Jon Christian Ryter - The Enron Meltdown

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From The Mailbag

20 years

February 4, 2002

Jim Vandewalker won the Entron logo design contest

When the investigation of Enron is finally completed the collapse of the energy reseller—the seventh largest corporation in America—will be one for the history books for more than one reason. The Enron collapse will historically compare with the Credit Mobilier of America scandal that rocked the administration of Ulysses S. Grant and ultimately forced the resignation of Grant's vice president Schuyler Colfax, and ruined the careers of several Congressmen and Senators as well as tainting several future Presidential candidates—and two future presidents: Chester Arthur and Grover Cleveland. Credit Mobilier, the holding company that owned the Union Pacific Railroad bribed every key Democrat and Republican in Congress in order to secure federal grants—both in land and in cash—to build a transcontinental rail system in America. And, like the Credit Mobilier scandal of the late 19th century, the Enron scandal which opens the 21st, will span the continents. As American politicians scurried for cover, trying to throw the spotlight on Vice President Dick Cheney who sought advise on the energy crisis from Enron management and President George W. Bush who accepted $113,000 in political contributions from Enron during the 2000 Presidential campaign, British Trade and Industrial Secretary Peter Mandelson was forced to resign from the Labor Party after it was learned that Enron had advanced Mandelson a £373,000 home loan. Following him for accepting money from Enron was Geoffrey Robinson, the Paymaster General of Parliament (also a Labor Party member). Prime Minister Tony Blair was the recipient of £38,000 of Enron largess. In addition, the scandal forced Parliament’s key “fixer” to resign. Lord Wakeham, the United Kingdom’s Press Complaint’s Commissioner, a Margaret Thatcher Conservative and a director of NM Rothschild in London, was unable to “fix” his own problems when it was learned that Enron contributed £6,000 per month to Wakeham as an Enron consultant. (It is interesting that Credit Mobilier paid its bribes to over a hundred Congressmen and Senators in the 1870s and 1880s by hiring them as “consultants.” Of course, they were consultants with no consulting responsibilities.)
     Enron, in other words, was not merely a United States “equal opportunity campaign contributor,” it was a transnational campaign contributor. Before its fall, Enron grew from a small Texas-based remnant energy rebuyer to the seventh largest corporation in the United States in what can only be described as a Cinderella fairy tale. And, like most fairy tales, there is more fiction than truth to the myths that Enron became an overnight energy giant by the sweat of its brow. Enron had help from strange places and because of that, Enron executives became footloose with company funds and used whatever monies were on hand for whatever purpose they were needed—even to the extent of raiding their pension fund as early as 2000 to pay off “friends of Enron” (i.e., make political contributions to those who could help them by structuring regulations to benefit Enron).
     Like Credit Mobilier, Enron’s financial problems seem to stem more from political payoffs and simple corporate greed than from over-extending themselves through too rapid development or from bad operational or administrative decisions either in the United States or around the world. When Enron’s bankruptcy was announced on December 2, 2001, the reason given was that Enron had failed to report losses from certain subsidiary companies—particularly those known as LJM1 and LMJ2 which are located in the Cayman Islands. According to Securities and Exchange Commission filings the Cayman corporations were “...sources of capital to buy assets from Enron” and they were “...potential equity partners for Enron investments...to help mitigate risks associated with Enron investments.”
     In reality, LJM1 and LJM2 were offshore international fundraising subsidiaries designed specifically to escape scrutiny from the United States federal regulatory agencies—and the Internal Revenue Service.

Who took Enron money?
