futures trading in the
US, had ambitions, too. All are now stalled by the US
withdrawal from Kyoto.
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