Appearing before the House Committee on Financial Services, on December 12, Joseph Berardino, chief executive of Arthur Andersen, the accounting firm that conducted Enron's internal and external audits, said the company had engaged in "possibly illegal acts," and had misled auditors. Berardino's appearance followed Enron's filing for bankruptcy on December 2, after years of being touted as an exemplar of corporate innovation. Berardino did not specify which laws he believed might have been violated. In a related action, the Securities and Exchange Commission went to court to force, Enron's former chief financial officer, Andrew S. Fastow, to testify in an SEC inquiry. Enron has been called "largely responsible for the grooming of George W. Bush as a national figure." Enron is Bush's top career corporate donor, with directors and employees having contributed a total of $550,025 (as of January 5, 2001). Bush economic adviser Lawrence Lindsey, and trade representative, Robert Zoellick, both served on Enron's advisory board prior to their government appointments. W's. association with Enron dates back to his father's administration when he reportedly lobbied on behalf of the firm for a pipeline contract in Argentina.
Mr. Berardino testified that Enron officials had withheld information concerning a so-called "special-purpose entity" on November 2, 2001. The auditing firm reported this to the Enron board. A week later Enron issued a revised financial statement that included $586 million in losses related to the special-purpose entities. An Enron spokesman acknowledged to the New York Times that some Enron personnel must have known about the entities that forced the balance sheet restatement. "It was not known to our chief accounting officer. It was not known to our senior management," the spokesman said.
One of these special-purpose entities was called Chewco. Arthur Andersen allowed Enron to omit Chewco's debt from Enron's books because an unnamed financial institution invested $114 million in it in 1997. This satisfied an accounting rule that an entity's finances need not be disclosed if a third party held at least 3 percent equity. Unbeknownst to Andersen, however, Enron had entered into a separate agreement with the financial institution in which it paid for half of the 3 percent equity stake with cash. Since the second contract circumvented the 3 percent rule, Andersen would have required that Chewco's debt be consolidated with Enron's financial statements. Enron's reported profits in years following the establishment of Chewco would have been significantly lower.
Enron was founded by Kenneth Lay in 1985 as a merger of two gas pipeline companies, and moved into the energy trading business -- which it largely created. Aided by deregulation, Enron added electrical power to its portfolio, and in 1998 took over British water supplier, Wessex Water, for $2.3 billion. The move into the water business was greeted with considerable skepticism by the British business press, as was Enron's decision to sell options on London weather.
In 1992 the government of the Indian state of Maharashtra signed an agreement with Enron to build a natural gas fueled power station. The Dabhol Power Company, which was a joint venture among Enron (80%), General Electric (10%) and Bechtel (10%) was the first private power plant in India. The project became embroiled in disputes concerning: the high cost of the produced power, alleged corruption in setting up the project, failure to consult citizens affected by plant construction, and inadequate assessment of environmental impact.
A 1997 report by Amnesty International criticized suppression by state authorities in Maharashtra of peaceful protests against construction of the Dabhol plant. The report stated, "...protestors and activists have been subjected to harassment, arbitrary arrest, preventive detention under the ordinary criminal law, and ill treatment." The report noted that women, including minors, had been particularly targeted, and arrests made violently. Amnesty International accused the State Reserve Police of being in collusion with supporters of the project. The wife of a protest leader testified that she was dragged from her bath, beaten by male policemen as they dragged her to a van, and that her one and a half year old daughter "held on to me but the police kicked her away."
Several public interest legal challenges to the project were initiated in state court and Indian Supreme court. Eventually Enron requested that the Indian finance ministry pay up on a financial guarantee to cover $47 million worth of power that the state utility board refused to pay. Enron essentially accused the Indian government of delaying the project for political reasons. Indian government officials repeated oft-heard accusations that Enron was behaving arrogantly, and rumors circulated that Enron was "losing interest in owning power plants in poor countries."
