Speak for Yourself: Letters to the Editor

“DIRTY ROTTEN SCOUNDRELS”?

Your interview with Rob Bradley, Jr. (“The Fall of Ken Lay,” April) presents a deep psychological indictment of former Enron executives Jeff Skilling and Ken Lay. Clearly, they are dirty rotten scoundrels, in Rob’s view.

But what would a detailed review of the indictment and conviction reveal? The answer is a lot of very interesting law and economics that my friend Rob left out of the interview. Note several aspects that did not receive a lot of press attention.

First, the fraud was without gain to the perpetrators. Second, the fraud convictions assert that both losses and gains were hidden from the financial authorities. Third, the gains were “massive” while the losses were merely “large,” according to the indictment. The conclusion that some of us have reached is that financial losses were not hidden; thus, there was no fraud and no illegal gain to Skilling and Lay.

This leaves an interesting question: What caused the collapse of Enron? Our analysis suggests a political conspiracy by California Democrats who wanted to punish Lay for his support of George W. Bush. They were also angry at Enron for making a lot of money trading electricity in California in 2000 and 2001. These were the hidden profits that the Federal Energy Regulatory Commission (FERC) subsequently estimated to be on the order of $1.6 to $1.8 billion.

The FERC, after initial resistance, yielded to the political pressure from California politicians and imposed rate caps on the wholesale market in June 2001, and in next month announced an investigation into the presumed market manipulation and would be estimating the refunds that would be ordered. Essentially, the FERC was going to allow a huge defaulting on the electricity trading activity of Enron and the other market makers. This is exactly what the FERC did in 2005. But the threat was credible in late 2001, and the market laid a multi-billion-dollar hit on Enron’s share price at that time.

A complicating factor was Enron’s role as an over-the-counter market maker. As such it was the counter-party to all trades, essentially guaranteeing compliance of all the parties. The FERC decision to order defaults not only destroyed Enron’s electricity trading, but also the electricity trading of all the other market makers. FERC’s action also threatened the trading of natural gas whose transportation is still regulated to some extent by the FERC.

So there you have it, except for one last issue. What about the poor employees who lost their pensions and all the value of their Enron shares? My question is why did they not diversify? Or why did they not buy a put on Enron’s shares? After all, Enron’s major business was risk management, and insurance was readily available. If the employees did not understand that, they probably did not deserve the initial run-up in Enron’s share price from 1999 to 2001.

I do not know if you are planning a revisionist article on Howard Roark and John Galt, assigning them to the same category of dirty rotten scoundrels as Lay and Skilling. But if you are, let me know. I will prepare a defense. 

James L. Johnston

Senior Fellow

Energy and Regulatory Policy

Heartland Institute

Chicago, Illinois

Mr. Bradley responds:

While I welcome Jim Johnston’s probe of the Enron collapse and the personal culpability of Jeff Skilling and Ken Lay, I disagree with much of his analysis.

He argues that Enron was brought down by California politics, which prevented the company from reaping its huge trading profits. But Enron’s earnings had very little free market basis. Enron, a wholesaler, “gamed” a system where the retail price was fixed and the wholesale price was floating, and utilities were obligated to pay the going price during a supply shortage. Moreover, it turns out that, while playing within this regulatory system, much of what the company did was illegal. You can’t have it both ways. You can’t say that Enron was a profitable company because of the IOUs it reaped from California, but it was done in by the California system. Ayn Rand knew the Ken Lay persona when she wrote, “He who lives by a legalized sword will perish by a legalized sword.”

The frauds of Enron, in whatever combination of philosophic and prosecutable, are frauds—whether or not the defrauders benefited. Certainly, Enron executives were trying to benefit from their frauds—to receive more compensation, to have more valuable stock, to feel successful, or just to not fail and increase the chances of getting caught!

In my C-SPAN talk, I stated:

Ultimately, the Enron story is about obfuscation and fraud. Not vanilla, WorldCom-type fraud, but thirty-one flavors of fraud, misrepresentation, misdirection, and old-fashion spin. The Enron fraud was so wide-ranging, in retrospect, that it is hard to know where it started and ended—and who knew what and when. And I venture to guess that any further “wave of truth” will bring forth more quantities and flavors of deceit, not fewer. For behind the really big ones are innumerable smaller ones.

My book-to-come will detail this conclusion in ways that go far beyond the trial.

Finally, I agree that Enron employees blew it by not cashing out or at least diversifying when Enron’s stock price was so artificially high. (A $30 per share stock was parading as high as $90.) And that is an under-appreciated story of the debacle: How Enron employees, including me, were being subsidized by shareholders and creditors for the last years of our employment.

  Robert Bradley, Jr.

  President, Institute for Energy Research

  Houston, Texas