the CAMP ENRON Report

... gateway to the next Progressive Era?

Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.

For a brief orientation, see this
Welcome to Camp Enron

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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003

(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.


free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English

reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.

More where those came from ... stay tuned.

For brief orientation, see this
Welcome to CP

... gateway to the next Progressive Era?

For a brief orientation, see this
Welcome to Camp Enron

Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Tuesday, January 29, 2002

--- One Progressive Era, Coming Up ---

[Originally posted on The Fray, in re this Breakfast Table dialogue between David Brooks and Joe Klein -- with superficially-divergent opinions on who's right about what kind of story Enron is, and who gets to be the next Teddy Roosevelt.]

Brooks gets it. NYT gets it. George "Crisis of Capitalism" Will gets it. They don't yet get that they're all heralding the same big story. And of course everybody wants to skip to the end, like collapsing a gnarly mathematical expression to an elegant Q.E.D., but it's not in the cards.

Enron's multimodal, multinational scandals are part of a pattern of skid marks at a major turning point. [Only Sunday before last, though, the conservative consensus was "not much of a story".] With the nonlinear pendulum poised above the top of its natural arc, and a crew of geniuses working feverishly to rachet it higher, a big swing is coming down ... a Progressive Era, or a New Deal, or Something Wicked, or Something Completely Different. Enron is its timely harbinger.

As customary in the arc of history, a system emerged out of relative disorder, then the savvier players got together and gamed the daylights out of it. Institutional impropriety is now so fully normalized that none of our gauges read true. Fog on the windshield, steam under the hood, loose parts clattering to pavement, something dark and slippery oozing from who knows where ... faster. Faster!

Context: a reward-based system has slipped its value-added moorings. Billionaires lead the attack against income disparity. Industry, distracted by collapse in speculative "market cap", inadvertently destroys real capital in excess of a year's federal budget. Circuses of media excess front the breadlines of civics education. Lower quintiles are enlisted against their own interests -- 19% of households think they're in the top 1% -- while the best and the brightest aspire to careers of unjust enrichment. And the band plays on.

My guess, GWB will not play a TR, or FDR ... more likely a McKinley or Harding or Hoover. Bush's comfort zone is the intellectual bunker ... K.I.S.S., batten down the hatches, back to basics. Oblivious to the upheavals of the Sixties, Bush will just as easily miss out on the Ought's.

Who are the leaders, and what is the program? TBD. We are probably going to take a collective left turn somewhere up ahead, but it won't be a shortcut to any Old Left stomping grounds.

There is danger here for all concerned. A discarded watchword of the upper crust -- "enlightened self-interest" -- comes to mind. Reading too much into the Center-Left's victory over Marxism, the Right bet their birthright on a winner-take-all showdown. What happens when a populace fattened on self-indulgent ignorance wakes up and realizes "Hey, we've been had!"? What happens when a favored minority, steeped in rationalizing ideology of entitlement thicker than Soviet Marxism, realizes "We're losing it, boys!"?

And so, we live in interesting times. Faster!

Sunday, January 27, 2002

--- Economic Impact Statement ---

Thought for the day: Al Qaeda couldn't do it. Larry Klayman couldn't do it. Henry Waxman couldn't do it. But the Enron bunker-buster did it. (Smoked Dick Cheney out of his hole.)

For your amusement and agonization, this Camp Enron Economic Impact Statement.

Today's riff supposes that Enron is only a financial accounting scandal, but a BIG accounting scandal.

Enron moved its own stock into shells on some Cayman Island beach that looked like separate firms, but really existed only as separate manila folders in an Enron file drawer. This made price moves in Enron stock look like Enron primary earnings, and these rising earnings gulled Wall Street into kiting the stock higher and higher.

Oldest trick in the book ... and nobody got wise while it still mattered. Not the analysts, nor the banks, nor Moody's, nor Andersen, nor SEC, nor S&P, nor WSJ, nor FERC, nor CNBC. How might this affect the token economy of dollars and shares and IOU's and options? The real economy of material and labor and goods and services and physical capital and intellectual capital?

Let's track a few trains of economic cause and effect in and out of the tunnels.

(1) Every financial report, for every firm, good and bad alike, gets read with greater skepticism, producing lower P/E's across the board.

(2) Accounting practice gets more conservative, lowering the stated earnings on which those lower PE's are applied.

(3) Imperfect information reduces price and volume in capital markets. (Both buyer and seller suspect the other knows more than they do.)

(4) The prices firms pay for externally generated capital goes up (both in absolute measure and relative to retained earnings).

(5) US relative advantage in perceived transparency narrows, and US assets are treated less favorably in global capital flows.

(6) Capital moves less fluidly to the most productive opportunity. Big moves in sophisticated instruments are most strongly affected.

(7) Equity market preference shifts in favor of dividend-payers, moving capital out of growth industries into mature industries, and into

(8) Proprietary innovations scale up more slowly.

(9) Proprietors reap less of the potential return on intellectual investment, learning curve, build-out costs and proof-of-concept risks before their innovations are copied, coopted or superseded.

(10) Innovation is reduced.

(11) In sectors accustomed to using stock as compensation, labor gets more expensive and proprietary risk increases.

(12) Regulation and regulatory delays increase.

(13) Product prices increase.

(14) And so on through currency effects, human capital displacements, lifestyle effects ... my apologies for whatever I may have left out.

In particular, any "New Economy" business model becomes a harder sell, whether it makes sense or not. Unfortunate, since we need a whole generation of new models to put the dotcom Humpty Dumpty back together again.

Several popular business practices -- especially transactions using stock as currency -- will be inhibited. Mergers and acquisitions, spin-offs, employee stock options, ESOP's and 401-k's, hostile takeovers, special purpose joint ventures, even IPO's ... both those that make sense, and those that don't. A whole adjunct industry of professional midwives to these transactions may also suffer.

Can we quantify these effects? Hmmm. If somebody had a few thousand unemployed quant geeks and a raft of unused computers, they might take a stab at pricing out a risk mitigation vehicle -- "Enron Insurance" -- and crank that into to a comprehensive econometric model. But as conservative theorists are fond of pointing out, fairly priced insurance raises the moral hazard that buyers will drop their guard, defeating the premium.