     Currently there are 20 Congressional and Senatorial committees investigating the Enron bankruptcy. On those 20 committees sit 250 Congressmen and/or Senators. Of them, only 38 members have not received campaign contributions from Enron or Enron subsidiaries. Two hundred twelve of the 250 politicians investigating Enron have accepted money from the failed energy giant. Enron, in the United States and in the industrial democracies around the world, funneled millions upon countless millions of dollars to members of each political party. In the United States, 70% of Enron’s contributions went to the Republican Party (which controlled both houses of Congress from 1994 to 2000), and 30% went to the Democrats. Had the Democratic Party controlled the House and Senate, the dole payments would likely have been reversed, with Democrats getting the largest chunk of the campaign contributions. While they received far less than the $113,800 that Enron funneled into the Bush 2000 Presidential Campaign, Enron donated $13,750 to Al Gore in 2000. In 1996, Enron donated $95,650 to GOP presidential candidate Bob Dole (on the mistaken belief that Clinton’s scandals would bring about Clinton’s downfall) and only $11,000 to Bill Clinton—barely enough to qualify for coffee at the White House during the White House Coffee days when Bill Clinton and Al Gore were courting campaign contributions from Chinese President Jiang Zemin and People’s Liberation Army General Liu Huaqing, and when the Intelligence arm of the PLA contributed over $600 million to re-elect Clinton and Gore in 1996—and escaped impeachment for treason only because too many liberal Senators and Congressmen (on both sides of the aisle) had been taking illegal money from the People’s Republic of China since 1989 when that money began to be funneled into the American political stream by now deceased Senator Alan Cranston who “laundered” it through the Democratic Senatorial Campaign Committee. Congressional funds were funneled through the Democratic Congressional Campaign Committee. In some cases, very specific but low-key fundraisers were held for candidates. Holding hearings on illegal campaign contributions designed to go no where is a tradition in Washington, DC. That’s why there are so many PAC watchdog groups like Larry Klayman’s Judicial Watch located there. Klayman—whom the GOP loved during the Clinton years until he got too close too wrongdoing by both GOP and Democratic Senators and Congressmen—subpoenaed several of the PLA-linked Clinton-Gore Chinese fundraisers, including Maria Hsia and Charlie Trie and uncovered enough damning testimony to not only successfully impeach and remove both Bill Clinton and Al Gore from office in 1996, but more than enough evidence to convict both of accepting bribes from an enemy government in exchange for access to some of America’s most sacrosanct industrial and military secrets. The House hurriedly impeached Clinton for perjury for denying under oath that he had sexual relations “...with that woman, Monica Lewinsky” in order to skirt serious impeachment hearings on much more serious charges that would have implicated many of them for accepting illegal campaign funds from an enemy of the United States. (Senator Ernest Hollings [D-SC] decided to lampoon the Clinton line by joking that the new Bush White House line would be that he “...never accepted money from that company, Enron Corporation.” Hollings appears to one of a minority of Democratic and Republican Senators and Congressmen that didn’t take Enron money. He may be one of very few Americans politicians who can honestly say he did not spend Enron employee pension funds to get re-elected in 2000.)
     The House and Senate are going to have a hard time—or at least half of the members are—holding unbiased hearings on the Enron failure since approximately 40% of Congress received contributions of some type from Enron. Enron doled out $606,000 to House members and $530,500 to members of the Senate during the 2000 elections. In addition, Enron donated over $300,000 to various charities in the names of Congressmen and Senators, giving the lawmakers “tax breaks” that would allow them to lower their gross income taxes—a bonus that would never show up on campaign contribution disclosure statements, but would end up in the politician’s pocket. This form of “gift” is the safest form of bribery that exists today.
