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The Enron Chronicles

Wednesday, 16 January 2002 12:00 AM

Back during the Eisenhower administration a House committee was investigating the ties between Ike's chief of staff, Sherman Adams, and one Bernard Goldfine, a Boston textile manufacturer.

Goldfine, it developed, had given Adams, a former New Hampshire governor, an expensive vicuna coat and other gifts. The committee wanted to know if Adams, in his White House capacity, had wrongfully done anything for Goldfine.

The case excited little media coverage until a committee investigator and Jack Anderson, then a colleague of scandal-mongering columnist Drew Pearson, were caught red-handed bugging the hotel suite occupied by two of Goldfine's hastily assembled team of public relations experts at the very time the men were holding a well-attended midnight press conference.

The incident created a media frenzy and put the investigation on the nation's front pages. Concurrently with the scandal, President Eisenhower had dispatched troops to Lebanon, where nothing much happened after the initial landings.

Bored stiff, the legion of reporters sent to cover the landings spent most of their time hanging around Beirut bars. One enterprising member of the media contingent, however, went out and interviewed Lebanese citizens. One of the questions he asked them concerned their understanding of the Adams-Goldfine case, then a hot topic in the U.S.

Almost universally, from their standpoint as practitioners of Lebanese-Byzantine business transactions, they said their impression was that Goldfine, a trader in textile goods, had given gifts to his cousin, Adams, and the committee was trying to find out if Adams had failed to honor his benefactor by refusing to give him what was his due as a result of his bribes, and was therefore in trouble with the law.

I was reminded of that incident the other day when I read that that absurd little pip-squeak Rep. Henry Waxman, D-Calif., was trying to create the impression, not at all supported by the facts, that the Bush administration had done some dark and dirty deeds on behalf of Enron, which had been lavish in its campaign contributions to President Bush and the GOP.

Bought up short by the realization that in opening the Enron can of worms, he might discover that his party and the Clinton administration might themselves be found culpable, he quickly retreated to a secondary position.

"It is now clear," said Waxman, his silly little mustache all aquiver, "the White House had knowledge that Enron was likely to collapse but did nothing to try to protect innocent employees and shareholders who ultimately lost their life savings."

In other words, either the White House was doing too much for Enron, or they weren't doing a damn thing. As Jonah Goldberg put it in his National Review Online column:

"Simultaneously the Bushies are greedy oilmen willing to do anything for their deep-pocketed Houston handlers – and they're heartless for just saying no when Enron asked the administration for help. This is the newest twist on the Madonna-whore complex: They're for sale but they don't put out. In effect, the Democrats are at once accusing Bush of incest and denouncing him for not going all the way with his sister."

It is becoming pretty obvious that the real story has nothing to do with Enron's political connections and everything to do with the way the company conducted its business operations.

It is a classic case of a company that rode high as long as the good times were rolling, ignoring or covering up costly mistakes, and only came a cropper when times began to get tough and money got scarce.

As far as I'm able to determine, Enron grew like Topsy, from a medium-size natural gas and pipeline operator to an industrial giant seen as the very model of a modern major corporation breaking new ground in that graveyard of dreams known as commodity trading.

"This has to be the most fascinating, tragic business story of the decade," wrote Bill Mann in The Motley Fool. "Enron, less than a year ago valued at $66 billion, collapsed in a heap of ignominy with nothing left before it but bankruptcy. It is a story where the seeds of the company's destruction were sown as it was achieving its biggest success. When a management team seems more interested in appearances than good corporate governance, look out."

Enron grew out of the merger of two pipeline companies in 1985 put together by Kenneth L. Lay. As Business Week put it on Dec.17, "From the beginning, Lay had a vision for Enron that went far beyond that of a traditional energy company." To help him implement that vision he brought Jeff Skilling, then working as a McKinsey & Co. consultant, on board in 1997.

Wrote Business Week, "To former Enron CEO Jeffrey K. Skilling, there were two kinds of people in the world: those who got it and those who didn't." "It" was Enron's complex strategy for minting rich profits and returns from a trading and risk-management business built essentially on assets owned by others.

Vertically integrated behemoths like ExxonMobil Corp., whose balance sheet was rich with oil reserves, gas stations and other assets, were dinosaurs to a contemptuous Skilling. "In the old days, people worked for the assets," Skilling mused in an interview last January. "We've turned it around – what we've said is the assets work for the people."

For all intents and purposes, Skilling ran Enron, with Lay playing a smaller and smaller role in the company's management. It was under Skilling's reign that Enron branched out into a worldwide conglomerate dealing not in hard assets but in the trading of commodities. It was also under Skilling that the company acquired its reputation for out-of-control hubris.

Wrote Bill Mann:

"The thing that should define Enron is hubris. Over the last two decades, its management, from CEO Ken Lay on down, was unwilling to accept Enron's position as a regional natural gas pipeline company, and simply ignored the playbook every other company used. Enron created trading markets for commodities where none previously existed, and in doing so not only carved an ironclad position for itself, but solved some real inefficiencies in these markets."

At its height, Enron's energy business traded an average of $2.7 billion worth of contracts a day online. It was the darling of Wall Street, and the financial press went into ecstasy over the company's future prospects.

"Much of the blame for Enron's collapse has focused on the partnerships, but the seeds of its destruction were planted well before the October surprises," according to Business Week.

Former insiders and other sources close to Enron told the magazine that the company was already on shaky financial ground from a slew of bad investments, including overseas projects ranging from a water business in England to a power distributor in Brazil.

"You make enough billion-dollar mistakes, and they add up," says one source close to Enron's top executives. In June, Standard & Poor's analysts put the company on notice that its underperforming international assets were of growing concern.

But S&P, which like Business Week is a unit of the McGraw-Hill companies, ultimately reaffirmed the credit ratings, based on Enron's apparent willingness to sell assets and take other steps.