On the plus side of all this, we may end up pouring less real capital down the proverbial rathole.

And these effects apply if it's a pure financial accounting scandal ... no assets stranded or economically destroyed (as in half-finished capital projects), and no resources maldistributed (leaving the economy farther from the efficient frontier).

8 ... 7 ... 6 ... 5 ... 4? Suppose it's an accounting scandal big enough to take down Andersen. [Better than even money based on current info. Also better than even money that current info is not the whole story.] Audit firms don't grow on trees, and they don't grow back. I remember the Big Eight ... when, a decade ago? Now there are five. Number Six is an order of magnitude smaller than Number Five. Merging the next 100 audit firms only creates a weak-sister #6. There are no contenders, and no process of grassroots development will produce one.

In industry after industry, big firms are gobbling up small firms, and going multinational. It takes a big outfit to audit a multinational, and nobody knows how to make a new big audit firm from scratch. There will be bigger firms, fewer choices, and more human resources sorted and stratified through internal culture rather than external feedback.

Suppose it's just an accounting scandal, but big enough to inspire conflict-of-interest prohibitions against firms doing tax and management consulting for its audit clients.

Auditing will be more expensive in terms of real cost -- even at the same level of intensity! Auditing and consulting share powerful marketing cross-subsidies. In "Make Audits Pay: Leveraging the Audit Into Consulting Services", AICPA says "intense competition has reduced the audit to a mere commodity that is distinguishable to the consumer only according to price." (thx, WaPo)

And audits will be more intensive, at least temporarily.

On the plus side, freer competition may open the market to better resources, better matched to specific audit and consulting tasks.

What about the void left by Enron, which was a major market-maker in a wide range of securitized commodities. Many observers -- this writer included -- were surprised when the collapse left these markets relatively unruffled. Not just unruffled ... it looks like energy markets in particular began operating much more efficiently in the immediate aftermath of Enron's departure. We'll revisit this when we delve into the question "Did Enron exist?". Meanwhile, a small network of very sophisticated number-crunchers are doing a little delving of their own, which may in time serve up another shock to the system.

And it may take time for the toxic effects of Enron fallout to show up in its business partners. We'll profile a few cases in later dispatches.

Friday, January 25, 2002

--- Centipede? Millipede? ---

One shoe drops, then another. How many shoes does this Enron thing wear, anyway? It's bigger than an 800-pound Magilla. A giant mutant spider? Centipede? Put my money on "millipede" ... when we're done playing Truth or Consequences, we'll identify some multiple of 100 distinct points of dark. The real X Factor -- how many Enron's are out there? [UPDATE: 2002-01-27, CNN Capital Gang's Al Hunt takes on the centipede issue]

Thursday, January 24, 2002

--- Jenkins: What's Right, Who's Wrong, What's Up, What's Goin' Down ---

[Previously unpublished correspondence, in re QuasiPundit exchanges here, here, and here, pursuant to Holman Jenkins' column "Enron for Beginners" in 2002-01-23 WSJ (not available online).]

Will is right. "Enron is us." We begged for unbelievable numbers, and we got them. Our mythos insists we can win big by compounding passive investments -- by picking and swapping horses, whether or not we know horseflesh. We're a nation of "system players", who think we're losers unless we beat par. If winning was so damn easy, the jockeys would get minimum wage. If the touts were so damn smart, they wouldn't need our money.

Will is right, Tony is wrong, something is very wrong with pay disparity. A least that's the "90% consensus", including a fair share of gazillionaires. And Will is right, any CEO worth his salt is backed by CEO-calibre staff ... but the excesses keep compounding. And don't get me started on shortstops. (The drivers are very similar.)

Tony says "utter non-sense", but Will (and Jenkins) are right in that stock schemes are intended to correct risk-averse management bias. Decades of management science literature suggests the rational manager avoids risk the rational enterprise would undertake.

But do CEO's sandbag? Do they deliver less than their best work for $1M cash, but work smarter for $2M cash or $20M in stock options? Seems far-fetched.

Split-incentive risk bias theory focuses on middle-management -- where venturing and winning means an agreeable bonus, but losing means career death. Do options work? They do favor a shared culture of hard work, but may have opposite the intended effect on risk preference. A branch manager can't make or break the firm, can't move the stock more than a tick, but any visible failure is now subject to reprisal by "injured" peers. Anecdotally, I have noticed strong conformist "go with the flow" pressures in option-heavy firms.

Re top hat compensation, Tony's right, "these packages tempt some people to fool around with the books". More often, they tempt exec's to take irrational risks short of outright fraud, since they're in on the upside and not the downside of risktaking. [2002-03-07 UPDATE: Warren Buffett makes this asymmetris incentive the centerpiece of his critique of the options game.]

Right on, Brother Will, on short-term focus, options, broader ownership, shills on CNBC, investment as spectator sport. The Street is an out-of-control sports bar, and woe to the team that wins but fails to cover the point spread. Good firms with option-rich compensation schemes (executive suite or rank-and-file) can find themselves lethally destabilized by minor stock wobbles. On the flip side, option-rich harebrained schemes ran fundamentally sound option-poor tortoises off the track in the late great dotcom recruiting derby.

"if Jeffrey Skilling had stuck to things Enron knew ... Enron might still be a darling." Disagree here, Will. The "ethos" -- them's us -- rips assets out of the hands of prudent stewards, and consolidates them in the hands of hustlers.

The Jenkins piece itself offers a remarkable mix of insight and obtuseness -- "Enron for Ostriches".

Among the obtuse: "how do you let the air out of your own stock? Our legal system and the ethos of shareholder capitalism make it very hard".
The ethos, maybe. Our legal system, no, just the opposite. Securities law mandates popping one's own bubble.