Enron's October 2001 financial statement showed a $1 billion write off of water distribution, broadband trading and other investments. What alarmed analysts and investors more, however, was an offhand comment by Mr. Lay during a conference call that the firm's had lost $1.2 billion in capital from a transaction with a private-equity fund called LJM. Apparently few people inside or outside Enron were aware of the terms of the deal, which forced Enron to sell 55 million of its own shares when the partnership dissolved. The substance and manner of Lay's disclosure led to a loss of investor confidence, and on October 30th Enron shares lost 19% of their value.
As analysts reviewed Enron's financial history in the aftermath of its decline, in addition to questions about the "special-purpose entities," Enron's energy-trading business itself came under suspicion. Competitors conceded that Enron transacted 15 - 20% of the gas and power trading in the region. But apparently volume did not translate into profit. As other companies entered the energy trading business Enron had pioneered, Enron employees defected to competing firms. Profits could not keep pace with revenue. From 1998 to 1999 revenue grew by $10 billion while profit grew by only $500 million. From 1999 to 2000 revenue grew by $60 billion, but profits grew by the same amount as the previous year. And despite the firm's practice of selling power plants and recording the sales as operating revenue, the company's trading margins shrank from around 6% in 1998 to less than 2% this year. A crucial question for investigators is whether Enron inflated its trading revenue. Dean Girdis of the Petroleum Finance company speculated to The Economist that "profits from hard assets may have masked the shrinking margins of [Enron's] virtual trading business," and encouraged executives to "to bet the company on [the] radical, risky view that Enron could create markets in just about anything."
Kenneth Lay has described himself as "passionate about markets." The Economist noted that this fervor led Mr. Lay to bully officials and skirt the edge of the law. It was an exercise in bullying that may have been George W. Bush's first favor for Enron.
In 1988, "Poppy" Bush was about to begin his term as president and Argentina's Raúl Alfonsín was about to end his. Having re-established civilian rule and prosecuted human rights abusers, Alfonsín wanted to initiate a private-sector industrial project as part of his legacy. He wanted to construct a pipeline that would facilitate domestic and foreign sales of Argentine petroleum products. Alfonsín's minister of public works was Rodolfo Terragno, a journalist who had been exiled in 1976 when the military took control of Argentina. When Alfonsín restored civilian rule, Terragno returned to Argentina where he had a distinguished career of public service.
Two pipeline proposals were under consideration. One was from the Italian firm Ente Nazionale Idrocarburi. The other was from a partnership between Argentine firm Pérez and Dow Chemical. The project was valued at approximately $300 million. Terragno was on the verge of making a decision, having deliberated for about a year, when Houston-based Enron -- the the time, the largest pipeline company in the U.S. -- joined the bidding.
Enron's only connection with Argentina was a front firm called Westfield, whose only assets in 1988, according to the Argentine national register, were the $20 filing fee. In an interview with the journal Mother Jones published in March 2000, Terragno said "I had a lot of reservations about Enron, because the company wasn't well established in Argentina." Enron sent him a one-page outline for the project that Terragno described to Mother Jones as "laughable." Enron proposed paying Argentina approximately 20% of the prevailing international price for natural gas. "It all seemed so inadequate," Terragno said. "Enron asked the country of Argentina to practically give them the gas."
Enron embarked on an intensive lobbying campaign to influence Terragno. Argentine business newspapers attacked him for obstructionism. The U.S. ambassador Ted Gildred called and visited Terragno repeatedly. Terragno dismissed these pressure tactics as politics and business as usual.
A few weeks after the 1988 presidential election, Terragno received a phone call from George W. Bush. Bush told Terragno that he "viewed with some concern the slow pace of the Enron project," and that the deal "would be very favorable for Argentina and its relations with the United States."
"It looked bad and it surprised me," Terragno said in the 2000 interview. "There was this political endorsement, apparently from the White House. I don't know if George Bush the father was aware of it, or if it was only a business contact by his son, who hoped the family name would have some influence." Terragno told Bush that the deal would be awarded according to Argentine law. But Alfonsín's party lost the election, and he left office early.
