Empty Cookie Jar
- Pipe Dreams: Greed, Ego and the Death of Enron by Robert Bryce
PublicAffairs, 394 pp, £9.99, November 2002, ISBN 1 903985 54 4
- Enron: The Rise and Fall by Loren Fox
Wiley, 384 pp, £18.50, October 2002, ISBN 0 471 23760 4
The Four Seasons hotel, Houston, 20 January 2000. The investment managers and analysts packed into the ballroom are paying only partial attention to the presentation by the Enron Corporation. On the New York Stock Exchange, Enron’s shares have been rising all day, by as much as $2 an hour. It is now mid-afternoon, New York is about to close, and the members of the audience know that the moment to profit will have passed if they wait for the dramatic announcement they all suspect is coming. Out come the mobile telephones. ‘They weren’t even leaving their chairs, they were calling their traders and saying, “Buy it, I don’t care what the price is, buy it,”’ one attendee told Robert Bryce. As New York closes, the announcement comes. Enron, which began by owning pipelines carrying natural gas, is going to organise the trading of ‘bandwidth’ (capacity) in pipelines that carry information, the fibre-optic cables of the Internet. At the end of a tumultuous day, Enron’s stock price has risen by 26 per cent.
The Waldorf Astoria, Manhattan, 19 November 2001. This time, the audience is Enron’s bankers. Any mobile telephones will have been used to say ‘sell’, but they probably won’t have been needed. All those present already know that Enron is in potentially fatal difficulties. The previous month, it had announced ‘non-recurring’ losses of $1.01 billion. Some had been incurred in the bandwidth business it had entered so triumphally the previous year, but Enron had also admitted large losses from its dealings with a ‘special purpose entity’ (of which, more later) with the unrevealing name of ‘LJM2 Co-Investment, LP’. Despite this warning of trouble, the scale of what the bankers are told on 19 November is remarkable. Enron’s balance-sheet for the third quarter of 2001 had reported debts of $13 billion. Now, the audience learns of an additional $25 billion of previously undisclosed debt. Appeals to the bankers are of no avail, just as calls to the Federal Reserve and the Bush Administration fail to produce a rescue. On 2 December 2001, Enron files for bankruptcy protection, at that point the largest US corporation ever to do so.
Though caught up in the Internet boom, Enron was not a stereotypical dot.com, all hype and no substance. It was a serious and imaginative firm. Every year from 1996 to 2001, Fortune magazine ranked it the US’s ‘most innovative’ company, and the award was given in earnest: Fortune isn’t big on irony. Enron combined expertise of two types. One was in managing physical assets such as pipelines, electricity generating plant and water systems (in the UK it owned Wessex Water). It was often very good at this. For example, the Teesside co-generation plant, built by an Enron-led consortium, processes natural gas, generates around 3 per cent of Britain’s electricity and turns what would otherwise be waste heat into steam for ICI’s nearby petrochemical complex. The plant was widely regarded as exemplary when it opened in 1993.
Owning physical assets was, however, seen by Enron largely as a lever for an ever more important second kind of expertise in the burgeoning area of energy trading. First in the US and then elsewhere, industries such as gas, electricity and water were liberalised in the 1980s and 1990s, making it possible to create markets where none previously existed. Enron positioned itself between the producers of energy and its consumers by, for example, offering large industrial consumers of natural gas the security of long-term fixed-price contracts. It then ‘hedged’ the risk of such contracts, for example by buying the gas ‘futures’ that the New York Mercantile Exchange began to trade in 1990 – a ‘future’ being a standardised contract to buy or sell a set quantity of a given asset at a set price on a given future date.
Enron’s ambitions were huge, and lay in areas in which government still called the shots. Accordingly, it built links to political power. Its connections to George W. Bush have attracted much attention. They were indeed longstanding, with deep roots in Houston’s local politics, and went beyond financial contributions: in 1986, Enron was involved in joint drilling with Bush’s company, Spectrum 7. Enron’s chairman, Kenneth Lay, seems to have developed a joshing intimacy with Bush. Loren Fox reproduces Bush’s 1997 birthday letter to Lay: ‘55 years old. Wow! That is really old. Thank goodness you have such a young, beautiful wife.’ Political links outside the US were also important, particularly in India, where Enron’s massively expensive Dabhol electricity generating plant, the first such privately owned project in the Subcontinent, was mired in controversy, and viewed as inappropriate by the World Bank. Local protesters were allegedly beaten up by the police and subjected, according to Amnesty, to arbitrary arrest. The then US Ambassador to India, who condemned the plant’s cancellation (soon to be reversed) by the state government of Maharashtra, later joined the board of Enron Oil and Gas.
Bush’s critics have failed to find the ‘smoking gun’ in his links to Enron that might threaten his Presidency. He, other Republicans and many Democrats would often have wanted to provide the free-market conditions that Enron sought, even if funding had not flowed in their direction from the corporation. Bush did not grant Enron the single decision it perhaps most desired: for the US Administration to withdraw its objections to the Kyoto Protocol limiting greenhouse gas emissions. If it seems odd that the corporation was in favour of Kyoto, remember Enron’s commitment to making money by creating markets. If an effective system of global control of carbon dioxide emissions is ever created, it will most likely involve a system of tradeable permits. Companies or countries that can reduce their emissions cheaply, or that do not need their full carbon dioxide quotas, will be able to sell emissions permits. Other companies or countries will then buy them if that works out cheaper than cutting emissions. Economists reckon that emissions trading will make it possible to achieve necessary reductions in greenhouse gas emissions at minimum cost. It’s not a silly idea: in the US, sulphur dioxide permits have successfully been traded by Enron and many others since the start of the 1990s. Tradeable greenhouse gas permits could even be egalitarian. If permits were issued on a simple per capita basis, the consequence would be a huge transfer of resources from rich to poor countries, though preventing benefits simply being absorbed by elites in the latter is a difficult issue.
Greenhouse emissions trading is, however, a prospect to make any trader drool. Carbon dioxide permits would quickly be supplemented by ‘derivatives’ of the kind in which Enron had great expertise: carbon dioxide futures, carbon dioxide options and so on. (An ‘option’ is a contract that gives the right, but – unlike a future – not the obligation, to buy or to sell a set quantity of an asset at a set price on or up to a given future date.) It might well all add up to the biggest market in history, and Enron badly wanted to be at its centre. So did the British Government, which wanted the market to be based in London, not Houston. Chicago, the historic home of futures trading in the US, had ambitions, too. All are now stalled by the US withdrawal from Kyoto.
More successful was a remarkable effort by Enron to move the trading of energy and energy derivatives, which had previously been conducted by telephone, onto the Internet. The idea was formulated early in 1999, and a 31-year-old gas trader in Enron’s London office led its implementation. By the end of November 1999, she and her team had EnronOnline up and running. By June 2000, it had hosted trades worth $100 billion.
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