"Enron's problem was bad assets" ... "Enron wouldn't have failed if investors had not rewarded it with an excessively optimistic stock price" ... [Cendant, Sunbeam, others] "had nothing to do with deregulation or campaign finance yet they are of a single species" ... "In accounting logic, though, a theory can trump a fact" ... "Harrumphing in Washington won't stop the occasional Enron".
Jenkins is afraid Washington will find a useful role. In his account, auxiliary arguments pop up like Cayman Islands subsidiaries.

"If these were crooks, they were dumb crooks"
"But Papa, how can all the Jews be bankers ... and communists?" "Ah, that just shows you how clever they are". (Having it both ways: either they're not crooks at all, or they're too dumb to succeed, thus there are no crooks in the universe smart enough to warrant institutional oversight.)

Among the useful:
"the public's appetite for risk has been growing stronger. We push companies to live dangerously" and "The sad truth is that Enron's business was maturing."

So here we find ourselves, a ragged band of Capitalist tools -- Jenkins, Krugman, Tony, Will (Vehrs), Will (George), RonK, and more -- puzzling over the bones of a fallen giant, trying to discern what it portends for the rest of us ... saying things out loud to see if they sound right, haphazardly agreeing and disagreeing, not yet divided into factions, striking this or that pose of confidence or concern, fishing for the keys by which we can attach meaning to this event without tearing up too much of the chain of meanings we learned and used in the world before Enron.

Our faith enjoins us to place Capital in the hands of those most capable and inclined to use it best, to create more Capital. Something has gone amiss, something we can't comfortably dismiss as an isolated instance, something we can't readily trace to a single defective component. This may take a while.

P.S. "Prediction: McCain-Feingold by St Val's Day", 2002-01-10, running a day late, as I pegged the Discharge Petition to hit 218 by the 23rd.

Tuesday, January 22, 2002

--- Messin' with Texas ---

Clearing the desk as the Enron story lurches erratically toward outright criminality, let's sweep one topic I teased in an earlier post. Enron's collapse is gonna mess with Texas. How? Let us count the ways ...

Enron's hand-picked Ex-Enron-Exec Max Yzaguirre resigns as head of the TX Public Utility Commission. "Hand-picked"? $25K in E-money, C.O.D., to Gov. Rick Perry's war chest. "C.O.D."? Contribution booked the day after the appointment.

Focus on Dereg. TX went live January 1 with their model of "Consumer Choice" retail electric deregulation, crafted by Enron, Yzaguirre, and former PUC chief Pat Wood (now FERC Chairman, replacing Curt Hebert (now chief lobbyist for Entergy (arguably a bag of "PUHCA Pretzels" ... but that's another story))). In light of Enron connections and the California experience, dereg should generate a stream of investigative probes (including its fair share of those annoying false positives).

Justice plausibly denied? The Houston US Atty's Office recuses en bloc. Sitting TX Supreme Court Justices took $134K in E-money ... refund intentions, a mixed bag. A bargain for Enron, saving them $15M in school tax assessments among other valuable considerations. (Polled anonymously, 79% of the Texas Bar say judicial campaign contributions get results.) Will federal bench nominations from TX draw closer scrutiny? Yes. Will TX change the system? No.

E-money burns holes in pol's pockets. Sen. Hutchison will donate to charity any of the $100K "remaining in her campaign account" (huh?). Retiring Phil Gramm will return 2002-cycle contributions (about $12K of a lifetime $97K). Most US House rep's holding theirs. Gov. Perry aims to keep his $200K. TX Attorney General John Cornyn stands nearly $200K deep in E-money (keeping it).

Phil Gramm is out of the game, but not off the hot seat. Any future office of honor, trust or profit -- public or private -- becomes controversial. GOP retention of Gramm's Senate seat once looked to be a safe bet. Gramm's GOP successor still looks to be the above-mentioned A.G. Mr. Cornyn.

Majority Leader Dick Armey -- gone. Tom "The Hammer" DeLay, House GOP Whip, holding fast to his post and his E-money. Enron poses no obvious direct threat, but rep's tired of being Hammered could use it as a pretext in the coming contest for Majority Leader. Martin Frost, House Democratic Caucus Chair, may suffer similar bank-shot repercussions.

Gov. Perry is running for election on his own, after succeeding GWB. A competitive gubernatorial contest would resurface issues from the Bush years, while national press are dumpster diving behind offices all over Texas.

The Texas Education Miracle, the Budget Miracle, the Bipartisanship Miracle and the Environmental, uh, "Compromise" almost got TX Gov. Bush elected President! What else do these "Texas Miracles" have in common? All were miracles of Enron-like creative accounting, creative compartmentalization, creative retelling, and media deference to GWB's "Don't Mess with Texas" dee-fense. Media self-exam, for GWB as for Enron: who casually accepted fuzzy answers to pointy questions, and why?

Other known walking wounded -- civic charities (some with E-funded construction programs, etc., in progress), Enron Field (Enron payments spread over 30 years ... ooops!), local businesses, taxing jurisdictions, and public employee retirement systems (looks like Texas got off light, but no authoritative accounting to date).

TX was a must-have big-state GOP stronghold, an anchor of the Southern Strategy, and a demo platform for the new, inclusive party model. All three could suffer as Enron plus post-9/11 INS vigilance plus other influences inflame a TX GOP Hispanic panic. GOP is doing better with minorities, but it's still on probationary status. It's never one thing that scuttles you, and it's never one thing that bails you out.

OK, now, what about DELL? Well, what about it? Worlds apart, on the surface. DELL sells real stuff you can count going out the door, made of real stuff you can count coming in the door.

Similarities: Texas born and bred, high-flyer, can't-miss enterprise, Rovian aura of inevitability. Management farther right than Enron's, but less politically active. Anything else?

Similarity: Logo features a block-script capital letter 'E', balanced precariously on its southwest corner. What's the theme -- the genius of dynamically unstable equilibrium? No idea, but I'd give that design a make-over.

Similarity: Appeals to Unjust Enrichment. DELL's public face is the Eddie Haskell clone "Steven", whose conspiratorial nudge-and-a-wink pitch suggests "Dude, you're in on a scam ... mum's the word, right?". Investors from Mom & Pop to Chase & CITI heard "Dude, you're gettin' an Enron!" and paid to play ... likewise India for a power plant nobody needs ... and California, for a certain wholesale power exchange model.