Alfonsín's successor, Carlos Menem, was a right-wing follower of Juan Peron. The day after Menem was elected, Neil Bush, George W.'s brother, showed up in Buenos Aires to play tennis with him. "Poppy" Bush made a total of eight trips to Argentina during his presidency. After the first, in 1990, which was the first visit by a U.S. president since Eisenhower, ambassador Terence Todman wrote a letter to Menem's minister of the economy warning that U.S. corporations would abandon investments in Argentina unless the government stopped favoring domestic companies. The letter described Enron as "poised to invest $250 million," if Argentina granted their demands for tax breaks. The letter concluded with something of an ultimatum, indicating that Enron required a decision within the month.
Menem responded by signing a presidential decree exempting Enron and some other firms from tariffs and value-added taxes. Argentine legislators demanded an inquiry, and a special prosecutor began an investigation. Menem fired the investigator. Enron eventually abandoned the project when gas prices fell, but a subsidiary later bought a one-third interest in the pipeline. The subsidiary's board includes Brent Scowcroft, "Poppy" Bush's national security adviser.
After leaving "Poppy" Bush's administration, Secretary of State James Baker and Secretary of Commerce Robert Mosbacher Sr. were both hired by Enron as consultants. Wendy Gramm, wife of Texas Senator Phil Gramm left her position on the Commodities Futures Trading commission in 1993 for a seat on the Enron board. During her tenure the CFTC ruled favorably on what Salon.com called "a crucial exemption from regulation." Enron's influence extended to the Clinton administration, as well. Frank Wisner, ambassador to India, helped Enron secure and retain the $3 billion contract to build the Dabhol power plant. In 1995 the U.S. government intervened on Enron's behalf concerning a natural gas project in Mozambique. John Kachamila, Mozambique's natural resources minister at the time, told the Houston Chronicle in 1995,
There were outright threats to withhold development funds if we didn't sign, and sign soon. Their diplomats, especially [the charge d'affaires at the U.S. Embassy] pressured me to sign a deal that was not good for Mozambique. He was not a neutral diplomat. It was as if he was working for Enron. We got calls from American senators threatening us with this and that if we didn't sign. Anthony Lake even called to tell us to sign. They put together a smear campaign against us, Enron was forever playing games with us and the embassy forever threatening to withdraw aid. Everyone was saying that we would not sign the deal because I wanted a percentage, when all I wanted was a better deal for the state.
While George W. Bush was Governor of Texas, Enron chairman Kenneth Lay wrote and visited him frequently. Enron's corporate jets were placed at W's disposal. According to Mother Jones, Lay "recommended appointments to state boards and asked Bush to meet with visiting dignitaries from countries with whom Enron was hoping to do business." Enron was among the companies that benefited directly from the Texas Clean Air Responsibility Enterprise -- a voluntary emissions compliance program supported by Bush and his appointees to the Texas Natural Resources Commission. Other legislative initiatives in Texas that Bush supported, and that benefited Enron, included easing taxes for capital-intensive companies, and limiting jury awards in civil cases. Enron executives advised Bush on all these matters; in some cases he sought their input.
In 1997 Enron was embroiled in a regulatory battle in Pennsylvania, where it was seeking to sell electricity. At the request of Kenneth Lay, George W. Bush called Tom Ridge, Republican governor of Pennsylvania to "vouch" for Enron. Lay told the New York Times "I called George W. to kind of tell him what was going on.... And I said that it would be very helpful to Enron, which is obviously a large company in the state of Texas, if he could just call the governor and tell him this is a serious company, this is a professional company, a good company." Enron prevailed, and breaking into the Pennsylvania market added to the momentum of its national and international expansion. As Robert Scheer observed recently, "Since we now know Enron lacked those virtues, it's clear Bush was used to sell a bill of goods to the unsuspecting Pennsylvania folks"
Early speculation that Lay might be named W'.s Secretary of Energy never materialized, but Lay was one of the industry leaders who attended Vice President Dick Cheney's secret meetings to formulate energy policy. Time magazine noted in May of this year that Lay and Cheney had a "luxurious half-hour chat" on the subject -- the only electrical industry executive to have a face-to-face meeting. Administration refusal to intervene in the California energy crisis helped create a windfall for Enron, a major supplier of electrical power to the state. When California energy prices climbed to record levels in the last quarter of 2000, Enron's revenues tripled and profits increased 34% over the prior year.
