The current financial crisis has many parallels with what happened to Enron in the early part of the decade. Although the hazards associated with overpaid executives, unethical practices and lack of accountability were clearly illustrated by the Enron Crisis; little was done to prevent the repetition of such behaviors. As a result, similar malfeasance, hubris and incompetence, coupled with the lack of political will for regulation has resulted in yet another financial crisis. The U. S.
and overseas stock markets were still adjusting to the psychological and economic impact of the terrorist attacks in New York City in the two months prior to the announcement of the bankruptcy of Enron. (Weller, Miller, & Zhang, 2001) The markets had just stabilized, and reassumed their moderate growth owing, in large part, to the assurances by Federal Reserve Chairman, Alan Greenspan that the underpinnings of the economy were strong, and large economic entities, such as Enron, were economically stable and fundamentally secure.
(Weller, Miller, & Zhang, 2001) These assurances came despite the consistent deregulation of trade practices in both federal financial markets, and California energy markets. (Weller, Miller, & Zhang, 2001) Such deregulation was the bailiwick of not only Greenspan, but the Republican congress and White House.
(Weller, Miller, & Zhang, 2001) The assumption on the part of those who supported deregulation and limited scrutiny of practices, was that enlightened self-interest of the heads of corporations would prevent destabilizing acts of stock manipulation and other actions that would serve to destroy the underlying equity in the corporation. (Weller, Miller, & Zhang, 2001) Clearly, this was not the case, as a small number of executives pillaged the assets of Enron without regard to the economic fallout of their actions.
These people reaped their individual fortunes, largely by dumping corporate stock, valued in billions of dollars, just prior to affecting the economic ruin of the company. (Weller, Miller, & Zhang, 2001) Had this episode had a salutatory effect on the perceived need for closer oversight and regulation of economic practices, it may have been worth the cost, but the lessons of Enron went unlearned, and the same behavior of corporate executives derailed the economy once again by destabilizing financial institutions and undermining economic development.
Congressional hearings regarding the current collapses of financial institution are ongoing at the time of this writing, but it is unclear at this point whether any laws were actually broken. As the lengthy prison sentences handed out to Enron executives illustrate, the actions of this group outpaced ethical considerations and proceeded to securities fraud, concealing evidence and other illegal acts. As of now, none of the executives involved in the collapse of the financial institutions are yet facing criminal charges. This fact illustrates a key point regarding these activities.
If executives can run decades-old financial institutions into the ground, bankrupt them, destroy their lending capabilities (which paralyzes corporate growth) and leave with multi-million dollar compensation packages without having broke the law, then clearly the law as it stands is inadequate. In the case of Enron, the executives knowingly engaged in fraudulent activities to the detriment to the company and its shareholders. The drive to maximize profits cannot outstrip ethical obligations of full and correct disclosure and fair trade practices. These standards are not only ethical in nature, but legal as well.
The law sets reasonable guidelines for practices that compel executives to act in the interest of their shareholders to the best of their ability, and in the case of Enron, they did not do so. The fact that these executives were knowingly breaking the law was illustrated clearly by their destruction of relevant records. This clearly illustrated the mindset of guilt that the people responsible had, and proved the likelihood of a significant cover-up effort. It is unclear at this point whether the same holds true for the authors of the current financial debacle. However, there are some key differences in the situations.
For one, unlike the Enron executives, the bank executives were inflating values of securities in a manner that benefitted their shareholders and borrowers as well as themselves. The second key difference is that these banks gained SEC exemptions that made what they were doing technically legal, if not particularly smart. The regulations governing energy sale in California contributed significantly in Enron’s ability to commits fraud and force a false energy crisis upon the state. (Griffin, 2006) Once prices were deregulated for energy in 1996, Enron determined a market plan that was predicated on short-term contract bidding for energy.
(Griffin, 2006) Essentially, Enron was maximizing profits by selling their commodity to the highest bidder. (Griffin, 2006) The problem with this system is it is not regulated, and executives at Enron decided to take advantage of the lack. (Griffin, 2006) Enron took advantage of the rules in three significant ways. (Griffin, 2006) First, they would shut down plants in certain areas forcing energy to come from marginal plants located nearby, and charged premium prices, that were additionally padded so that executives could skim off of the income. (Griffin, 2006) Enron also conducted “wash trades”.
(Griffin, 2006) These recorded sales and purchases of energy that never occurred. These trades are revenue-neutral for both parties, but the activity drives up index prices by creating a false demand for the energy. (Griffin, 2006) Finally, Enron itself place bids to occupy energy on the grid, creating artificial shortages, which they, in turn, would alleviate at premium prices. (Griffin, 2006) These practices, combined with an increase in demand coupled with a stable, but not increasing reserve volume of natural gas, helped cause the California Energy Crisis.
(Griffin, 2006) Then-Governor Grey Davis absorbed a significant amount of blame for the perceived energy crunch in California that followed from these practices, but he was in no way to blame. (Griffin, 2006) The policies that were manipulated were enacted by the legislature, not the Governor. (Griffin, 2006) Davis was also fighting the public perception that not only was he complicit in the crisis, but he was in contact with Kenneth Lay of Enron over the issue. (Griffin, 2006) Davis never denied this, but claimed it was a prerequisite to asking the federal government for aid.
When the Bush administration declined to offer aid, Davis, a Democrat, was recalled and replaced by Republican Arnold Schwarzenegger. (Griffin, 2006) The Stanly Milgrim experiments were invoked in the film, “The Smartest Guys in the Room” to explain why energy traders for Enron, who were aware of the damage caused by their activities, continued to act in the manner that they did. Milgram set up an experimental circumstance where subjects believed that they were causing bodily harm to another participant (actually, a confederate of the experimentor).
The variable being measured was how much pain (measured by voltage of electrical shock) would a subject be willing to administer under no compulsion other than being told by a person in a lab coat that they “must continue”. It was demonstrated through this experiment that up to 50% of subjects would give what they believed would be fatal shocks to others under virtually no duress, and with no promise of reward. It was suggested that Milgrim’s experiments proved that individuals would do things (such as shock a person to death) with nothing more than a verbal instruction from a perceived authority figure to prompt them.
From this, Milgrim concluded that unquestioned obedience to authority is a reaction that is very strong in most individuals. It should be noted that this argument had earlier failed to sway judges of the Nazis at Nuremburg, and later those who judged Callay guilty for the Mi Lay massacre. While this experiment does illustrate some insights regarding human nature and obedience, it does not explain, or really relate significantly to the situation regarding the energy traders at Enron.
For one thing, the Energy Traders, as evinced by their own recorded conversations, stood to gain significantly from their activity themselves. Their motivations clearly went well beyond “following orders” as they expected to be “able to retire at 30. ” The common element between the two circumstances (Milgrim’s Experiment and the Enron Traders) appears to be a perceived locus of responsibility. That is, the subjects/traders felt that whatever the consequences of their actions, blame and responsibility would fall solely upon the persons who issued the orders.In the case of the Enron Traders, this turned out to be true to a great extent. ?
References Griffin, L. (2006) “California Energy Crisis Meets Enron’s Ethical Catastrophe”. Retrieved December 8th, 2008 from McCombs School of Business Website: http://www. mccombs. utexas. edu/news/pressreleases/spence06. asp Weller, M. Miller, P. & Zhang L. (2001) “Moral Hazard and the US Stock Market: Analysing the ‘Greenspan put’” The Center for the Study of Globalization and Regionalization Working paper No. 83/01, November, 2001.
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