Similarity: Favored by institutional investors, citing a neoteric business model -- you wouldn't understand, just buy it -- to support a P/E that seems a bit rich for a margin-shaving commodity business. Especially since that whole market (configurable PC's) is toast if PC designs stabilize, or become more plug'n'playable, or if MSFT's ".NET" strategy really works. Especially since DELL's market-share beanstalk has already grown a long way toward the observable sky. Especially since re-potting that beanstalk to reach any other market entails stratospheric business risks.

Similarity: Dissonant trajectories of reported cash flow, net income, and retained earnings. Fuzzy math? Hard to tell without spelunking the footnotes.

Similarity: Proficient at out-maneuvering competition (case in point, Gateway ... a key employer up there in Tom Daschle country). Are they geniuses of Adam Smith efficiency ... or masters of franchise strategery?

Is this an extreme tangent from the Enron story? Not necessarily. Both claim the ability to profit more than other firms, doing things other firms do. Can they really? Maybe yes, maybe no. Either branch raises hard questions for the champions of, uh, what was our socioeconomic system again? The elegant optima of free-market capitalism? Or the cutthroat gamesmanship of franchise oligarchy? Can't be both. "What holds it up, Momma?"

Looking ahead, I spy, with my little data-geek's eye, a run of numbers that are too neat to be natural. Preliminary inference: not all the FEC disclosable E-money has hit the tote boards yet.

Still on the desk: following the E-money, tax island paradise, Waxman's 17 points (Windfall or Windbag?), leave it to Levitt, ecology of capital, Gresham's Law, Grisham's Law, circling the wagons, SEC chokes on "PUHCA Pretzels", Level Three Diagnostics, "a Culture of Minimal Disclosure", and ... "Not an EWG, Joey, but a FUCO".
==== Messin' with Texas, Updates ====
Among TX US House members donating Enron campaign contributions to one or another charitable fund for Enron employees --
Gene Green (D) to donate all $5,750
Sheila Jackson Lee (D) to donate (some? all 38K?)
John Culbertson (R) to donate all $5,000, reversing earlier position

Prediction: Stampede. Even in Texas, it will take a lot of cojones to smile for the cameras and claim "Hey, I earned it fair and square!".

And as speculated earlier --
TX Supreme Court Justice Priscilla Owen, a Bush nominee to the 5th Circuit Court of Appeals, taking heat over $8,700 in E-money and the $15M pro-Enron school tax decision.

Related Correction: The beneficial effect to Enron was $225K (in tax revenue), not $15M (in taxable inventory) as I reported yesterday -- and as Owen erroneously asserted in the opinion she authored.

Is Owen getting Borked? Very possibly ... one of those annoying false positives. But like I said, this thing is gonna mess with Texas.

Sen. Hutchison pledges $100,000 in charitable contributions to benefit laid-off Enron employees (exceeding Enron's reported $99,500 lifetime total contribution to her federal election campaigns).

Also, best Houston Chronicle link for summary of TX contributions

Friday, January 18, 2002

--- Short Takes ---

Spelcheck!. It's not "Anderson", it's "Andersen" (formerly "Andersen Worldwide", formerly "Arthur Andersen", and estranged parent of "Andersen Consulting", now "Accenture"). This far into the scandal, major media -- from LA Times to -- should know better. Lucky none of the Big Five were founded by Poles or Arabs.

Scandal skeptics insist Enron's just an ordinary train wreck. No big deal ... most trains keep running on schedule. Roll in the heavy cranes, clear the track, find out what the engineers were smoking, fill out the reports and pass 'em on to the insurance guys. "Whatcha gawkin' at, people, go on about your business, willya!" Could be true ... but if I thought so, I wouldn't be writing this ... and if they thought so, most of 'em wouldn't be drumming so hard.

"We can't quit, you fire us!!!" Enron dismisses Andersen. The relationship had to end one way or the other, and it probably had to end this way. Better for a public corp to fire a vendor than be shunned by its auditor. Better for an auditor to have the door slammed in its face than be seen slinking away from a terminally wounded client it failed to protect.

Can't teach an old industry lapdog new tricks. SEC Chairman Harvey Pitt unveiled an ingenious plan for addressing the crisis -- put the whole audience to sleep. (Pitt is a less dynamic speaker than his pre-SEC career as an accountant's accountant's lawyer's committee's lawyer would lead one to expect.) Before they wake up, move the industry even farther into the wilderness of toothless oversight.

Pitt doesn't "get it", never will. Give him the hook, and find a real reformer. Jack Welch is a perfect misfit for almost any post in government, but he could lead a task force on corporate governance. A bullshit-detector's bullshit detector, he built a career reminding people to FACE REALITY, he understands the stakes, and he passes every test of public confidence and political acceptance.

What would rational markets do? When terrorism made the jump from nebulous possibility to concrete reality, when recession edged in from indefinite future to immediate present, when telecoms and dotcoms crashed and failed to bounce back with better business models, when global economies slipped backward rather than inching forward ... a rational market would have settled on a lower discounted present value of all future returns. My "Planet Enron" reference to nitrous oxide (N2O) was only half-joking. Wall Street is floating, oblivious, in pain but feeling no pain, waiting patiently in line for the next epoch of limitless growth. Enron times 100? The books may not be cooked, but the prevailing psychology is just as dramatically fried.

Enron must be the crusading prosecutor's wetdream. Mom & Pop victims, moneybags defendants. So many players, so much complexity, no way they'll keep their stories straight. Fingerpointing, grudges, small crimes to bargain for cooperation against the bigs, probably scams inside of scams, ripping off the scammers. Defendants with everything to lose, running scared. All the defense and appellate counsel money can buy, though, and mind-numbing subject matter.

The big fish could still slip the net on the premise that everything they did was stupid but technically legal, or done on misinformation, or on somebody else's authority, or done "virtually" in places where it wasn't even illegal. Or "auditor ate my homework" defense, or some premature proceeding leaves them with Ollie North immunity. Or they pull a Marc Rich ... or find Jesus, plead out for a slap on the wrist and retire to the Cayman Islands to write their memoirs.

