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Non-Tech : The Enron Scandal - Unmoderated -- Ignore unavailable to you. Want to Upgrade?

To: stockman_scott who wrote (1991)	4/5/2002 10:57:43 PM
From: Raymond Duray	Respond to of 3602

Enron Was No Friend To Free Markets - Jerry Taylor/Cato Institute Hi Scott, Here's an interesting, older article on the role that Enron played in the 'free market' for energy. Well considered, and correctly viewed for the most part, IMO. In a nutshell, Enron never found a government handout it didn't like. Nor did any philosophical ideals get in the way of always lobbying for the sake of greed. -R. cato.org Enron Was No Friend To Free Markets by Jerry Taylor Jerry Taylor is the director of natural resource studies at the Cato Institute. While it's still unclear exactly what caused the implosion at Enron, ideological playwrights are already busily casting the company in the starring role for their pet political morality plays. The most common scripts being written have cast Enron CEO Ken Lay as Adam Smith on steroids and the corporation itself as the avatar of irresponsible, run-amuck capitalism. Those of us who've been involved in the energy debates of the 1990s know different. Enron was less the 21st-century incarnation of Robber Baronry than it was the latter-day inheritors of the mantle worn by Archer-Daniels Midland, the corporation that would hardly exist were it not for government favor and regulatory help. Enron is most famously known for pioneering wholesale electricity and natural gas trading. Since ending the legally protected franchises that utilities had on those services was a prerequisite for Enron's strategy, the company lobbied aggressively for competition and "consumer choice" for gas and electricity services. But while donning the garb of Ronald Reagan on the one hand, the company was donning the mantle of Ralph Nader when it came to the transmission and distribution side of the energy business. Enron, you see, was worried that the incumbent utilities would either under-price the non-utility competitors that Enron wanted on their trading floors or, alternatively, would charge such high prices for access to their transmission systems that non-utility gas and electricity providers would be unable to effectively compete for business. So Enron insisted that electric utilities be forced by law to get out of the generation business, that strict price controls be set for the rates charged for access to the various transmission grids, and that the day-to-day operation of the electricity distribution systems be handed over to state officials who were directed to govern those systems at the behest of the system's "stakeholders" (read: Enron and friends). So Reaganite competition, according to Enron, required new micromanagerial rules about industrial organization and the de-facto nationalization of the transmission systems by officials who'd have to answer to Enron. Many times over the past decade I found myself in meetings or on conference panels with Enron officials. On each and every occasion, the "jungle capitalists" from Houston were apoplectic over arguments that the grid should be deregulated like the wholesale power markets. They also ranted against the idea that companies should be able to charge whatever they wished for access to their property, that the grids should be left in private hands, or that government cannot know a priori how best to organize private enterprises and should thus refrain from imposing arrangements on the market. While most legislators got a full dose of Enron's regulatory agenda, some were hearing from the company that, well, grid owners should be left alone to do as they wanted. Those legislators, however, came from regions where Enron had managed to buy the transmission systems in question before the debate was settled. So officials from Texas, Louisiana, and various parts of South America in charge of the gas pipelines that Enron had bought were hearing one story while the rest of the political world was hearing another. That pattern of regulatory opportunism extended virtually everywhere, but perhaps no more so than on the environmental front. Enron, for instance, managed to pick up several near-bankrupt wind and solar power companies over the years and treated them like political lottery tickets. Wherever Enron went, pious campaigns for the virtues of renewable energy subsidies (in effect, subsidies for Enron) were sure to follow. Likewise, Enron saw spectacular business opportunities in the trading of greenhouse gas emission permits and accordingly argued for aggressive action to address global warming. And given that natural gas would be less disadvantaged by carbon emission controls than would competitor fuels like coal and oil, Enron was more than happy to link hands with nearly every environmental activist that crossed its path to undertake war against America's carbon-based energy economy. Whether it was de facto support of the Kyoto Protocol, the outspoken embrace of Clinton's proposed BTU tax (which would give Enron a competitive advantage in the marketplace), or the occasional attempt to secure a tax on oil imports (necessary back in the 1980s to save one of its pipelines in Florida), Enron was more than happy to hammer energy consumers with the power of government to fatten its own bottom line. While Enron was adept in putting together these coalitions to expand the regulatory state, it was no slouch at more conventional raids on the public treasury. Since 1996, for instance, Enron managed to bag $450 million to underwrite its investments in India, Brazil, and Guatemala through the auspices of the taxpayer-financed Overseas Private Investment Corporation. Another $135 million was liberated from the Export-Import Bank over that same period to underwrite Enron's investments in Venezuela. There was virtually nothing that the corporation did that wasn't worth a handout from the taxpayers, according to Enron lobbyists. On balance, Enron was an enemy, not an ally, of free markets. Enron was more interested in rigging the marketplace with rules and regulations to advantage itself at the expense of competitors and consumers than in making money the old fashioned way -- by earning it honestly from their customers through voluntary trade. Indeed, Enron would probably still be a small-time pipeline company were it not for the statist conceit that consumers are better off under the regulatory boot of government than with the invisible hand of the marketplace. There's a morality play here all right, but it's the opposite from that being readied for a political theater near you.

