The Real Enron Scandal

In Washington, the word "investigation" is essentially synonymous with the word "scandal". So when Congress began to investigate the collapse of Enron last week, the political establishment leaped to the hyperventilated conclusion that this constituted the first major scandal of the Bush administration. But then, when little evidence surfaced that the White House had acted to prevent Enron from imploding, the Beltway leaped to the opposite conclusion: This is not a political scandal at all.

Actually, Enron's failure is a political scandal - but in a different way than such things are conventionally defined. Scandals are usually thought of as disclosures of illegal or unethical behavior, divorced from the normal policy-making process. Unless something dramatic comes to light, that didn't happen in this case. Rather, the scandal is that conservatives in Washington systematically rejected a series of safeguards that would have alleviated the damage from Enron's collapse, or even prevented it altogether.

The most obvious Enron victims are its employees, who had much of their retirement money vested in Enron's now-worthless stock. This, alas, was simply the most dramatic example of a common phenomenon. Many workers have huge portions of their 401(k) plans vested in their own company - employers prefer (and often require) it that way. In 1997 Senator Barbara Boxer proposed fixing this by banning investment of more than 10 percent of the total 401(k) plan in the employer's stock - the maximum that investment experts recommend a person sink into any company, let alone one in which you've also invested your job prospects. But the business lobby howled, and conservatives watered down the bill to the point where it offered little protection to hapless Enron staffers.

The GOP also indirectly helped Enron conceal its fraudulent business practices. Enron planted about one-third of its myriad subsidiaries in offshore havens and squirreled away its domestic assets in various tax shelters - all of which helped keep its Byzantine financial arrangements from the light of day. The degree to which companies can hide their assets is, of course, a question of public policy. Lawrence Summers, the previous Treasury secretary, sought to crack down on tax shelters but was stymied by congressional Republicans. His successor Paul O'Neill has renounced even the modest steps to discourage tax havens proposed by the Organization for Economic Co-operation and Development.

Enron also sustained its deception because independent auditing - epitomized in this case by Arthur Andersen - has become a toothless formality. Why? One reason is that accounting firms do all sorts of big business with the firms they audit. They have every incentive to look the other way so as not to lose their lucrative consulting fees. The previous chairman of the Securities and Exchange Commission, Arthur Levitt, tried to ban accounting firms from soliciting other business from their audit clients. But the accounting lobby beat back his efforts. And the lobbyist who represented the accounting firms, Harvey Pitt, was appointed last year by President Bush to serve as the chairman of the very commission he helped to defang.

But the single biggest reason Enron escaped detection is that it invested in a particular kind of derivatives - a complex financial arrangement - that, due to its newness, escaped regulatory oversight altogether. No law required Enron to disclose its derivatives' investments on its balance sheets at all. Some regulators found this alarming - in 1997 Brooksley Born, head of the Commodity Futures Trading Commission, proposed more stringent disclosure requirements for derivatives. But financial interests, including Enron, vigorously resisted. At one point, according to The Wall Street Journal, House Banking Committee Chairman Jim Leach scolded Born for two hours for her pro-reform leanings.

And not only did powerful conservatives stymie the regulations that might have mitigated the Enron debacle, but many don't even grasp its failure now. Bush economic adviser Lawrence Lindsey called Enron's fall "a tribute to American capitalism". O'Neill echoed, "Part of the genius of capitalism is people get to make good decisions or bad decisions, and they get to pay the consequence or to enjoy the fruits of their decisions".

The distinctive characteristic of the Enron fiasco, of course, is precisely that the malfeasers have not paid any consequences. The executives who cooked up Enron's crooked schemes sold hundreds of millions of dollars worth of stock, while unsuspecting employees have borne the brunt. The broader victim is the public's trust that ordinary people won't fall prey to crooked machinations by inside operators - a trust upon which capitalism itself depends. The Bushies seem not to recognize this larger failure, either. Enron isn't considered a political scandal because it hasn't impugned Bush's character. But far more damning, it has impugned his ideology.