Auditing Enron was big enough to take down one of the world's top audit firms. Forensic reconstruction of the disaster will take a lot of legwork, and FBI is overextended with homeland defense. Help is in the pipeline, however, in the form of a DOJ-chartered FBI reorg to "identify and recommend actions dedicated to improving and upgrading the performance of the FBI ... evaluate the organizational structure and mission of the FBI, including the agency's own perception of its mission and core values" Contract was let back in July, to a topnotch consulting firm -- Andersen.

"Enron" ... the Soundbite of Mass Destruction? Those looking for ballotbox angles should look to the 2012 election cycle ... not 2002.[UPDATE: 2002-01-23 Daschle uses "Enron" as verb transitive -- budget should not "Enron the people".]

Enron ... Scandal-gate's last stand? Media have a scandalously slothful habit of consumer-branding every investigation with the generic "-gate" logo, invoking vague, plausibly-deniable parallels to the web of high crimes known (slothfully) as "Watergate". Enron just may be big enough and different enough to break this unfortunate reflex.

In upcoming dispatches: political op's bigger than they look, tax island paradise, messing with Texas, leave it to Levitt, the effects of fallout on the ecology of capital, circling the wagons, and ... what about DELL?

Thursday, January 17, 2002

--- To Infinity, and Beyond ... ---

[orninally posted on The Fray, and reprised on "Dispatches From Afar"]
Setting aside the "astronomical" thesis of my dispatch from Planet Enron, and picking up Josh Marshall's "meta-scandal" and Richard Cohen's "no category for it", what's the right sized box for the Enron debacle?

If I'm right about how big "big" is, it's big. Bigger than the Titanic, bigger than the Hindenberg, bigger than the Edsel. Conservatively, let's assume no violation of law by any political figure -- no President, regulator, jurist, legislator, fund-raiser, party hack or party flak -- and with a firm grip on Occam's Razor, create not categories beyond necessity. It's still BIG ... can we find a descriptor grandiose enough to do it justice?

One subculture has thrown up a virtual shantytown of hasty minimalist framings, a melange of four distinct architectures:
(1) Andrew Sullivan's "Big Hairy Deal" theory , or as Libertarian Samizdata put it, "yawn".
(2) A premature headline "Enron Investigation Complete, Bush Not Guilty" making the rounds in GOP loyalist circles.
(3) The "Andersen Scandal" treatment favored by Will Vehrs and others. In essence, "Dogbertgate" ... a Marat/Sade remake, with hired suits telling the inmates how to run the asylum.
(4) "Everybody did it", per David Brooks, and especially "Clinton did it".

Versions three and four are more damning than their authors intend. True, Andersen let us down. And indeed, Everybody did it. By my reckoning, these signposts direct us to the trailhead where Marshall and Cohen scrambled up the slopes a couple days back.

On the way to learning how Andersen failed us and why Everybody did it, a web of assumptions will be examined ... beliefs so pervasive our culture has no names for their alternatives, since we never imagined there might be (or must be) alternatives. Where this journey will take us is beyond the capacity of anyone to anticipate -- even yours truly.

For now, let's bang words together, hoping to stumble on a fitting category -- perhaps familiar, perhaps something new under the sun.

The Fall of the House of Enron is a seminal event, of far greater magnitude than the production of one Blue Dress. A cultural bombshell. A watershed. An end to Business as Usual. The End of an Era. A massive failure of intelligence. A massive failure of epistemology. A tipping point. A Bridge Too Far. A collective epiphany. Losing our religion. Nietzsche's Transvaluation of Values. McLuhan's Reversal of the Overheated Medium. A Hegelian Crisis of Cannibalism. The fall of a dynasty of baseless enthusiasms. A Bonfire of Inanities. A compound fracture of the Pillars of Community, where jagged scissile bones of Unjust Enrichment protrude sickeningly through the riven flesh of Shattered Trust. A Hoberman Scandal. Could it even be a Paradigm Shift?
Sorry, that one sounds for all the world like an Andersen pitch for new shelfware, and "shift happens" only when a new paradigm emerges to out-rationalize the old. Do post the earnest solicitation "Paradigm Wanted -- Inquire Within" ... but remember the creaking superstructures of dilapidated paradigms have been known to teeter menacingly over public thoroughfares for generations on end.

Enron does for the mystique of American faux-capitalism just what 9/11 does for the world of Islam. It calls for a review of faith and its application in the modern world. It's the Crash of 1929, with or without the crashing. If the dislodged superstructure merely levitates in plain sight, the nagging question "What holds it up, momma?" subverts the social order more deeply than the outright fall of any grand edifice.

What imbues Enron with such powers of cosmic upheaval? Nothing. It has no power of causation, but of ideal representation and perfect timing. A constellation of contradictions has been converging under our noses. Lanny Davis labels Enron an "emblem" -- the hood ornament on a runaway train-of-thought, now coming off the rails everywhere at once.

Legitimate Capitalism hangs on a chain of premises -- one person's surplus above immediate consumption can be pooled and transferred, and another person can use it to make some flocks increase, and net increase can be counted, and the first person can receive a share of the greater surplus, and the counts can be verified and contracts enforced and disputes settled by competent disinterested third persons, and all can be justly rewarded, and these incentives will lead to surplus everywhere being put to better use. The Enron story attacks every premise. Enron broke all the rules we knew, and more.
[paragraph above revised for clarity]

Enron is not the only make-believe castle in the make-believe sky, but it is big, and centrally located. And almost everyone was in on the make-believe, from trusted eminences to ordinary investors who became convinced they could reap 20% annual returns, compounded, by aimlessly trading tokens of things they didn't understand ... or that somebody somewhere could do this for them, for a miniscule slice of the proceeds.

Enron is an early skirmish -- and a decided upset -- in the battle between what was supposed to come next, and whatever will come next. The early favorite, anarcho-capitalism, blows out a knee in the preliminary heats. Samizdata may have it nailed in their mission statement: "Developing the libertarian meta-context" (and, artfully avoiding any possible confusion) "... for the future". That's exactly what's at work here: creative destruction of the prevailing meta-context ... "for the future".

