The Enron affair is shaping up as quite possibly the largest political and financial scandal in American history. Untold billions of dollars have vanished down the drain in the biggest bankruptcy filing ever. Political connections ensnare every level of the Bush administration. Even more fearsomely than in the past, Americans will learn some hard lessons: that business corrupts politics, that capitalism cannot be trusted simply to the capitalists, and that without government safeguards, the public trust and the public treasury are always at grave risk.
Enron dwarfs the momentous insider infamies of the Gilded Age and the Jazz Age. But it is also special for other historical reasons. It signals a crisis in modern conservative thinking and politics -- a crisis that has less to do with bad character than it does with scandalously bad federal policy. Enron is the belated culmination of the age of Ronald Reagan, George Bush the elder, and Newt Gingrich. It stands as a monument to the era of deregulation and laissez-faire business politics that has endured for more than 20 years.
There were early signals that such a debacle lay ahead. Above all, the savings-and-loan scandals of the 1980s, including the Keating Five affair, exposed far-reaching trails of graft. But Enron looms as the Big Kahuna, the tsunami of modern corruption scandals. At its root are the neo-robber-baron politics and mentality that the Reaganites ushered in, the Gingrichites expanded, and the George W. Bush administration now advances so smugly and dogmatically.
From the advent of the New Deal until the 1980s, no such grand financial-and-political-corruption scandal took place, on either party's watch. That was partly because regulations were adopted, beginning in the 1930s, to prevent such corruption. The Reagan-Bush-Gingrich counterrevolution severely undermined those protections. A new way of thinking about business morality -- or rather, a very old way -- took over. The Gilded Age, "public be damned," caveat-emptor spirit of Commodore Vanderbilt came back from the dead, reincarnated as a self-evident, all-American truth. Indeed, the Enron saga exemplifies "the genius of capitalism," Bush II Treasury Secretary Paul H. O'Neill recently proclaimed.
Republicans ruled. Ergo, Enron.
The real "genius of capitalism," history shows us, flourishes under the light of regulatory oversight; corruption gathers in the shadows, when government turns its back. The Enron matter looks in some respects like a throwback to the early industrial era, before regulatory safeguards took shape. But in degree if not in kind, Enron -- and de-regulation -- are new, and far more damaging.
Surely, Enron is not as simple as the sordid business machinations that famously beset the administration of Ulysses Grant in the nineteenth century. As the nation began to industrialize heavily, stockholders in the Union Pacific Railroad formed a venture called Crédit Mobilier of America, gave it contracts to build the railroad, and then sold or gave influential congressmen Crédit Mobilier shares. When the congressmen helped themselves by voting federal subsidies for railroad construction, with no checks on costs, the Union Pacific plotters made profits to the tune of a then-incredible $23 million. And there were other scandals in the offing. In 1875 it was discovered that whiskey distillers had been able to retain money collected as tax revenue by bribing various government officials, who in turn used the bribes to finance political activities and silence snooping journalists. A year later, Secretary of War W.W. Belknap was caught taking illicit payments from traders at government Indian posts.
These Gilded Age scandals look fairly primitive today, befitting the relative simplicity of that era's corporate economy. Corruption back then consisted of blatant bribery schemes by which businessmen, large and small, gained public favors. Much more sophisticated were the scandals of the 1920s, under President Warren Harding and his so-called Ohio Gang. The famous Teapot Dome affair of that period reflected the growth of both business and government throughout a period of high industrialism. During Theodore Roosevelt's presidency, reserves of natural petroleum (or "domes") located on public land in California and Wyoming were set aside for exclusive use by the U.S. Navy. Big oil companies, eager to sell their own reserves to the government, naturally opposed the program.
In 1921, Harding appointed one of the most zealous pro-oil legislators, Senator Albert B. Fall of New Mexico, as his interior secretary. Fall persuaded the Navy Department to hand him administrative power over the reserves. Then, in return for gifts and loans totaling about $400,000, he secretly leased Teapot Dome in Wyoming to the Mammoth Oil Company and the Elk Hills reserve in California to the Pan-American Petroleum and Transport Company. Although Fall had made the lease deals so complicated that they could be defended legally, and although he had powerful friends in the administration, he eventually was jailed for a year and fined $100,000. One oil magnate, Harry F. Sinclair, was jailed briefly on a technicality, but otherwise Mammoth and Pan-American officials escaped punishment.