     Leading the pack was George W. Bush with $113,000 of Enron pocket money. Next was Kay Bailey Hutchinson [R-TX]; $99,500 • Phil Gramm [R-TX]; $97,350 • Bob Dole [R-KS]; $95,650 • Democratic National Committee; $55,000 • Ken Bentsen [D-TX]; 42,750 • Shelia Jackson-Lee [D-TX]; $38,000 • Joe Barton [R-TX]; 28,909 • Tom DeLay [R-TX]; $28,900 • Martin Frost [D-TX]; $24,350 • Conrad Burns [ R-MT]; $23,200 • Charles Schumer [D-NY]; $21,933 • Michael Crapo [R-ID]; $18,689 • Christopher Bond [R-MO]; 18,500 • Gordon Smith [R-OR]; 18,000 • Al Gore, Jr. [D-TN]; 14,750 • Charles Stenholm [D-TX]; $14,439 • Jeff Bingaman [D-NM]; $14,124 • Chuck Hagel [R-NE]; $13,331 • George H.W. Bush [R-TX]; $13,000 • Pete Domenici [R-NM]; 12,000 • Bill Clinton [D-AR]; $11,000 • John Breaux [R-LA]; $11,000 • Douglas Bereuter [R-NE]; $10,000 • Larry Combest [R-TX]; $9,820 • John McCain [R-AZ]; $9,500 • John Dingell [D-MI]; $9,000 • Edward Markey [D-MA]; $8,500 • Earl Blumenauer [D-OR]; $8,500 • Robert Bennett [R-UT]; $8,053 • Kevin Brady [ R-TX]; $8,000 • Pat Roberts [R-KS]; $8,000 • Bob Graham [D-FL]; $8,000 • Sam Johnson [R-TX]; $7,750 • Pete Sessions [R-TX]; $7,750 • Hillary Clinton [D-NY]; $4,000 • Arlen Specter [R-PA]; $3,000 • Joe Lieberman [D-CT]; $2,000 • Rick Lazio [R-NY]; $1,000.
     Since 1998, Enron coughed up $2,568,214 to political candidates in America. Approximately 70% of the donations went to Republicans and 30% to Democrats. Clearly if Enron had not gone belly-up, its a safe bet that Democratic Senators would have fared much better than GOP Senators next year since they now control the Senate.

Exposed Banks and Power Companies
     In the United States most Americans (whose retirement programs do not contain Enron stock) believe the only “injured parties” were Enron employees who were denied the right to dispose of their 401K Enron stock holdings as the directors of the company disposed of theirs—and pocketed millions of dollars as Enron stock which, at one time, reached $70 per share, fell into penny stock limbo. In reality, Enron is looking more and more like a Ponsi scheme that survived and grew on borrowed money, inflated stock valuations and an old-fashioned shell game where Enron management shuffled funds back and forth between different corporate entities in order to conceal financial shortfalls. But most of all, as it was reported on CBS News on February 4, Enron employee Robyn Hosea discovered that Enron managers were raiding the employee retirement fund and using those funds for political payoffs to “friends of Enron” during the 2000 election year. Stolen from their own employees was over $14.5 million. Had Enron not gone belly-up, the company’s employee retirement program would likely have been bankrupt anyway. It is because Enron always had the appearance of being “cash flush” that the banks whom they approached for loans did not look too closely at them. Clearly, any good investigation of Enron will include an audit of the banks they used.
     The banks that are taking it on the chin for extending credit to Enron are: Abby National [United Kingdom], ABN Amro [Holland], AEGON [Holland], ANZ Banking Group [Australia], Axa Bank [France], Bank of Montreal [Canada], CHUBB [United States], CIBC [Canada], CSFB [Switzerland], Daiwa [Japan], Fortis [Belgium], JP Morgan Chase [United States], KBC Bancassurance [Belgium], National Australia Bank [Australia], Société Générale [France], Sumitomo Mitui [Japan], and Swiss Re [Switzerland]. Also taking a hit in the pocketbook are several electric power holding companies who had contracts with Enron: American Electric Power [United States], British Petroleum [United Kingdom], Centrica [United Kingdom], Duke Energy [United States], Dynegy [United States], El Paso Power [United States], Exelon [United States], KeySpan [United States], Mirant [United States], Reliant Resources [United States], RWE [Germany], Utilicorp [United States], Wessex Water [United Kingdom], Western Gas [United States], and Williams [United States].
     Just as Enron lobbied its friends in the United States Congress and both the Clinton and Bush White Houses, they also lobbied their friends at #10 Downing Street. While the Bush Administration—particularly Vice President Dick Cheney—is in more than just a little hot water over Enron lobbying two presidents and over 200 Congressmen and Senators for favors—British Prime Minister Tony Blair who has taken campaign funds from Enron, has been careful not to leave evidence laying around to suggest that Enron has been able to influence policy in the Blair government. However, Tony Blair faces exposure that may very likely drag Bill Clinton into the middle of the scandal at the very moment that Arkansas banker Wilton “Witt” Stephens is launching a massive telemarketing fund raising effort to raise $50 million for Bill Clinton’s 2004 run for the White House.
