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.
Sunday, February 10, 2002

--- Camp Enron Mission Statement ---

The coroner investigating the Global Crossing incident has called in special agents from the X-Files team. Elsewhere, financial bloodhounds are sniffing at some extremely odd terms in a series of Citigroup credit-linked notes. The plot thickens -- and broadens ecumenically -- in ways that affirm this writer's view of the matter. This is not just the Enron melodrama, it's a metastasizing meta-scandal, a takedown of the prevailing meta-context ... a revelation of latent defects so crippling and openly exploitable as to subject The System to the possibility of product recall. The geniuses of ENE and GX have demonstrated a devastating hack attack on corporate governance. Was this a simple case of buffer overrun, one we can cover with a patch? Or is there a gaping set-theoretic hole in the platform security model, rendering the entire architecture untenable? In either case, how far from shore should we sail in our theoretically-leaky boats?

I'll stick out my reputational neck. In history's rearview mirror, Enron may loom larger than 9/11. The contest depends on things yet to be. In 21st century history, will "terrorism" and the "war on terrorism" play out as coherent themes? Or as anecdotal clutter? As major or minor motifs? Will they be eclipsed by related conflicts, and seen later as mere links in a chain-reaction? Or will unrelated issues eclipsed them entirely? Same questions for "Enron". Which will more strongly influence the emerging global meta-context? There's a reasonable case to be made for WTC, a clear sentimental favorite ... but my money's on Enron.

Camp Enron coverage will include ample servings of highlights and sidelights ... politics (including PPD), and courtroom drama, and soap opera, and farce, and even sport. But keep in mind that Enron itself is merely the chimerical sideshow poster child for a three-ring circus of misplaced devotion.

In the main I'll attend to the larger and deeper implications (which are emphatically large and exceedingly deep). Our topic in a nutshell: How will republican democracy and market-based capitalism escape being eaten alive by their own demon spawn?

And so the Plot Thickens ...
Global Crossing's collapse seemed at first an unrelated matter, coincidental except as convenient to die-hard ballot-boxers looking for a Democratic tat to match the Republican tit of Enron. Deeper inspection reveals a unifying theme, one that will draw a great many other matters into its orbit. Let's lay out the "coincidental" case first ... later we'll demolish it under the weight of analysis.
ENE hyped a neoteric smoke-and-mirrors business model; GX was constructed as a real business for real customers.
ENE was a counterproductive business; GX was a productive business that (along with its peers) built too much useful capacity.
ENE collapsed when trading partners realized its balance sheet was bogus; GX collapsed when real revenues didn't cover fixed charges.
ENE accounting was fictive; GX accounting (also audited by Andersen) was aggressive.
ENE used off-book sham transactions with foreign shell partnerships; GX presented its results on its own books.
ENE tried to hide bad results with ever wilder fabrications; GX owned up and bailed out.
ENE tweaked politicians to avoid regulation; GX tweaked politicians to establish regulation.
ENE politicked more aggressively than anyone else in its sector; GX politicked on par with its telecom peers.
ENE was overwhelmingly partisan; GX was evenhanded. GOP ex-Pres Bush41 got in on the same ground floor as DNC Chair-to-be McAuliffe. GX's chief promoter was a neocon/futurist Reaganaut. ("If you don't like capitalism," said Mr. McAuliffe in defense of his windfall, "move to Cuba or China." ... but if you DO like capitalism, move to the Caymans or Bermuda?)
[Note on terms of reference: In bankruptcy, Enron ("ENE") trades OTC as "ENRNQ". Global Crossing "GX" now trades as "GBLXQ".]

Now, how did GX make money on paper ... without actually making money?

Suppose Will Vehrs borrows $10, buys a collectible Warren Buffett bobblehead doll, and sells it to Tony Adragna for $1000. Will's financial statement shows revenue = $1000, cost of goods sold = $10, debt = $10, cash-on-hand = $1000, and net profit = $1000.

Now suppose Tony sells it back to Will, again for $1000. Tony got out of the game even. Will has revenue = $1000, COGS = $10, debt = $10, cash-on-hand = $0, and assets = $1000. Will's profit, by GAAP, is still $1000. (The doll is effectively marked up as a $1000 asset on Will's books, whether valued at cost or "market".)

