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Rethinking the new economy – Enron, etc.

Greg Loper

When the Justice Department filed obstruction of justice charges against the Arthur Andersen accounting firm for shredding documents related to Enron’s financial activities, I realized it was a serious matter, with deep financial and political roots. Then I learned that Andersen is a firm with 1,700 U.S. financial partners, 2,300 clients (20 percent of the publicly traded companies in the U.S.) and 85,000 employees; that it is (was) one of the five largest accounting firms in the country; that the head of the Securities and Exchange Commission, which is investigating Andersen for its creative accounting practices – including its accounting role in the 1980s bankruptcy and pension raid at Sunbeam – is Harvey Pitt, who previously worked as an attorney for Arthur Andersen’s law firm. Not until the major news networks started to trot out the latest dirt on the Clinton/Monica Lewinsky scandal, however, did I come to fully appreciate the breadth and magnitude of this sordid development.

The names of the prominent players who participated – unwittingly or not – in the Ponzi schemes of high finance in the 1980s just keep coming: CEO Gary Winnick, a Michael Milken disciple, followed Ken Lay’s lead by cashing out for $734 million before running his fiber optics giant, Global Crossing, into the ground; George Bush Sr., who chaired Reagan’s Task Force on Deregulation, turned an $80,000 stock investment with Global Crossing into $14 million; Dick Cheney, as current energy task force head, stood by while Ken Lay hand-picked a new chairman of the FERC, which did nothing – as Enron bilked $70 billion from California utility rate-payers – until the state threatened them with lawsuits. Paul Volcker, ex-Chairman of the Federal Reserve, now heads the Andersen oversight committee. A quick look at Paul Volcker’s handling of the collapse of the Continental Bank of Illinois back in 1984 provides some insight into how the current potential financial collapse might turn out.

Continental Illinois lost $1 billion in loans when Penn Square Bank of Oklahoma City went bankrupt. Then-chairman of the Federal Deposit and Insurance Corporation, William Isaac, insisted that only insured depositors – up to $100,000 – should be reimbursed at Penn Square. This message sent shock waves through the financial community; large depositors would not be protected in the vent of a financial meltdown. The moves was consistent with the ethic of “free market” discipline espoused by fiscal conservatives and financiers like Paul Volcker. At Continental, however, assets from its largest depositors – about 2,300 banks – were at risk. In subsequent meetings with the FDIC, the Comptroller of the Currency and the Federal Reserve, it was agreed that a run on those deposits would take down the largest institutions in the country, including Bank of America.

After Continental’s steady, two-year decline, the largest bailout in the history of banking, with $8 billion in emergency loans from the Federal Reserve, answered the call. Paul Volcker defended the action as ” … the most classic function of a central bank.” But much more important is the precedent that it set. In effect, it was an announcement from the Fed, the FDIC and policy-makers to banks and investors everywhere: It’s OK, make your investments as speculatively and recklessly as you like – we’ll shaft wage-earners as both taxpayers and consumers for years to come to make up the difference.

Add 18 years of deal-making within a financial network that has gone global, along with the repeal of the Glass-Steagall Act in 1999 (enacted in 1933 to separate commercial and investment banking practices – limiting bankers’ ability to pawn off bad deals on unsuspecting depositors), and Paul Volcker’s recent order to split Andersen’s auditing and consulting services (to eliminate conflict of interest) looks pretty weak.

A plea bargain is in the works between Andersen and the SEC. Andersen wants assurances that if they plead guilty, they won’t be barred from future practice – required under SEC rules for a firm with a felony conviction. In other not-so-punitive actions, Treasury Secretary Paul O’Neill, in a “crackdown” on offshore tax havens for fraudulent corporations, gave notice that businesses on the Cayman Islands will be investigated and prosecuted – after a two transition period. (Enron has 874 subsidiaries there, and more than 2,000 in countries with similar laws which prevent disclosure of financial activity.)

How could matters be worse? Well, author and filmmaker Michael Moore, in a recent book-signing tour that included a stop in Grass Valley, made reference to a Business Week article that chronicled G.W. Bush’s consideration – in December 2000 – of Ken Lay for the position of Treasury secretary.

Greg Loper, a resident of Cedar Ridge, writes an occasional column.

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