     It seems that Enron’s accounting firm—the one which was shredding documents for Enron—has a special relationship with Blair’s Labour Party. If anything damages Blair it will be the apparent closeness between him and the senior management of Arthur Andersen. It seems that Arthur Andersen already had a well deserved reputation as a scoundrel, and had been banned from doing business with the British government since 1985. Yet it was Blair that apparently recommended Arthur Andersen to Enron—very likely through Bill Clinton. Was Enron looking for an accounting firm that could be trusted to perform questionable actions if needed? It appears that may be the case.
     It is an Arthur Anderson executive, David Duncan, who will very likely be charged with a felony for ordering the shredding thousands of Enron documents after a court order sought them. Duncan was terminated after it was it was made public that he was destroying reams of Enron documents. According to Congressman James Greenwood, who questioned Duncan on Thursday, Jan. 24, “Enron robbed the bank and Arthur Andersen provided the getaway car,” he said, “and they said you were at the wheel.”
     Called to testify before Billy Tauzin’s committee in the House, Dorsey Baskin, another Arthur Andersen executive, swore to the House Committee that the bulk of the destruction of documents at Enron was ordered by Duncan who headed the Enron audit in Houston. Andersen’s own internal investigation revealed that hundreds of documents were destroyed by others at the firm although the reasons for the destruction appear to have been quite different than that which was reported in the media. An attorney for Amalgamated Bank, one of the Enron shareholders, found an Enron employee—not connected in any manner with Arthur Andersen—Maureen Castenda Raymond (a director in Enron’s foreign exchange department) who witnessed the shredding of massive amounts of documents at Enron’s Houston headquarters. When Raymond was laid off from Enron, she managed to sneak a cardboard box full of shredded documents out of the building and took them home. She gave the shredded documents to the attorneys representing the Enron employees who were not allowed to sell the Enron stock in their 401Ks as the company’s executives and directors cashed out, earning millions before Enron collapsed. The documents shredded by Enron executives (as opposed to Arthur Andersen auditors) were spreadsheets dealing with Jedi II (one of the “special purpose” vehicles that Enron used to hide debt from its shareholders). Jedi II and other shell companies were partnerships operated by Enron’s former chief financial officer, Andrew Fastow. It was the drain of $1.2 billion into those shell companies in October, 2001 that led to the loss of investor confidence in Enron and triggered the October 25 announcement by the Securities Exchange Commission that they were launching a formal investigation of the company. On October 31 the SEC notified Enron that it had subpoenaed all company documents. Enron executives began shredding Jedi II data and spreadsheets on December 13. Prior to the December 2, 2001 bankruptcy filing 37 Enron officers and directors and others associated with the Enron management disposed of approximately 17,500,000 shares of Enron stock for $1,200,000,000.00—and most of the records detailing the shell game that linked the CIA with Enron. Before the CIA became interested in it, Enron was just a small, inconsequential American gas and electric reseller that did not interest anyone. It went from being a small blip on the energy radar screen to the seventh largest corporation in the United States only after it attracted the interest of CIA, and suddenly Enron became a transnational conglomerate.

The DynCorp-Enron-CIA Connection
     ImageData, LLC, the “private entrepreneur” that was buying drivers’ license photograph databases from each of the 50 States promoted itself as a “private enterprise” venture. Yet it was leasing CIA-owned iris-scanning technology to American banks for use in their ATM machines. It turned out that the business start-up of ImageData was financed by the US government because ImageData was owned by the Secret Service. DynCorp was likewise financed by the US government. Only instead of the Secret Service, DynCorp was owned by the Central Intelligence Agency. Today DynCorp is not only the largest building contractor in the world, it is the Internet provider for the United States government and most of the State governments.
     DynCorp, which is thoroughly infiltrated at all levels with CIA people (although no outsiders know who are and who are are not black ops personnel, and few of the non-agency people within DynCorp were aware that “the Company” owned the company. Granted, most of them had heard the rumors, but none had seen any physical evidence that they were a black ops outfit, nor had they seen any “spy-like” operatives lurking around in the shadowy corridors of DynCorp’s World headquarters in Reston, Virginia or in their international headquarters in Fort Worth, Texas. To the non-Company personnel who were hired to perform the mundane “normal” job descriptions of a normal “mundane” construction company or an equally mundane internet service provider, DynCorp is a good place to work because there are no layoffs and lots of opportunities for international travel.