To: stockman_scott who wrote (1991)	4/8/2002 3:41:19 AM
From: Raymond Duray	Read Replies (2) \| Respond to of 3602

I'm shocked, shocked... there seems to be corruption here! nytimes.com April 8, 2002 Enron Investors Say Lenders Took Part in Fraud Scheme By KURT EICHENWALD and MICHAEL BRICK In an expanded lawsuit expected to be filed today, Enron (news/quote) shareholders accuse some of the country's top financial institutions of knowingly participating in a scheme to defraud them, [Ed. yawn...like is that news, or what?] adding new details about deals involving banks and investment firms that kept Enron afloat even as its finances were falling apart. According to a draft of the complaint, a group of nine financial institutions repeatedly structured deals to funnel millions of dollars in cash to Enron and a series of related partnerships, all to allow transactions that improperly increased Enron's profits and hid debt. In many of those transactions, the complaint says, senior bank officers themselves secretly invested in the partnerships, receiving quick, outsized profits for participating in deals that disguised Enron's true financial health. [Ed. Sacre bleu! You mean they were cheating? Amazing!] While many of the allegations involving banks and brokerage firms have previously emerged in the months since Enron's collapse, some are raised for the first time in the 501-page amended complaint. [Ed.: Yet another variant on the 501 blues]For example, the complaint contends that, in the closing days of 1999, banking institutions and their executives advanced nearly all of the money to finance an Enron partnership known as LJM2. That money — provided in both loans and equity investments — allowed Enron to engage in a rapid series of deals with the partnership, the draft complaint says, selling off assets in "sham" transactions, enabling the company to report large, fictitious gains for the quarter and the year. In the months that followed, the complaint says, those sales were unwound, essentially moving all of the assets back into Enron. At the same time, it says, the transactions created enormous profits for the banks and banking executives who participated in the partnerships as investors. Other transactions, including what the suit describes as bogus natural gas trades used to disguise bank loans, paid out huge fees to the financial institutions while disguising the troubles in Enron's books. "Instead of protecting the public from the Enron fraud, the bankers knowingly chose to become partners in deceit," said William S. Lerach, senior partner at Milberg Weiss Bershad Hynes & Lerach, the lead lawyer in the suit. "They were not only willing participants but profiteers." [Ed.: Gosh, Bill, like is this newsworthy, or what?] Shareholders initially sued Enron, its executives and directors, and its former auditor, Arthur Andersen, last year, but are now adding the banks and investment firms. The firms named in the lawsuit are J. P. Morgan Chase (news/quote), Citigroup (news/quote), Credit Suisse First Boston, Canadian Imperial Bank of Commerce (news/quote), Merrill Lynch (news/quote), Bank of America (news/quote), Barclays Bank (news/quote), Deutsche Bank (news/quote) and Lehman Brothers (news/quote). Spokesmen for the banks and investment firms declined to comment yesterday because they have not seen the complaint, or did not return telephone calls. The expanded lawsuit, due in Federal District Court in Houston, also names two law firms, Vinson & Elkins and Kirkland & Ellis, accusing them of complicity in the frauds. Vinson was Enron's chief law firm, and was involved on behalf of the company in the partnership dealings that ultimately played the critical role in its downfall. Kirkland represented several of the partnerships. A Vinson spokesman could not be reached for comment yesterday, but the firm has consistently maintained it did nothing improper in its representation of Enron. In a statement issued last night, Kirkland criticized the plaintiffs' lawyers for releasing the complaint before ever contacting the firm. The statement said, "Kirkland's work was proper and complied with all ethical and legal obligations," and added that the allegations are designed to extend liability through guilt by association. Efforts were still under way over the weekend in Houston to settle the portion of the case involving Arthur