Or was it just an accounting glitch, and a run of bad luck?

Wednesday, January 16, 2002

--- Breaking News from Planet Enron ---

[ originally posted on The Fray]

How big is the Enron debacle? How big is big? To Richard Cohen "This is a cultural event, a systemic collapse, an outrage so breathtaking that we poor scribblers have no category for it."

To Josh Marshall "this could develop into a meta-scandal - a cascade of revelations which gain traction not because of specific or discrete criminality but because the sheer magnitude of the event delegitimizes the whole framework of interaction between government and corporations".

Is Enron a Meta-Scandal? Mega-Scandal? Giga-Scandal? It just might be a Scandal of Astronomical Proportions. This just in ...
FLASH: In a development whose gravity cannot be overstated, the planet Enron imploded and simply disappeared. Persistent rumors suggest the Elders of Enron had been manipulating a captive singularity -- a so-called "regulatory black hole" -- in a series of covert experiments intended to engineer an inexhaustible source of power.

A number of satellites continue to orbit Enron's last known position, spinning at ever-accelerating rates. Time itself becomes distorted as myriad small bodies plunge helplessly into the vortex, emitting withering blasts of heat and ionizing radiation.

Fragmentary distress signals from Aa, largest of Enron's five habitable moons, are still being picked up on the scan dial. This last dispatch from one Andykin Skytalker: "FASB GAAP EITF ... CFTC CBOT FERC RTO ... RNC DNC FEC SOP ... ENE CFO SPE LLP, SEC 8K ... BBB B-, MBA SOL ... AICPA ASB GAAS N2O, HAHA HAHAHA ... SHAZBAT! (EOT)" Homeworld languages in this sector are barely comprehensible, but we've achieved a partial translation as follows: "Ooooh ... Dark in here!"

An observer on Enron's sister planet Eiron notes with typical Eironic detachment: "Geniuses of Centripetalism? Poor spreadsheet jockeys didn't know Black Holes from Black-Scholes! Only a speculation, but I figure these Masters of the Universe miscalculated the derivatives somewhere, accidentally transforming the net energy field into a total cluster-function. With routine public disclosure, somebody would have nailed the error right off. Just goes to show -- Nature abhors a backroom."
[UPDATE: Maureen Dowd visits Planet Enron in the halcyon days before the Fall.]

OK, how big is it really? It's REALLY big, and I'll be back to describe just how big ... after I go invent some new categories.

Tuesday, January 15, 2002

--- Enron, FERC and California ---

[cross-blog compilation]

QP's Tony Adragna notes "We also haven't heard the last on whether the California crisis was the result of an actual shortage, or a market manipulation".

True, we haven't heard the last, but we've heard the first ... the prima facie presentment, the rebuttals, and the finding of market manipulation at the close of July 2001 proceedings by FERC Chief Administrative Law Judge Curtis L Wagner, Jr. -- at least in passive voice ("prices were manipulated", as opposed to "you, Enron, manipulated prices").

[This result from a decidedly neocon FERC. WJC's appointments leaned pro-market (if not libertarian, then at least strongly 'deregulatarian'); previous Chairman Curt Hebert was hand-picked by Lott and Tauzin (a bit of appointment process horsetrading); current Chairman Pat Wood was hand-picked by Ken Lay (a bit of scandal). Wood is regarded as having higher ambitions, and now must bend over backwards to avoid the appearance of bending over for Enron.]

With that stake in the ground, the parties are engaged in what could become 20 years of evidentiary proceedings to formulate the amount and allocation of refunds due (suspended as of Dec 6, 2001 pending review of "contextual issues" -- wonder what those could be?), and all manner of subsidiary litigation and appeals. [CONTEXT: ENE went Chapter 11 on Dec. 2]

California asks $9B, the betting line is more like $1B, and claims by other injured parties are still proceeding. The status of the "market vs manipulation" issue is basically "we've already determined what kind of a woman you are, Ms. Enron, now we're simply haggling over the price". [UPDATE 2002-01-30: Wood says he's concluded ENE did not manipulate prices. A career-limiting move if any of several ongoing investigations pan out.]
-- RonK

P.S. A jog down memory lane: FWIW, this writer correctly predicted FERC imposition of price caps and consequent evaporation of "shortages" (providing detailed market-theoretic explanations) directly following the Jeffords flip.
-- RK

--- Follow-up's on 2002-01-13 Short Takes ---

[From threaded responses and e-mail.]

WillV [at] wonders why my tea leaves show potential trouble for (well-regarded white male Houston US House Democrat) Kent Bentsen, but potential opportunity for (well-regarded black female Houston US House Democrat) Sheila Jackson Lee. There's a difference.

Jackson Lee is running for re-election to the House, in a "safe" district. Bentsen is angling for a Senate seat, against credible opposition, while redistricting makes his "Leans Democrat" House district less secure. Thus minor Enron paper cuts could tip the balance against Bentsen's next move, while Jackson Lee has merely to avoid major damage (think Dan Rostenkowski) ... and she gets bonus national spotlight time to comfort the afflicted (Enron employees in her district) and afflict the comfortable (malefactors of bogus accountancy).

WillV also questions "Carnahan's Gold" ... is it a parsing problem? That was a topic caption, in the possessive ... not a contraction for "Carnahan is Gold". Yes, Jean C. is in a tough race, and something like this creates a digestible bite-sized "hook" that works almost without energy input ... the national media machine keeps reconditioning the local message.

Also on the QP Refuge, Mark Dahley flames: "giving back the money at this point would put her in a category as sleazy as Davis, but now gives her the chance to put a heroic spin on it." Just the point. Carnahan returned the money months ago, before everybody despised Enron. Sleazy would be waiting until this week (as Dick Gephardt, D-MO did) to return a thousand dollars Enron contributed in 1999.

