Enron and On

By Rohit K. Shukla

Deregulation and New Economy Made Destructive Bedfellows

By now, we have all become intoxicated with Enron's death throes. In death, it will inevitably grab and pull many others down with it--thousands of employees, to be sure, as well as shareholders, and unfortunately some legitimate businesses. Hopefully, it will drag down the politicians, who, along with some well off accountants, were the foxes guarding the hen house.

It is almost meaningless for most of us to focus on the minutiae of deceptive practices and seat-of-the-pants accounting gimmicks that marked the company's ascendancy. The adulation that followed Enron's rise was a by-product of the era of the so-called "new economy," when the mere presence of hubris seemed to be a guarantor of success. This new economy provided an inside track to only the most "daring," the most "visionary." In other words, it left room for those willing to deal themselves the best hand while indulging in an elaborate, self-indulgent game of "now you see it, now you don't."

While Enron joined scores of other companies in marking the territory of the new economy, those businesses cannot and should not be equated entirely with Enron. They were more like truant children compared with the deliberately constructed artifice that was Enron. Enter the foxes.

In addition to the new economy idiocy, Enron was also a product of deregulation of the energy market. Government wrote the rules, instituted vast bureaucracies to manage them and provided chummy access to all the players through a comfortable, long-lasting regime of monopolies and protected pricing. Then it adopted the mantra of "choice," a hallowed word whose very mention promises to usher in new vistas of prosperity for American consumers.

Dressing deregulation up as "true choice" could no longer mask the fact that opportunism was the way out for the good old boys and their protectors. As wildcatters of days gone by, they took outrageous risks and built empires with gusto. In a region (Texas) known for great hurrahs and sudden crashes, they were perfectly suited to the tenor of the '90s, a period of opportunism which dovetailed nicely with a gargantuan appetite in the capital markets, a time when new business models, based on hubris, hype and hideous distortion were being touted as liberators from the hide-bound economy of old.

The fact that Enron became the primus inter pares--the first among equals--in the new-fangled economy was pre-ordained; it had an element none of the other sectors could possibly have: unparalleled access to policymakers dating back to the days of regulation, a system of interdependence and connections. Whether keeping the braying consumers at bay (while they fretted about skyrocketing energy bills), or inventing new rules for disclosure and accountability (making sure that rule makers consulted with Enron), or keeping prying eyes shut (through a vast infrastructure of influence-peddling), or impressing analysts (by moving armies of workers from one floor to the other at Enron headquarters to give the appearance of a humming operation), the corporation simultaneously played two sets of cards: one inherited from its past in regulation, and the other as a player in the "new economy."

Confronted with what is being touted as the biggest "scandal" in American industrial history, most of us would resign ourselves to a variation on a simple clichŽ: Greed comes before a fall. Certainly, a top-to-bottom housecleaning is called for. Reforms with teeth are long overdue. At last industry and government are discussing the problems seriously, albeit not often in the same room. Next, we should tackle the self-dealing which analysts at investment banks and at research groups indulge in as a matter of course. If we are serious about a knowledge-based economy, we can't indulge a system of "Chinese whispers."

We should also be mindful of a more difficult and central lesson of the Enron debacle. It is that markets created by the activist hand of government--from airlines to defense, from telecommunications to energy--hide horrible distortions inimical to the interests of consumers. When that hand is overplayed, as has been repeated over and over again in deregulation, those distortions often become even more dangerous. Not only do consumers in the first instance bear the cost of maintaining elaborate systems of irrational costs, they subsequently also bear the cost of making these companies more "responsive" to the open market. The promise--and premise--of deregulation is that innovation will surely follow. Enron proves that innovation and manipulation are often two sides of the same coin.

Rohit K. Shukla, a contributing writer to L.A. Downtown News, is president and CEO of Larta, the think tank for technology businesses.

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