Next suppose Tony buys a Warren Buffett doll, Will buys a Paul O'Neill, and I buy a Robert Rubin, at $10 each. We can make similar trades pairwise (as GX did with Qwest, only with fiber-optic capacity instead of bobbleheads), or in three-way swaps, or we can invite more friends to play in our rotisserie "Geniuses of Capitalism" fantasy league. In the token economy, "on paper", we all get rich. In the real, utilitarian economy, we're idiots ... but no specific transaction or bookkeeping entry violates any specific rule of accounting. The scheme as a whole may have violated first principles of accounting, and economics, and even law (depending on how Will raised that first $10) ... but those are separate questions.

We could have played the same game, but left the bobbleheads in the box, on the shelf, or even in the warehouse ... trading "bobblehead swap" contracts for whatever beneficial interest might attach to owning a bobblehead. The bobbleheads don't even have to exist, as long as our speculative enthusiasm does exist.

ENE played a very different game. The players were captive entities, dressed up to look like arms-length counterparties. ENE explicitly created structures that made ENE revenues dependent on the price of ENE stock. And they explicitly structured the closing dates on derivatives contracts to keep the upside of a given transaction on one financial statement, time period and/or taxing jurisdiction, while slip-sliding the offsetting downside result into a different statement, period or jurisdiction. Even done right -- and ENE didn't always dot all the i's -- this violates rules, principles and laws.

The two schemes have one thing in common, something that blows away the "coincidence" thesis and raises legitimate concerns in seemingly unrelated quarters.

Both schemes depend on reciprocal patronage. I buy your stuff, you buy my stuff. This isn't necessarily evil. There's nothing wrong with ATT buying IBM computers and IBM buying ATT telecom. Direct or indirect reciprocal patronage is the essence of market economics. But it is a context that bears close scrutiny.

ENE's version was obvious corrupt practice. The GX/Qwest round-trip swap falls somewhere in the darker end of the grey scale. In better camouflage -- in three-way swaps or staggered round-trips -- it might have ranked well up in the light-grey range and escaped notice entirely, even in bankruptcy.

These "light grey" corruptions are subtle. They work when a whole community shares the same unfounded enthusiasm. The imputed value will never be brought to ground so long as it is honored by all, and so long as there's never an occasion to spend the "proceeds". Call this illusion the Categrorical Derivative ... vice that's as good as virtue, as long as everybody acts alike. [Kant believe I wrote that!] For obvious reasons there are strong social pressures against spoiling the game, against pointing out that the Emperor has no clothes.

What other systemic shadings depend on the mutual backscratch of reciprocal patronage?

Think about market bubbles (endemic even in simulated markets where, in theory, they ought not exist). Think about bull markets in general.

Think about the IPO game, and how little of the "take" ends up capitalizing the enterprise a public offering is ostensibly meant to finance. Think about the derivatives game (then read Frank Partnoy's FIASCO, and think some more). Think about the whole publicly-held equity game, in which most successful firms span the arc from launch to collapse without actually disbursing anything to shareholders (who value their shares according to the firm's theoretical capacity to disburse dividends).

Think about the Japanese economy, where everybody is too big -- and too interrelated, and too deep in the hole -- to count their losses and fail.

Think of the "managing class", the echelons of desk-jockeys who squeeze disparate compensation out of their firms' equity investors, customers and thier fellow employees -- because they and their peers write all the world's staffing and compensation plans.

Think of Citigroup, who issued near a billion dollars in ENE credit-linked notes ... securities that behave almost exactly like ENE corporate bonds except for one thing -- they pay less interest! In other words, securities nobody in their right mind would ever buy under any circumstances, no matter what condition Enron was in ... unless there was a hidden agenda. As NYT's Daniel Altman astutely recognizes, the real mystery isn't "did Citigroup take advantage of inside information on ENE partnerships?", it's "who the hell bought these notes?" (was it Enron, or an ENE partnership?) and "why?" (was this deal part of some extended quid pro quo pro quo pro quo ... ?).