Enron and 1990s capitalism

It is remarkable how much of bellwether Enron turned out to be regarding structural changes within capitalism — despite the fact that the company ultimately turned out to be fraudulent house of cards built on bizarre and incomprehensible accounting tricks (although then again, maybe its fraudulent aspect is precisely that which most represents capitalism’s fundamentals). Studying the rise and fall of Enron is like studying the political economy of the 1990s in general. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (2003) covers the whole saga with definitive detail.

Initially, in the ’80s and early ’90s, Enron was a logistics company in the energy industry, specifically focusing on owning natural gas infrastructure. This involved being the intermediary between gas production plants and consumers, selling access to pipeline capacity, ensuring delivery, etc. Before long, Enron started to financialize all these physical assets, which coincided with the steady deregulation of the energy markets. Gas contracts were made more short-term, and trading markets were set up so that contracts could be bought and sold by third parties, and speculation on future prices started to increase. Of course, since Enron controlled a large portion of national natural gas infrastructure, they had access to high-quality information to inform their bets.

Even as Enron slowly morphed into primarily being a financial firm, they expanded their physical operations globally by hopping on the international development train that was taking off after the end of the Cold War. This was a time when privatization of assets and contracts across the Third World was heating up, and Enron was buying up energy and resource access in places like India and Brazil. A lot of these deals turned out to be total busts, not least because Enron was far more interested in closing big deals, fast, than in actually running an efficient and profitable operation, or even making deals that made long-term financial sense. And when they did make a profitable longer-term deal for themselves, as in the case of the infamous Dahbol gas plant in Maharashtra, India, they turned out to be such blatantly crooked deals that they were eventually shut down by popular backlash. For an analysis specific to Enron’s global operations, check out Vijay Prashad’s Fat Cats and Running Dogs: The Enron Stage of Capitalism (2002).

Within the company, the real fraud turned out to be in the accounting. Enron used “mark-to-mark” accounting, popular on Wall Street, which allowed you to book the total expected profits from a deal immediately, instead of as the cash actually came in over the life of the deal. The flip side of this is that if the expected value of the deal decreases in the future, you have to mark that down as a loss. Of course, Enron never did that, and took the abuse even further by twisting their assumptions about deal profitability to absurd lengths to book whatever amount of profits they needed to hit their quarterly earnings targets. And when they did have to face a loss, Enron shuffled away them away in weird shell company entities so that losses and debt were moved off the company books. However, these didn’t actually disappear, and slowly grew as a ticking time bomb over the course of the ’90s.

But even before the accounting fraud finally blew up, Enron became infamous for their actions during the 2000-2001 California electricity crisis, when they took advantage of a shoddy power deregulation effort to manipulate the markets and engage in serious price-gouging. By this point, Enron’s physical assets had grown to include power systems, and they used these to do things like withhold or divert power to drive up prices, or overload the transmission line schedules to get paid to not produce power, and so on.

Last but not least, Enron even tired to get into the Internet business, by trying to roll out broadband networks and to build a trading operation for Internet access like they had done for natural gas and electricity. This turned out to be a bust, not only because they didn’t understand the technology, but also because the dot-com bubble popped in 2000.

So to sum up, the story of Enron is also a story of logistics infrastructure, energy deregulation, state privatization, international development and neocolonialism, financialization and speculation, Internet and tech — and, fundamentally, the short-term systemic thinking that is central to the overall operations of capitalism. Wowza!

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