Political corruption hardly ended with the Harding administration. It remained especially hale in local politics, where organized crime milked old political machines undermined by the advent of the New Deal. Strikingly, however, efforts at systematic federal-level bribery and corruption declined between the 1920s and the 1960s. This shift can be credited largely to the regulatory efforts of the 1930s, begun in response to the stock-market crash and ensuing Great Depression.
Not least significant was the U.S. Securities and Exchange Commission, established in 1934. The new agency had the power to regulate exchanges, brokers, and over-the-counter markets as well as to keep track of company financial disclosures. Within a year of its founding, the SEC also gained substantial power to regulate public-utility rates and financial practices. It would no longer be possible to own fraudulently intertwined utilities through holding companies. Stock manipulations of the sort that had been the mainspring of both political corruption and financial panics would now be far more difficult to execute.
Thence began what looks, in retrospect, like a long golden age. With some relatively minor exceptions under Harry Truman and Dwight Eisenhower, the period from the advent of the New Deal to the advent of the Great Society was remarkably scandal-free at the federal level. And when, in 1964, concerns about alleged influence-peddling arose around Robert G. ("Bobby") Baker, a longtime aide to Lyndon Johnson and the Senate majority leader's secretary at the time, both the House and the Senate undertook historic campaigns against corruption. In both houses, select committees on standards and conduct were established to monitor strict ethics codes for members. The Federal Election Campaign Act of 1971 (subsequently strengthened after Watergate), the Foreign Corrupt Practices Act of 1977, and the Ethics in Government Act of 1978 established strict guidelines for financial disclosure by federal officials, forbade payments by American companies to foreign officials, and closed loopholes in previous public-ethics codes.
To be sure, even the most vigilant efforts could not wipe out greed and venality in Washington. Richard Nixon got mixed up in corruption scandals involving International Telephone and Telegraph and the dairy lobby. In the so-called Koreagate scandal of 1976-1978, dozens of congressmen were found to be on the take from the South Korean government, with relatively little political consequence. The Abscam sting operation at the end of the Carter years netted numerous federal officials willing to take money in exchange for favors from immigration officials. But as unsavory as these scandals were, they concerned relatively trivial amounts of cash and influence, and they did not involve any structural changes to the law, political culture, or economy.
The deregulating, go-go Reagan-Bush years were different. A new pattern of heavily deregulated industries brought with it new and bigger scandals. In the Wedtech affair of 1986-1989, bribes from a military contractor led to the conviction of two members of Congress and many less prominent figures on charges ranging from racketeering to perjury. Even more memorable was the monumental savings-and-loan crisis of the late 1980s -- a direct result of such vast and aggressive deregulation of the nation's savings institutions that S&L operators like the notorious Charles Keating were able to lend themselves money. With total government bailouts amounting to an estimated $1.4 trillion, the S&L scandal may well be the largest single theft in world history.
The savings-and-loan fiasco undermined public support for George H.W. Bush and probably helped pave the way for Bill Clinton's election. Thereafter, Republicans tried hard to deflect the blame for the S&L matter onto Clinton, confecting what turned out to be a fake scandal called Whitewater and tying it to a failed S&L. Whitewater, with its phony charges, endless subpoenas, and media hype became the model for a whole string of trumped-up scandals during the Clinton years, culminating with Kenneth Starr's perjury trap concerning Monica Lewinsky.
The Enron affair, however, is the real thing. Little more than a pipeline company in the 1980s, the Enron Corporation flourished in a new postindustrial economy, growing immense in the 1990s by evading the checks and balances built for another age. Like the S&L crisis, the Enron affair is a direct product of deregulation -- not so much from the Reagan-Bush years but from the period of Republican congressional control under Newt Gingrich after 1994. With Gingrich as their fire-eater, congressional Republicans and their K Street bankrollers mounted huge resistance to the regulatory efforts of the Clinton administration, as well as to the existing regulatory rule-books. Kenneth Lay and Enron lobbyists were particularly aggressive. They sought to gain political influence, largely with Republicans in Texas and in Washington, D.C., in order to alter regulations and gain exemptions so that Enron could operate in a completely deregulated zone.