While the government “ties” with Enron have not popped up yet, they exist.
     Interestingly, the chairman of Enron’s finance committee board is Herbert “Pug” Winokur, the former Chairman of the Board of DynCorp. Tied to Winokur through Harvard University’s endowment board is Dudley Mecum who currently sits on the board at DynCorp. Mecum, an Enron director is also a director of Citicorp. Through Citicorp Mecum is tied to former Clinton Treasury Secretary Robert Rubin. When Enron executives started dumping stock, and the warning signs that Enron was in deep trouble were everyone except on the evening news, Winokur and Rubin called Peter Fisher, the current undersecretary of the Treasury to determine the practicality of artificially supporting Enron’s credit rating in order to enable Enron to borrow enough money to stave off bankruptcy. Fisher, a former New York Fed governor, called his former boss, Peter G. Peterson, the New York Fed chairman—and the current chairman of the Council on Foreign Relations. Peterson was also a top Enron financial advisor through his own company, Blackstone Group. Peterson was also against the idea of artificially supporting a phony credit rating for Enron.
     What is most troubling by the Enron failure is the names and positions of those connected to it. Since corporate directors are usually held financially liable for taxes owed to the federal or State governments, it is hard to believe that people like Peterson, Fisher, Winokur and Mecum would not know what Enron’s management team was up to.
     It appears that when the meltdown was beginning—before the fire got so hot that it could not be put out—that those closest with the national and international banking community knew what was going on at Enron. But, instead of blowing the whistle early enough to prevent Enron’s directors and officers from selling off their stock and draining Enron of $1.2 billion of liquidity that would likely have kept it solvent, those financial experts were trying to decide if they should help artificially bolster Enron’s credit rating so the energy giant could borrow enough money to keep it solvent when, had the directors and officers not cashed out, the corporation would have had the stopgap liquidity it needed to keep it solvent at the moment.
     However, it wasn’t the “immediate” that troubled Enron CEO Kenneth Lay, it was the long term. Enron used their offshore entities to overstate profits—to the tune of about $600 million. On top of that, Enron formed shell companies in the Cayman Islands and around the world and backed those entities to secure loans from the international banking community; then using that money to buy Enron stock or Enron assets, making Enron appear to be not only solvent but a good value for investors.
     Former Federal Reserve Chairman Paul Volcker has just been appointed to head an Arthur Andersen team to restore the integrity of the accounting firm, and to help establish accounting guidelines that will prevent what happened at Enron from happening again with any other American corporation. Little, if anything, is likely to happen to retroactively protect the employees of Enron from Enron’s bad management practices. What is happening, it seems, is a massive effort to generate enough smoke and mirrors to perpetually shroud what really happened at Enron. Shortfalls of $1.2 billion—the precise amount taken out of the company by its officers and directors—put Enron into bankruptcy.
     The 218-page “excuse” filed with the federal bankruptcy court in New York will likely show the cause of the bankruptcy is described as a “self-enrichment” scheme by Enron’s management. The problem with that is that the Enron losses that forced the energy company into bankruptcy is almost exactly the sum of the stock payouts to Enron executives and directors—$1.2 billion.
     Instances of personal self-enrichment will be cited by the media and by the court as this case is heard. Andrew Fastow, Enron’s chief financial officer was allowed to head up Enron’s Cayman Island entities while retaining his position with Enron. Fastow, who was fired in October, made over $30 million “on the side.” In one deal, Fastow converted a $25,000 “partnership investment” into a personal profit of $4.5 million. He brought two other Enron employees into another Cayman Island deal. The employees each invested $5,800 and earned over $1 million each. Hillary Clinton should have linked up with Fastow instead of Don Tyson. Investing in Enron would have been a lot more profitable for the future first lady than cattle futures where Hillary, you will recall, converted a $1,000 investment into $100 thousand.