Andersen. Talks will continue this week, people involved said. Andersen has agreed to pay a little less than $300 million to settle the suits. The shareholders and creditors have accepted this amount, but a few related issues are still under discussion. The settlement talks come as Andersen's financial condition has rapidly deteriorated after its indictment last month for obstruction of justice for destroying documents in the Enron case. The settlement money will come from cash and insurance, but Andersen must pay its insurer nearly $130 million to reactivate its policy. The main threat now is the indictment, and Andersen is negotiating with prosecutors to resolve the case. Andersen was also continuing its efforts to sell its consulting, tax and other nonaudit businesses. Andersen partners have spoken with Electronic Data Systems (news/quote) and Experio Solutions, a unit of Hitachi, among others. Partners are also exploring the possibility of a management buyout or an infusion of equity from a private investor, an Andersen spokesman in London said. The naming of the banks in the Enron shareholder lawsuits had been widely expected, in part because the company's collapse created so many plaintiffs seeking compensation, while so little money is now available from the primary participants in the debacle. With Enron in bankruptcy and Andersen's financial condition deteriorating, anyone seeking a recovery also has to look elsewhere. The allegations spelled out in the lawsuit describe an unusually close relationship between Enron and its financial backers, which, if true, could create enormous liability for the banks and other financial institutions in the company's collapse. As portrayed in the lawsuit, the debacle at Enron began in 1997, when the company experienced a severe financial shock because of a $400 million loss in a British natural gas transaction and a $100 million charge relating to deals involving a fuel additive. By autumn of that year, Enron stock lost one-third of its value. Enron's top executive and board members were determined to reverse the decline of Enron's stock, the complaint says. They knew this could be accomplished by having Enron report stronger results than expected going forward. The suit says, however, that Enron's actual business operations were not capable of generating such results. The solution was found in the partnerships, managed by Andrew S. Fastow, the company's chief financial officer. With them, Enron was able to move assets and debt off its books, and engage in rapid transactions that allowed the company to boost its reported profitability. But, the suit says, it was all a sham, and the financial institutions knew it. In particular, it cites transactions in December 1999, when Enron was establishing the partnership known as LJM2. According to the complaint, Enron was unable to raise the money it needed for LJM2 quickly enough from independent investors, and so turned to its banks and bankers to advance the needed cash. According to the complaint, J. P. Morgan Chase advanced $65 million in a line of credit, while more than $14 million was advanced in the form of equity by investment partnerships representing senior banking executives. Mr. Lerach said that his team had not yet been able to determine the identities of those bankers. The money was needed desperately, the suit says, because the end of the reporting period was coming, and Enron needed to shift some assets off its books. Indeed, within seven days of the money coming in from the banks and banking executives, Enron shifted a series of assets off its books in sales to LJM2. Those assets included a 75 percent interest in a Polish power plant and a 90 percent interest in a natural gas system in the Gulf of Mexico. However, the suit says, after the close of the reporting period, Enron repurchased many of the assets it sold to LJM2. As a result, the complaint says, LJM2 and related partnerships served only as vehicles to accommodate the defendants in the manipulation, falsification and artificial inflation of Enron's reported financial results, while enriching the LJM2 investors. ******************************************************** Sleaze is alive and well in Las Vegas and on Wall Street. Some days it's hard to tell which is the biggest racket. Oh, sorry, for a moment my mind wandered. Back to 1600 Pennsylvania Avenue....