Every year, acting like an NFL coach scouring campuses for likely candidates for the NFL draft, Skilling recruited 250 of the allegedly best and brightest MBAs.

According to insider reports, they were told to go out and make deals, which meant setting up partnerships with other entities trading in a whole raft of commodities – in many cases, commodities that had never been seen as commodities.

The pressure to make deals and trade was intense, and cutthroat competition between Enron employees to make the most deals was encouraged by management.

The deal was what mattered. Create a partnership in a new field and the bonus could reach $5 million. It didn't matter if the deal was risky and probably doomed to fail sometime down the road, it was making the deal that mattered and it paid off in big bonuses.

A case in point: the broadband debacle.

In May of 1999, Enron startled investors by announcing that henceforth broadband – allowing superfast connections to the Internet – was now a commodity to be traded like cattle futures and corn.

With the demand for ultrafast Internet connections far exceeding the supply, it seemed as if being the middleman between fiber-optic network owners and the Internet firms that desperately needed their bandwidth was an idea whose time had come.

The company insisted that it was just a matter of time before bandwidth would be traded just as commodities markets trade everything from petroleum to pork bellies.

"We were all hoping that bandwidth would be traded like natural gas and power, and it would be the next really big commodity," Jerry Samuels, a former energy trader who is now vice president of the bandwidth brokering firm RateXchange, told Wired.com's Joanna Glasner.

It didn't work out that way.

"They were the cornerstone of this market," Seth Libby told Wired.com. Libby, an analyst at Yankee Group, credits Enron as the first prominent firm to propose transforming the loosely affiliated community of bandwidth buyers and sellers into something more akin to a commodity market, with fixed prices for service contracts.

Two and a half years later, with bandwidth prices at a fraction of their former highs and Enron's energy and other trading business in near ruins, bandwidth traders are no longer optimistic about this phase of the business.

There were warning signs. Libby recalled that almost from the beginning, a couple of major problems emerged.

To begin with, the companies that owned the fiber-optic networks balked at the very idea of selling their services as a commodity. Glasner writes that some doubters made the point that not all networks perform equally well.

Moreover, most preferred to negotiate prices with individual customers, rather than be stuck with a one-size-fits-all pricing scheme.

"Carriers have never been big fans of bandwidth trading, because on one level you're talking about [making a commodity out of] their core product," Libby told Glasner. "They want customers to be confused about pricing."

Perhaps the biggest blow to the bandwidth trading business was the steep decline in price of its main product.

"We were trading bandwidth a few months ago, but the market wasn't there," said Al Butkus, vice president of energy trader Aquila (ILA). "It didn't really have to do with Enron so much as the dot-coms. There's just too much capacity out there and too little demand."

According to Libby, average prices for bandwidth have declined between 30 percent and 50 percent in the last 18 months. On certain key routes, the freefall is more drastic.

"According to RateXchange's Samuels, for example, the price of a standard contract for carrying data traffic between New York and London has declined from $30,000 to $5,000 over the past nine months. "

Another deal that went sour was Enron's venture into the water business.

According to Business Week, Enron's ill-fated 1998 investment in the water services business was another example of the kind of deal that brought the company down.

Enron acquired Britain's Wessex Water allegedly as a "consolation prize" for Rebecca P. Mark, the hard-charging Enron executive who had negotiated the Dabhol deal in India and other investments around the world.

In an effort to sidetrack Mark, insiders told Business Week, the Enron board narrowly approved the Wessex deal, which formed the core of the Azurix Corp., which was to be run by Mark.

"But Enron was blindsided by British regulators who slashed the rates the utility could charge," Glasner reported. "Meanwhile, Mark piled on more high-priced water assets. 'Once [Skilling] put her there, he let her go wild,' says a former executive. 'And she's going to go wild because she has something to prove.' Mark spent too much on a water concession in Brazil and ran into political obstacles."

Notes Business Week, Enron then "tried to disguise its problems with financial alchemy. To set up the company, Enron formed a partnership called the Atlantic Water Trust, in which it held a 50 percent stake. That kept Wessex off Enron's balance sheet.

"Enron's partner in the joint venture was Marlin Water Trust, which consisted of institutional investors. To help attract them, Enron promised to back up the debt with its own stock, if necessary. But if Enron's credit rating fell below investment grade and the stock fell below a certain point, Enron could be on the hook for the partnership's $915 million in debt."

And that is exactly what happened.

It was this kind of deal, pledging Enron's credit based on its stock price to back up loans made to off-the-book partnerships, that brought the company down. None of this had anything to do with political clout with the GOP or the Democrats.

"Enron is dead because its management got caught up playing Wall Street's stupid little games, promising and delivering big revenue and profit growth, damn the debt and other balance sheet contortions it took to get there," Mann wrote.

And that's the whole story, Mr. Waxman. You can forget pinning anything on the Bush administration or the GOP. You can now go back to your principal endeavor of covering up the Clinton administration's criminality and obstructing investigations into the former president's corruption.

Phil Brennan is a veteran journalist who writes for NewsMax.com. He is editor & publisher of Wednesday on the Web (http://www.pvbr.com) and was Washington columnist for National Review magazine in the 1960s. He also served as a staff aide for the House Republican Policy Committee and helped handle the Washington public relations operation for the Alaska Statehood Committee which won statehood for Alaska. He is also a trustee of the Lincoln Heritage Institute.

He can be reached at

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Back during the Eisenhower administration a House committee was investigating the ties between Ike's chief of staff, Sherman Adams, and one Bernard Goldfine, a Boston textile manufacturer. Goldfine, it developed, had given Adams, a former New Hampshire governor, an...
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Wednesday, 16 January 2002 12:00 AM
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