Enron and the System

Enron and the System
By PAUL KRUGMAN

<http://nytimes.com/2004/01/09/opini...>

Two years after Enron, then one of America’s most
admired companies, was revealed as a fraud, prosecutors
finally seem to be getting somewhere. Andrew Fastow, the
company’s former chief financial officer, and his wife,
Lea, are reported to be engaged in plea-bargaining. Mr.
Fastow’s testimony will probably lead to charges against
other former Enron executives.

But it would be a big mistake to conclude that the
system is working. It isn’t.

For one thing, the progress in the Enron case is
something of a fluke - sort of like convicting Al Capone
for income tax evasion. The charges against Mrs. Fastow
don’t focus on dubious corporate deals; they focus on
her failure to report the personal kickbacks she
received from participants in those deals. And it’s
still unclear whether the company’s top executives will
ever face charges.

More important, in political terms the statute of
limitations may already have run out. The political
figures with the most direct ties to the Enron scandal,
former Secretary of the Army Thomas White and former
Senator Phil Gramm, are no longer in office. War and a
rising market have, at least for the time being,
diverted attention from the role of other political
figures whose deference to corporate demands aided and
abetted Enron and other corporate malefactors.

And that’s unfortunate. The wave of scandal was made
possible, if not caused, by a political climate in which
corporate insiders got pretty much whatever they wanted.
Since the politicians who did their bidding haven’t paid
any price, that climate hasn’t changed.

A November profile of Lea Fastow in Business Week was,
among other things, a reminder of just how important a
permissive political environment was to the company’s
growing sense that it could get away with just about
anything. One of Mrs. Fastow’s earliest high-profile
deals involved the creation of an elaborate tax shelter.
It was obvious from the beginning that this type of
shelter was a scam, and the Treasury Department tried to
get this maneuver banned in 1994 - but Congress refused
to act. In 1998 Treasury tried a different tack, getting
the I.R.S. to disallow Enron’s tax deduction, but the
agency backed down in the face of an intense lobbying
campaign.

So have things changed? No. In October the I.R.S. backed
off its challenge to another transparent scam, the
synfuel tax credit. The agency denies that it was
buckling under political pressure. Uh-huh.

Meanwhile, what about stock options? Just about every
analysis of the emergence of widespread accounting fraud
stresses the distorting role of huge options grants to
top executives, which gave insiders a strong incentive
to do whatever it took to push up stock prices. (A
fixation on the stock price was central to the Enron
scandal.) Companies might have issued fewer options, and
accounting fraud might have been less of a problem, if
accounting rules had required companies to count the
issue of stock options as a cost, rather than pretending
that they were somehow free.

But in 1994, when the Financial Accounting Standards
Board tried to issue a rule to that effect, companies
that issued lots of options mounted a lobbying campaign.
And politicians rushed - in a fully bipartisan manner -
to be of service. Senator Joseph Lieberman took the
lead: he introduced a resolution opposing the change,
the resolution was approved 88 to 9, and the board
backed down.

So now it’s clear that options were a big motivator for
corporate fraud, has Congress moved to require that
issuing them be counted against profits? No. In fact,
the politicians who led the charge against reform back
in 1994 haven’t budged.

"The best comparison I can think of is the one the
N.R.A. uses about guns - which is that guns don’t kill
people, criminals do," Senator Lieberman said on
"Frontline" on PBS. "Options were not the problem with
Enron; it was the way in which the executives at Enron
sold their options."

Yesterday Gen. Wesley Clark made an appearance with
Sherron Watkins, the Enron whistle-blower, and promised
to crack down on corporate tax shelters. Howard Dean has
also made a crackdown on tax shelters a central plank of
his campaign. If these or other candidates actually
succeed in making corporate abuse into a successful
campaign issue, we may finally see some real reform. But
right now, two years after Enron imploded, we have to
say that the system is still broken.