Carnahan may have had other reasons at the time. She may have taken California's side against Enron's energy gouges. She may just have been teed off at Enron's $60K-to-nada support for her opponent last time around. As the supportive life partner of a career politician, she may have developed an instinctive nose for sleaze. (Every good pol should retain somebody with that gift.) But now, she's the only known specimen of a pol who turned down Enron money before it became obvious the stuff was toxic.

Several names were omitted in discussion of major politico's on the E-money list. Among these were the non-eyebrow-raisers, e.g., chairs and ranking members of Energy committees, and a couple of prominent Texans, Sen. Kay Bailey Hutchison (R) and Rep. Martin Frost (D).

Hutchison's enrodynamics seem similar to those for Sheila Jackson Lee -- high visibility, low jeopardy. (Hutchison, like Jackson Lee, is thought to have potential for advancement.) Though tied for top honors in E-money, she seems not to have carried water for Enron in any conspicuous way. Indeed, for major players in the same state, their paths rarely seem to cross except as obligatory at parades, unveilings and such. Does she, like Carnahan, have a built-in sleaze-detector?

Frost is a California-born, Missouri-educated Jewish lawyer ... probably not your typical 12-term Texas Congressman. The savvy Capitol Hill apparatchik is Chair of the Congressional Democratic Caucus, Ranking Member on the all-powerful Rules Committee, and point man for his party's efforts in the decennial redistricting process (a matter of political life and death for many incumbents).

Can he get hurt? Unlikely, but yes, under either of two scenarios. Frost is in the running for Majority Leader, if and when Democrats retake the House. A minor Enron taint might shade the balance of interests against him. Or, should Frost be implicated in any major way with Enron legislative gamesmanship, he might lose any of his current leadership roles.

Sunday, January 13, 2002

--- Short Takes from Camp Enron ---

[ First "Camp Enron" special, originally on The Fray ]

"So much manure, gotta be a pony in there somewhere." Well, for starters there's a Clydesdale in the, uh, lobby of retiring Sen. Phil Gramm's (R-TX) office. That doesn't mean a whole herd will be corralled and broken, no matter how many hoofprints run from Houston to D.C. and back.

Democrats are salivating at the "payback" opportunities ... beware the immunization effect! Remember how GOP operatives treated the Clintons to so many bootless "AHA!" moments that the first real scandal drew a public "ho-hum, what else is new"? [CONTEXT: the AHA-man himself, former Senate Whitewater Cmte Counsel Michael Chertoff ("What about THAT, Mrs. Clinton, what about THAT?") now heads DOJ's criminal division.]

Democrats be-doubly-ware, all scandals work to the atmospheric benefit of Republicans, by reinforcing John Q's cynical view of politics and government.

Republicans beware, the stench of suspicion lingers after the meat of (alleged) misconduct is off the table. Everybody remembers Whitewater as a "shady land deal", even though there was no wrongdoing done in the deal.

It's not a real Washington scandal till the fat lady denies something that everybody already has on tape. Ooops, I guess we're there. WH still claims no reason to round up a list of Enron/WH contacts. That would be a "fishing expedition". [2002-01-20 UPDATE: GWB's "KennyBoy who?" routine busted wider open, in David Corn's 1994 piece re GWB/Lay/ENE/Argentina in 1988. ]

Let's take a quick cruise through the obvious political fallout, following the money. Later in the cycle, attention may shift to "follow the legislation" -- who introduced which loophole, who bought in, who pushed back -- but for now "E-money" is radioactive, and they spread a lot of it around.

Most E-money went to Texas. Phil Gramm's legacy is gone in a cloud of subpoenas ... will he still wind up running some institution dedicated to proving "the market's always right, and the gubmint's always wrong"? [UPDATE: Chmn declares Gramm NOT categorically disqualified for coveted Texas A&M post. ]

Enron's "home port" Congresspeople, Kent Bentsen and Sheila Jackson Lee (both Democrats) were major recipients. Sheila is a highly regarded up-and-comer, fallout remains to be seen. She and caught-in-a-crossfire FERC chief Pat Wood could even emerge with enhanced stature if they play their roles artfully.

Bentsen is/was a serious contender for the primary nod to run for Phil's old senate seat ... but probably not the most compelling candidate in November's general election. The touch of Enron may knock him out in the primary, helping his party's prospects.

TX governor's race also becomes more competitive, and with multiple angles that could hurt GWB in 2004. [UPDATE: see Camp Enron Report of 2002-01-23, "Messin' with Texas"]

Outside of Texas, Sen. Chuck Schumer (D-NY) got a big bag of E-money. Schumer has been a key advocate of Enron-style deregulation. Is that all?

One man caught more E-money than any other senatorial candidate in any single campaign, in or out of Texas ... John Ashcroft. Why Ashcroft? He was no Senate heavyweight. And why in a competitive race? (As a rule, big corp money is restricted to sure bets, or is balanced across evenly-matched contenders.) What did Enron want? What did they get? And when Ashcroft lost to a dead man, who tabbed him for A.G.? [CONTEXT: ENE rarely backed a loser. In hundreds of state-level races, 98% of their contributions went to winners.]

Robert Rubin will get raked for interceding on behalf of Citigroup, a major Enron creditor. That brings another name into play ... Saudi Prince Alwaleed (from whom Rudy G spurned a $10M WTC donation). Prince A bought heavily into ("bailed out"?) CITI when it was out of favor.

Looks like Rubin's angle was expediting a Dynergy merger, which might have saved most Enron jobs and pensions (though at reduced valuation) ... and a good many Citigroup shekels. Bridge financing, or risk mitigation, or honest brokerage plus creative technical consulting, or just a good word from the right people in the right circles might have salvaged the deal. Of course it's hard to save anything when the books are cooked. [UPDATE: Nope. A lost cause, correctly assessed by Treasury's Peter Fisher (who was instrumental in the LTCM bailout.]

A minor plus for California's Gray Davis, who demonized Enron before it became fashionable. A potential sympathetic plus for several western states now in uphill legal proceedings to recover damages from "California crisis" energy market manipulations (where Enron was a leading "player", in the worst sense of the word). A potential economic minus, since Enron's presumed deep pockets are now empty. [UPDATE: plus - pretext to break long term contracts now under water.]