Incoming Republican National Committee chairman, former Montana governor Marc Racicot, is a registered lobbyist for energy, timber, and mineral interests at Washington law firm Bracewell and Patterson. Enron is among Bracewell and Patterson's clients. Racicot lobbied Vice President Cheney and his energy task force director Andrew Lundquist, protesting the Environmental Protection Agency's efforts to force older electrical plants to comply with clean air standards. Cheney's commission recommended that the Justice Department drop a number of lawsuits filed for violations of environmental regulations. In a break with recent tradition, Racicot has announced that he will retain his lobbying job while serving as RNC chairman.
In addition to potential conflict of interest, and the question of whether administration officials with ties to Enron were tipped off about the firm's impending collapse in time to cash in their stock, some observers have pointed out the role Enron played as a business model. Like security firm Argenbright, whose legal entanglements undercut the administration's argument for the privatization of airport security, the collapse of Enron calls into question the virtues of deregulation and trickle-down approaches to economic stimulus. Enron's advocates believed the company's success would prove that fears of market deregulation were unfounded. Enron's own executives referred to the "regulatory black hole" that their political connections had helped create. In a recent column economist Paul Krugman wrote:
Unfortunately, what disappeared into that black hole was not bureaucratic clutter but billions of hard-earned dollars, including those of Enron's own employees. Or maybe it wasn't a black hole, but rather a wormhole, and those billions of dollars emerged in some other universe -- say, overseas bank accounts.
The key economic lesson of the 20th century, he suggests, is that market systems need a little help from government: active monetary policy to fight recession, and regulations to prevent abuses.
Dubose, Louis and Carmen Coiro "Don't Cry for Bush, Argentina" Mother Jones Mar. Apr. 2000
Byock, Lila "Kenneth L. Lay (with Linda P.)" The Mother Jones 400. Mother Jones 5 Mar. 2001
"The Bush Profiteers: 100 Donors Who Enjoy Hands-off, Handout Government" Texans for Public Justice
Frank, Thomas "The Enron outrage" Salon.com 13 Dec. 2001
Shochat, Gil "Racicot Will Continue Lobbying While Serving As RNC Chair" Center for Public Integrity 6 Dec. 2001
Kahn, Joseph and Jonathan D. Glater "Enron Auditor Raises Specter of Crime" NY Times 13 Dec. 2001
"Wet behind the ears?" The Economist. 30 Jul 30 1998
"Buying a financial umbrella" The Economist. 15 Jun. 2000
"Enron, and on, and on" The Economist. 19 Apr. 2001
"Houston, we have a problem" The Economist. 1 Nov. 2001
"The amazing disintegrating firm" The Economist. 6 Dec. 2001
Oppel, Richard A. "The 2000 Campaign: The Donor; For a Generous Donor and Bush, The Support Is a Two-Way Street" NY Times 30 Jun. 2000
Scheer, Robert "Connect the Enron Dots to Bush" LA Times 11 Dec. 2001
See also The Dubya Report's Government for Fun and Profit and The Money Trail. For a history of the rise and fall of Enron from a sometime champion of the firm, see Why Enron Went Bust, from the Fortune magazine site. Business Week interviewed Enron chairman Kenneth Lay the day after CEO Jeffrey K. Skilling resigned in August.