Auctioning Integrity

For most of the media, Enron's collapse is another story about the credibility of our business and political leaders. What did they know and what did they do with this knowledge? Enron becomes one more instance of the retreat from public policy questions to ad hominem attacks. Enron is better understood as a symptom of larger issues that should interest every worker hoping to retire with Social Security and pension benefits. What are the limits not only of energy but also of financial deregulation? What happens when the very foundations of a market society, not merely land, labor, and money but even its accounting practices, become commodities sold to the highest bidder?

Enron stands at the confluence of deregulatory trends in energy and finance that the administration and "centrist" Democrats seek to broaden. Originally a natural gas pipeline company, Enron took advantage of energy deregulation to become a leading trader, first in natural gas and then in electricity. To what extent it used its market power to manipulate prices remains in dispute, but what Enron did with profits from its energy transactions raises new issues.

Enron soon applied its expertise to became a dot com trader of many goods and services. The New York Times reported: "Electricity, wood pulp, steel, advertising time on television, insurance against credit defaults -- all became fodder for the rapidly growing Enron finance and trading empire."

Nonetheless, many of these trades and investments failed to produce stellar profits. Some even generated long-term debts. These blemishes, however, occasioned the company's true genius, cosmetics. The Times reports: "the company set up a series of limited partnerships, organized in such a way that -- they could be treated as separate entities. If there were any assets or debts on the books that the company did not want, they could simply be shed to the partnerships."

Independent auditors are expected to ferret out misleading or deceptive practices so that investors can make informed choices. Yet major accounting firms increasingly are also financial consultants to the corporations they audit. Their incomes depend on management's good will. Arthur Levitt, Securities and Exchange Committee Chair in the mid '90s, warned of these risks and proposed new standards for the industry, but he received little support from either party.

Enron should be taken as an early warning for all investors and public officials. Just as the Bush administration pushes to privatize Social Security, it becomes increasingly clear that small investors must cope with a financial world where neither corporate management nor auditors can be trusted.

Allowing a safety net for retirees to depend on individual investments in volatile markets poses needless risks under any scenario. In today's circumstances it is folly. The Bush administration knows that Enron is not merely a political Albatross but a barrier to its radical Social Security plans as well. The administration has proposed minimal regulatory proposals for accountants and corporate pension managers, but these are unlikely to curb many potential abuses.

Conservatives are right in reminding us that Social Security provides inadequately for retirement. Nonetheless, rather than make a public insurance system more risky, we need to expand workers' opportunities to save and invest on their own. American corporations are capable of providing better employee compensation and equitable pension plans. Just as basic is control of these assets. If employers are to move from defined benefit to defined contribution pension plans, workers must have more control of the assets on which their retirement depends. When corporations are in effect able to control the pension investments of their employees, there is a built-in conflict of interest. Forcing workers to invest in their own company may benefit owners and managers, but imposes inordinate risk on employees. William Greider points out in The Nation that the only Enron employees not wiped out were sheet-metal workers at subsidiaries "whose union locals insisted on keeping their own separately managed pension funds." He adds that "pension funds supervised jointly by unions and management give better average benefits and broader coverage (despite a few scandals of their own). If pension boards included people whose own money is at stake, it could be a powerful enforcer of responsible behavior."

Enron should also serve as a warning regarding financial deregulation. The company morphed from energy schemes into virtual investment banking, but unlike investment banks of another era, its loans and reserves were unmonitored. This clandestine metamorphosis is unlikely to be unique. Under recent banking deregulation, the New Deal era's mandatory separation of commercial and investment banking has broken down. Commercial banks can spin off investment banking subsidiaries that underwrite mergers and stock offerings. Not only is there a potential conflict of interest here, with bank trust departments facing the temptation to promote stocks in which the parent company has an underwriting interest, but also there is a risk to the public insurance system itself. The new laws require a "firewall" between commercial banks and their investment banking subsidiaries, but if this firewall is being monitored as well as Enron was, we have reasons for concern. Failures of an investment subsidiary could drag the commercial arm down. These failures could necessitate huge taxpayer bailouts -- unless US citizens are willing to go the way of Argentina and see their bank deposits frozen.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. He invites comments at

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