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In a recent post entitled: War Criminals and Economic Criminals (13
February 2002), I put forward the observation that to preserve the
system, the establishment needs to transfer the faults of the system to
rogue individuals.
There is a general rule about the way society treats criminals: to place
responsibility of anti-social acts on the individual, thus absolving
society from blame. The mismatch between society's attitude toward
heroes and criminals rests in society's claim of credit on heroes while
rejecting responsibility on criminals. A criminal is one who has
betrayed societal values, who is criminally deranged but not legally
insane, a deviant, an anomaly, a manifestation of social disease, a
virus against an otherwise healthy system, a malfunction. Hitler was
labeled a mad man to protect German culture and fascism, notwithstanding
the curious fact that Hitler rose to power in Germany for very visible
cultural reasons and through popular vote. Even organized warfare must
be conducted within the limits of regulated behavior. Crimes against
humanity are not tolerated.
Yet neo-liberal market fundamentalism argues for deregulation to allow
economic crimes against humanity. Ponzi was deemed an unprincipled con
man to insulate capitalism itself from being revealed as a systemic
ponzi scheme. The oral barrage that the 21 members of Senate Committee
unleashed on Kenneth Lay yesterday (February 12) amounted to wholesale
trampling of Lay's constitutional rights. The issue of Lay's guilt or
innocence is a matter for the judiciary branch and Lay's right to avoid
self incrimination is fundamental to American justice. The same
senators were not skittish about having their pictures taken with Lay
only weeks
earlier or accepting vast sums in political contribution from Kenneth
Lay and his company and consultants. Senator Peter Fitzgerald,
Republican of Illinois, comparing Lay to Charles Ponzi, labeled him
worse than a carnival barker, for a carni will at least "tell you up
front that he's running a shell game." Is Senator Fitzgerald telling
the nation that deregulated market fundamentalism is a shell game? The
evidence is undeniable that Enron exposed weaknesses in the entire
system for policing American capital markets. Arthur Levitt, former
head of SEC, characterizes corporate financial statements as a "Potemkin
village of deceit."
Senator and Chairman Ernest Hollings, Democrat of South Carolina,
characterized Lay's political prowess as "cash and carry government".
The NY Times the following morning reported that Hollings received over
$20K from Enron and Arthur Andersen from 1989. Until Enron filed
bankruptcy, the system's top law firms and accounting firms were
providing opinion that what went on in Enron was "technical" legal.
Much of the schemes undertaken by Enron and other companies were devised
by investment bankers who collect fat fees advising their clients and
profited handsomely from providing financing for schemes they knew were
towers of
mirage. It was known in the industry as finance engineering. Already,
the prevailing view in the legal professions is that the beleaguered
Enron executives will most likely not be convicted for economic crimes,
only criminal liabilities arising from perjury, conspiracy and
obstruction of justice.
Yesterday (February 26), Jeffrey K Skilling, former President and CEO of
Enron, who was the sole top
company official willing to testify without claiming 5th Amendment
protection, was forced to engage senators in a veiled debate about the
system's responsibility. It has become clear that what Enron
management did may be unethical, but it was most likely not illegal.
Yes, the company's management did cause a great deal of financial
casualty and death, but it is not at all clear that it committed
financial murder in the eyes of the law. At most, it was collateral
damage. Unlike Skilling and his less forthcoming colleagues, the
political future of the lawmakers is subject to public opinion. Thus
there was a line to step to the microphone to make indignant
grandstanding statements. Yet Skilling was quite effective in laying the
blame of the financial mess at the door of unregulated structured
finance (derivatives), which Congress has repeatedly refused to
regulate, albeit at the urging of the both the Fed and the Treasury,
even the SEC which only warned against accounting manipulation of
corporate
balance sheets.
It is ironic that the head of a company who championed unregulated
markets, a company whose spectacular recent growth was financed by
wholesale theft from the future, by booking future revenue as current
income and associated liabilities as off balance sheet future capital
expenditure, by disguising loans as hedges in derivative transactions
that produce spectacular instant profit, is now calling for Congress to
regulate the widespread use of the "material adverse change" clause in
derivative contracts and related financing that allows investors to pull
their funds abruptly and completely on practically no notice. To
deflect the embarrassing
subject, one Senator ridiculed the suggestion as a version of the old
movie, "The Wonderful Life", notwithstanding that it was a rather good
movie.
There is another systemic fault that surfaced briefly in the exchanges
when Senator Boxer of California accused Mr. Skilling of "unloading"
stocks while encouraging Enron employees to buy. When Skilling
responded that he too had been hurt by the Enron collapse, being one of
the major shareholders as a result of the dubious practice of stock
options granted to management, albeit that his selling of a small
portion of his holdings amounted to $60 million, no Senator challenged
what justified that astronomical levels of executive compensation. All
accepted it as the American way. Obscene disparity of income is
accepted as the heart, rather than the cancer of finance capitalism.
Yes, a lot of people connected with Enron lost 95% of their holdings,
but that 5% could range from tens of millions to a mere thousands of
dollars. This leads to some thoughts on the problem of setting the
minimum wage below the poverty line. Even the average shareholder or
worker were allowed to bail out 5% of his/her holdings at $45 a share,
down from its peak of $90, many would still have walked away with merely
a few thousand dollars. Risking one's pension with a down side of $60
million is very different than a downside of $6,000. Skilling even
ventured to propose the introduction of deposit insurance for derivative
investors. Is Enron the opening shot of the return of the New Deal?
Skilling was
probably telling the truth that when he resigned a year ago, he did not
expect Enron to go under, or he would have sold out his holdings
completely. If Greenspan cannot resist denial of the inevitable outcome
of a debt bubble, why should Skilling?
GE was dragged into the hearing when the Committee inaccurately listed
GE subsidiaries as numbering only 24 as compared to Enron's 3,000,
presumably to show GE as the model of good corporate behavior. Ahgast,
Skilling responded that most who are in the slightest way familiar with
structured finance know that GE is every bit as aggressive as Enron, and
GE in fact is engaged as counter party in most Enron trades. GE's
dominance in the commercial paper market is what gives it the financial
advantage over many competitors, including commercial banks. Bankers
fear Jack Welch and Gary Wendt (leaders of non-bank financial
institutions)
more than they fear Saddam or bin Ladin. When Wendt ran GE Capital, he
had a reputation of taking no prisoners.
With the exception of contempt of Congress, Congress is powerless to put
any of the Enron officials behind bars, or to force them to disgorge
their ill gains. That is the courts' responsibility. The rule of law
often allows the unethical but legal to happen. Already, Greenspan,
who steadfastly opposed regulating the structured finance markets, told
congress today that independent boards in corporate governance are
harmful to economic growth. Marx left out a big slice when he surmised
that surplus value would lead to capitalism structural
demise, in assuming that financial system was inherently honest. To
keep the mirage of an honest system, Congress needs to find crooked
financiers.
Henry C.K. Liu
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