June 24, 2005

HORSEFEATHERS WARNS YOU THAT THE NEW ENRON MOVIE IS A SLICK PIECE OF LIBERAL SCHLOCK

If you enjoyed “Farenheit 911” you will love “Enron: The Smartest Guys in the Room.” The movie is advertised as “based” on the book by Bethany McLean and Peter Elkind, “The Smartest Guys in the Room:The Amazing Rise and Scandalous Fall of Enron,” which is too bad, because although the movie is a fascinating piece of trash, the book is brilliant journalism, thoughtful, well written and has the ring of truth.

The movie is, as you would expect, not only an attack against the crooks at Enron and their greedy business friends, but an attack against the Bush family (by the time George W. Bush’s administration took over in 2001 most of the bad things at Enron had already happened), the free market economy, the deregulation of the energy business, and by implication all of big business—they’re probably all alike; they’re all crooks.

The film created by Alex Gibney—he wrote the Docu-Prop film “The Trials of Henry Kissinger,” “a film about the war crimes of the American diplomat…”—manages to push all the right buttons to create outrage in the audience—the arrogance, avarice, and hypocrisy of Jeff Skilling, Kenneth Lay, and their henchmen—but it doesn’t hesitate to use similar techniques to those that Enron used in order to game the world—exaggeration, innuendo, omission of facts, and false implications.

Just as the movie obfuscates the issues it targets, the book illuminates and clarifies:

The Bushes and their relationship to Ken Lay began in 1991. Lay was at that time a reputable economist and Washington schmoozer with the city’s power-brokers. He was then also the head of one of the country’s largest natural gas pipeline companies, which was just in the process of becoming Enron, a time when there was nothing illegal going on in the company. Lay and his wife, Texas VIPs, were invited to sleep at the White House and Bush even offered Lay the position of Secretary of Commerce when the incumbent announced he was stepping down.

But Lay was never close to George W. Bush. According to McClean’s and Elkind’s book, “…Lay made a fatal miscalculation with George W. Bush that permanently strained the relationship. In 1993, when Bush was preparing to run for governor of Texas, he had made a ritual pilgrimage to Houston to get Lay’s blessing. Bush asked Lay to serve as the Houston finance chairman for his campaign. Lay, however, rebuffed the candidate, explaining that it wouldn’t be appropriate since he was then serving as chairman of the Business Council for Ann Richards, the Democratic governor….As election day drew near and the polls showed that Bush might well score an upset…the Lays ended up giving far more to Bush than to Richards, [but] Lay’s luke warm embrace left its mark.” The fact is that neither Ken Lay nor Enron got any help from George W. Bush’s administration, and if the first Bush was friendly with Lay it was before Lay began his hanky-panky, and when Lay had a million “friends” in Washington and Houston.

The free market, deregulation, Enron—throughout the film the commentary gets these three hopelessly confused. Over and over again, by implication, by insinuation, even explicitly, the film maker wants the audience to know that Enron=big corporation=free market=deregulation and all of them are bad, bad, bad. In fact the whole system is tarred with the same brush that is used to condemn Enron’s crooks—Andrew Fastow (already tried and convicted, in the pokey for six years), Jeff Skilling, and Kenneth Lay.

The trouble is that the folks who made the movie and many of the folks who make up the audience do not want to hear that the big corporations that make up the S&P 500 have been churning out 8% or 9% annualized returns decade after decade for the past 75 or 100 years to hopeful widows, orphans, and pension funds. And that these same companies have been providing employment for tens of millions of wage earners and their families steadily for decades. And although they exist in a dog-eat-dog environment these corporations have an important economic utility.

Furthermore, Alex Gibney apparently does not know that there is no such thing as a free market. There are only freer and less free markets. All markets have constraints. American markets, arguably the freest in the Western world, are fraught with constraints and impedimenta—just try to read the boiler-plate regulations that come with that new brokerage account you want to open.

The movie wants you to believe that Enron wanted a deregulated energy market, which is true (so did all companies related to the production and sale of energy), and that Enron somehow managed to achieve deregulation on its own, which is completely false. Gas deregulation was largely a fact by 1988, before Enron was born. And Electric deregulation in Calfornia and other states had gone into effect in 1998. California is a major focus in the film because Gibney wants to blame Enron for the electricity shortages which occurred during 2000 and 2001 in California.

The facts are these: The “deregulation” of the energy markets which took place piecemeal over a period of ten years during the eighties and nineties (during both Democratic and Republican administrations) resulted not in a “deregulation” but a “reregulation” of the industry. “In truth for all Enron’s lobbying,” say McClean and Elkind, “the new rules accompanying California’s deregulation were a far cry from what the company had hoped to see enacted….But there were so many powerful competing interests jockeying for advantage that the California Public Utilities Commission, which was in charge of designing new rules, was never going to allow a completely free market….The result was a convoluted mishmash of compromises featuring more rules and regulations than ever.”

This mess of contradictory regulations allowed the clever traders at Enron and five or six other energy companies to spot loopholes to game the system and take advantage of strategies that were not illegal but not exactly fair play either. Enron and the other energy companies made a fortune on those strategies that took advantage of the regulatory loopholes and the California ratepayers ended up getting screwed.

When the Federal Electric Regulatory Commission looked into the matter in November of 2000 their report exonerated the power trading companies, including Enron, and added that “…certain market rules do interfere with the functioning of the market and, taken together, may permit sellers to exercise market power…”—as much of a slap at California’s stupid regulations as at the power companies.

In short, Enron did not create the California crisis but it and its rivals did take advantage of the opportunities created by California’s laws to make profits, a practice as old as the hills. Not too different from your accountant taking advantage of some IRS loophole to save you money when April 15 rolls around.

If you want to find out what really went wrong in the Enron case and how a few greedy men were responsible for thousands of investors and employees losing their nest eggs, Horsefeathers suggests skipping the film and buying the book by McClean and Elkind.