Proponents of the regulatory state have been building up the collapse of Enron as a huge political story, and using it to tarnish the presidency of George W. Bush. However, the entire Enron issue rests on a giant fiction, namely that the energy trading firm was an example of unregulated capitalism at work. In fact, Enron was a savvy manipulator of government, using its lobbying muscle to rig the marketplace with rules and restrictions benefiting itself at the expense of competing businesses, consumers, and taxpayers.
Enron advocated any policy that would benefit Enron, regardless of the level of government intervention. In energy policy, the firm wanted partial deregulation to allow it to trade wholesale electricity. But it also lobbied for heavy regulation and price controls over utility power grids, in a bid to gain cheap access to other companies' power transmission and distribution systems. Enron's favored approach to energy policy was adopted by the state of California, where it caused disastrous shortages and rolling blackouts in the summer of 2001.
The company's aggressive political maneuvering led it to champion the Kyoto Protocol on global warming. As an owner of several solar and wind power facilities, the company wanted federal intervention to help these money-losing businesses turn a profit. The treaty would have achieved that goal by penalizing the use of fossil fuels. In addition, Enron would have profited handsomely from the energy rationing system needed to enforce the treaty. As an energy market maker, Enron would have had a dominant position in the trading of greenhouse gas emission permits. President Bush ultimately rejected the Kyoto treaty, which would have raised energy prices for the American public and enriched Enron in the process.
Despite the administration's rejection of Kyoto, a media frenzy has formed over Enron's relationships to the Bush administration. Yet, no evidence exists that Enron exerted undue influence over President Bush. When Enron started to encounter difficulty, it called on the Bush officials for help. Specifically, Enron executives asked for assistance in avoiding a downgrade of the company's debt by the Moody's ratings agency. President Bush's Commerce Secretary, Don Evans, refused to intervene on the company's behalf. The debt downgrade is what finally caused Enron's house of cards to collapse. Later, the Bush administration refused requests for a federal bailout.
Numerous congressional investigations, instigated by partisans, seek to tar the Bush administration with the Enron brush. But most of the federal assistance propping up Enron occurred under President Clinton's tenure. Billions of dollars of subsidies and loan guarantees were arranged through federal agencies to help Enron win contracts for power projects in Third World countries. The taxpayer-funded Overseas Private Investment Corporation now has over $1 billion in exposure to Enron-related projects that are jeopardized by the company's bankruptcy. Enron donated money to both parties to grease the skids for this federal largesse.
Ideological proponents of big government want to use the Enron failure as an opportunity to increase government regulation. However, this thinking puts far too much faith in the ability of regulators to prevent corporate mismanagement. The Enron story itself demonstrates the futility of regulation. There are already numerous rules and regulations governing companies like Enron, including the Public Utility Holding Company Act of 1935. In 1994, regulators waived that law's requirement that Enron disclose its investment records, which would have exposed the company's problems far in advance.
Also under existing law, the Securities and Exchange Commission (SEC) was supposed to conduct a thorough review of Enron's financial statements describing its complex structure of off-balance sheet financing. SEC regulators were supposed to make sure that Enron's auditors clearly explained the energy trading firm's operations, financial condition, and risks. Yet the SEC failed to review Enron's filingsnot just once, but for several years prior to the company's failure. Incredibly, the last time the SEC reviewed an Enron annual report was in 1997. When Enron submitted its 2000 annual report, the agency postponed the review process for another year, reportedly because the SEC staff thought Enron's filings were too complicated to understand.
The implosion of Enron was a financial fiasco of grand proportions. But a close analysis of the facts reveals no wrongdoing on the part of President Bush or any member of his administration. Those who would capitalize on Enron to expand government bureaucracy have their facts wrong. Rather than demonstrating the flaws of capitalism, Enron was a story of cronyism and fraud being discovered and rooted out. It is a demonstration of why less government is needed, not more.