Carnahan's Gold. The single most golden move by a member of Congress may be Senator Jean Carnahan's decision to return a $1,000 PAC contribution from Enron, way back in June 2001 before the troubles became evident. "After looking at some of the ways at how Enron did business and whatnot, we didn't think it was appropriate to keep the check." Could decide the race ... "Clean Jean" is up for re-election this year, in a nationally targeted race that could decide control of the Senate.

Non-political questions abound. Unlike WTC, Enron collapsed without creating much of a crater in the surrounding economy. Did Enron really exist in the first place? Airlines got same-day service at the bailout window ... why or why not Enron? And how did $600M in restated earnings knock down $60,000M in market capitalization?

Will Arthur Andersen survive? They look to be the most asset-rich litigable target for Enron victims. The debacle does not reflect credit on either the consulting side or the auditing side of the business ... even without that unpleasantness about destruction of records under subpoena. And the main resource -- "Andy's Kids" -- can stroll across the street and become somebody else's troops if their services are more readily marketable under a different nameplate.

Don't stop at Andersen. How much of the media -- trade and popular -- "invested" mindshare in the idea that unbounded value could be generated in glass-and-steel trading hives ... that equity might compound indefinitely without visible means of support? Ditto the financial community, academia, and a generation of "momentum investors", and the marketeerist political community, and what other packs of lemmings. The music stops, and "POP!" go the weasels.

Enron, the tip of many icebergs. Off most observers' radar, the global bandwidth market tumbled ... $1T in fiber build-out will be obsolete before it's ever used, and Enron paid to play. Enron got caught with a hand in California's cookie jar. As Enron's hand-picked man (Pat Wood) became FERC chair, the energy crisis turned to energy glut. In a soft global economy, many commodities worldwide lay in surplus ... and traders just don't thrash markets in a surplus-driven panic the way they did in shortage-driven panics.

Artificial markets for pseudo-commodities can be efficient, minimally intrusive allocation devices for all kinds of assets -- and liabilities (CO2 emissions, fishing quotas, NIMBY mitigations, natural-monopoly franchises). Will we throw the baby out with Enron's bath water?

Ironically, Enron was right on global warming, strongly favoring the Kyoto Accords (where Enron would have cleaned up on GHG quota trading). That's probably why Spence Abraham, and not Ken Lay, is Energy Secretary now. [UPDATE: Enron backpedaled, is now downright anti-Kyoto compared to BP's policy on same.]

Luckily, Lay and his gang of Alice in Wonderland accountants didn't have time to "save" Social Security for us. In a way, they did. Privatization, RIP.

In a sign of the (brave new) times, conservative columnist George Will emphasizes market dependence on regulation and institutional infrastructure, declares "Capitalism's a government program"!!! If only US neocons had made that clear to the Former Soviet Union back when the walls came down. Oh, well.

And remember that phrase ... "a Culture of Minimal Disclosure".

Friday, January 11, 2002

--- Breaking Ground for Camp Enron ---

[ Camp Enron Historical Marker: This 2002-01-11 "Short Takes" piece from The Fray (here with minor edits and updates) alludes to Enron's "Culture of Minimal Disclosure", and lays down my marker on the Enron affair as "a major historical turning point" ]

For future reference, remember this phrase ... "a Culture of Minimal Disclosure".

Bad day in the "Don't Go There" department --

DGT(1): T-AQ "detainees" to be treated as "Unlawful Combatants", not POW's. Procedural consequences? "We're still working on that." Premise: "You're not a real army, those aren't real uniforms, Taliban's not a real government." Not the kind of loophole you want ripped open going into a dicey century like this.

DGT(2): Recess appointment of terrorist Otto Reich to State Dept. O.R. was losing GOP support, wouldn't have passed confirmation anyway. An expensive push.

DGT(3): Recess appointment of Scalia's kid to Labor Dept. (where he'll enforce laws he viscerally opposes). A contingent interest that would've meant Scalia's recusal in any ordinary case.

Speaking of declarations of war, things hotting up again between Pakistan and India.

"Taps" today for Nate Chapman. That's Sgt. First Class Nathan Chapman, 1st Special Forces Group, Ft. Lewis, WA. Mom & Dad a military family, proud as heck, "no regrets". Tougher on the widow Renae. Two kids, too young to understand.

From what I hear, Chapman died of leg wounds, so he bled to death ... a good way to go. Get to see your life pass before your eyes, no miscellaneous fluids gurgling out, you still look good at the funeral.

Saw one of the KC-130 widows on air earlier, proud of her guy. Don't know how anyone anywhere ever handles it with so much composure. Death by fireball, not such a good way to go.

Enron, pro & con, getting ahead of the game. The "Scandal-Industrial Complex" (per CNN's Jonathan Karl). Conventional wisdom says it's just more Hatfields and McCoys. I predict it becomes a major historical turning point. [UPDATE: "SIC" coinage, far as I can tell, belongs to Robert Dreyfuss, "Collateral Damage: The Personal Costs of Starr's Investigation" (C) 1997]

As with Argentina, cabinet officials snubbed Enron's pleas. The conservative principle of "laissez la chute de pommes frites ou ils pourraient" steers clear of "moral hazard" but invites catastrophe. The instinctive wrong-headed response, even if it does save a few skins ... trouble brewing, at least give it a look! Bush & Associates, LLC would've casually watched as Mexico -- and LTCM -- went belly up and markets went to hell.

Al Qaeda comes to Git'mo. They'll be greeted by, among other novel experiences, American women ... women equipped unimaginable attitudes and unimaginable firepower. Will our gal Sadmira, USMC be there to 'splain 'em how it's gonna be? Who can say? (Sadmira? Bosnian Muslim freedom-fighter, war widow, single mom, Frayster, turned US Marine in response to 9/11.)

And remember to remember this phrase ... "a Culture of Minimal Disclosure".
-- RonK, Seattle
P.S.: Parthenogenetic Sharks in Nebraska! Sorry for the oversight -- RonK