"Deregulation" and "free market" were mantras for both the Gingrich Republicans and Enron. But their talk of freedom was highly misleading. The Gingrich Republicans were not interested in creating some fanciful, pristine, abstract "free market." Such a "free market" has never existed and never will. Rather, through intensive government efforts, they sought to create new market rules that were favorable to Enron and a host of other influential corporations. The so-called free market that resulted was no state of nature. It was a highly-crafted artifice, coolly manufactured on K Street and on Capitol Hill by the Republican Congress -- and in Enron's case, with the help of Kenneth Lay's close friend, the new governor of Texas, George W. Bush.
Only one force stood between the Gingrich Republicans and total success: the Clinton White House and the Democrats. Clinton, to be sure, recognized the need to reform old regulatory rules and other laws in accordance with changed economic realities. And the Democrats had plenty of their own connections to K Street. But Clinton and the vast majority of his party also realized that radical deregulation of the sort Gingrich advocated could spell disaster. And now, in the Enron crisis, the disaster has unfolded.
Consider, first, the Enron employees and stockholders, who are the scheme's most obvious victims. In 1997, California Democrat Barbara Boxer pushed a Senate bill restricting 401(k) retirement accounts that would have prevented or at least mitigated the disaster that hit Enron's innocent holders. But that would have been regulation; so the Republican free-marketeers and business lobbyists watered down the bill to the point where it protected almost nobody.
Second, consider Enron's shenanigans with its auditing firm, Arthur Andersen. In the late 1990s, then-SEC Chairman Arthur Levitt, Jr., tried to banish such cozy connections between auditors and the companies they audited. But that would have been regulation; so the accounting lobby defeated Levitt's efforts. And the current President Bush did the lobbyists one better: He appointed the leader of the anti-Levitt effort, Andersen lawyer Harvey Pitt, as Levitt's successor at the SEC.
Third, consider the matter of tax shelters, such as the labyrinth of offshore hideouts where Enron placed about one-third of its assets in order to conceal its losses. President Clinton's treasury secretary, Lawrence Summers, tried to put a stop to that practice, but that would have been regulation; so congressional Republicans beat him back. Current Treasury Secretary O'Neill has obstructed even modest efforts by intergovernmental agencies to monitor the tax-shelter scams.
Fourth, consider the energy-derivative schemes -- obscure financial arrangements so new that they escaped regulation completely. In 1997, Clinton administration officials proposed more-exacting disclosure of energy derivatives. But again, that would have been regulation; and so Enron, with the help of congressional Republicans led by House Financial Services Committee Chairman Jim Leach of Iowa, put a stop to the reformist nonsense.
Measured strictly in dollar amounts, Enron might seem to be a smaller scandal than the savings-and-loan collapse. But in terms of public pain and political fallout, its impact could be much greater. The federal government did, after all, eventually bail out the S&Ls, making up for the fraud with taxpayers' dollars -- although the delay in its response vastly increased the damage to the federal treasury. By contrast, there seems to be, as yet, no way for the defrauded Enron investors -- including the hundreds of employees with now worthless 401(k) plans -- to recover their life savings from Kenneth Lay, Jeffrey Skilling, and the other Enron executives who looted the firm.
Politically, the Enron fallout is potentially far more damaging than that generated by the S&L controversy that preceded it. The savings-and-loan crisis implicated some on Capitol Hill, most famously Alan Cranston, John McCain, and the other senators who had had links to the fabulously corrupt S&L owner Charles Keating. But Enron raises even deeper and more disturbing political issues than the standard scandal story-lines about who paid what to whom for what.
George W. Bush campaigned for the presidency largely on the character issue, as though character were purely a personal matter. But character is not just personal. Regardless of whether Bush himself is unblemished in the usual way of taking bribes or pushing graft, the Enron scandal testifies to the character of his politics and beliefs. It also testifies to those of the modern Republican Party.
Enron shows us what happens when tiny groups of corporate special interests manipulate government to their own benefit; when matters of corporate governance are left entirely to the corporations; and when a company's treatment of its employees is considered a purely private matter.
One of the more curious revelations since the Enron scandal erupted has been that President Bush, at the urging of his political adviser Karl Rove, has read a new best-selling biography of Theodore Roosevelt -- a biography that, as it happens, single-mindedly minimizes TR's progressive side. Yet one wonders what Bush makes of TR's attacks on what he called the "malefactors of great wealth," of TR's implacable anger at the early reactionary politics that led to scandal after scandal, and of his trail blazing for the emerging progressive era that culminated in the New Deal.
Maybe the president just skips those parts.