The Real Enron Losers

     The real losers in the Enron collapse were not the middle class investors across the nation that lost billions of dollars as the U.S.S. Enron floundered on the shoals of self-created bankruptcy, it was the Enron employees whose participating 401K pensions were funded with Enron stock. The middle class investors across the land who bought Enron through investment counselors and stock brokers made conscious decisions to buy Enron stock, and although they may have done so with faulty investment data that concealed massive Enron losses and concealed unexplainable infusions of capital from other areas that should have raised a red flag, the stock market has always been a “buyer beware” marketplace. The investor who bought on the street had the option of disposing of whatever Enron stock they owned at any time they wanted to dispose of it. Enron’s employees, however, were not given that option. As Enron executives and directors disposed of some 17.5 million shares of Enron stock before crashing the U.S.S. Enron into the shoals, they restrained their employees—whose retirement nest eggs were tied up in Enron stock—from doing the same. Tragically, Enron’s employees were not day traders with sufficient discretionary income to “play the market.” They were forced to sit back and watch their retirement nest eggs disappear.
     It goes without saying that the Enron managers who promulgated the fanciful lies that filled Enron’s investment prospectus and donated $14.5 million in pension funds to politicians as campaign contributions are likely guilty of felonies that could net them several decades in a federal prison. That will not offer much satisfaction to the 59- and 60-year old former Enron employees who do not have enough “work years” left in them to rebuild the nest eggs they lost when Enron collapsed.
     Furthermore, it is not the responsibility of the taxpayers of the United States to foot the bill in covering the losses of Enron’s employees. They didn’t spike Enron’s financial statements. The taxpayers didn’t hide the $1.2 billion in losses that drove Enron into bankruptcy court; nor did the taxpayers open the Cayman Island accounts that allowed Enron executives to conceal how the corporation was being infused with capital.
     It is interesting that the law enforcement division of the SEC acknowledged a rush by Enron executives and directors to cash in $1.2 billion in stock options—an amount equal to the sum that put Enron into bankruptcy) before filing bankruptcy. Yet nobody seemed to think that rush to cash in options before the company went belly-up was illegal. Immoral perhaps, but not illegal.
     Further, the executives who cashed out knowing the stock was about to head south did so not only with what can be construed as “insider information,” but with the ability to withhold that information from an unwary public until such time as they disposed of their assets at the highest prices while restraining their employees from doing the same.
     I believe an action needs to be filed by the United States Justice Department against those who participated in the U.S.S. Enron “ship jumping.” The $1.2 billion grossed by Enron executives and directors needs to be seized by the SEC and held by the government until the bankruptcy is settled and Enron’s employees have had a chance to lay claim to those funds to compensate their 401K program.
     While I would not generally advocate seizing the personal assets of corporate directors and the officers of those corporations to compensate the employees of those companies, I think the events surrounding the Enron bankruptcy mandate that such action be taken.
     Documents released to the U.S. Bankruptcy Court in New York indicate an admission that the bankruptcy of Enron was due to lack of corporate oversight on the part of senior management. Enron senior management states that they did not monitor what was happening between Enron and its satellite companies (the smoke and mirrors rhetoric that is being used to mitigate responsibility—and criminal liability). Further, the directors claim that most of what was going on in the company was never reported to the board. The board, of course, consisted of those same people who cashed out $1.2 billion when they saw the ship was going to sink. That money rightly belongs to those who invested their sweat equity to build Enron into a major American corporation—not the officers whose investments of time and money were adequately protected with golden umbrellas, but the hourly employees who invested themselves, and who gambled their retirement nest eggs on the integrity of the officers who led the company—and were denied the right by those same officers to salvage their retirement pensions while the same officers were protecting their own retirement nest eggs.
In a world controlled by transnational industrialists who buy politicians “by the gross” by filling their campaign war chests with millions of dollars to keep them in office, it is not likely that Congress will ever enact legislation that will criminalize this type of activity by the corporate types who keep them in office. Yet, in the case of Enron, the officers and directors who cashed out when they realized that Enron’s stock was heading south must be held personally liable for the losses to the employee 401K retirement program.