Econ 103 D
Economics In The News
“Taking Care of Business”
The Enron Story
The Crisis in Corporate Capitalism
Crotty Analysis and Video
“TAKING CARE OF BUSINESS”
Corporate Fraud Companies
Tyco Global Crossing
U.S. Foodservices Xerox
Martha Stewart/Omni Media First Boston Bank
Bank of America
The Enron Towers
The Enron Story: Cast of
Ken Lay, CEO
Jeff Skilling, COO (Later CEO)
Andrew Fastow, CFO
Sherron Watkins, VP in Corporate
Development and various other positions.
• Born Tyrone, MO (pop. 100) 1942
• B.A and M.A: Economics University of
Missouri. Phi Beta Kappa, President of
Fraternity. PhD. Economics University of
• Formed two close friendships, fellow student
Rich Kinder, protégé of Pinkney Walker
• Lay became fascinated with markets and how
they worked. He believed success went to the
man who could predict evolutionary changes.
Ken Lay cont…
• Job History: 1966 Senior Economist Humble Oil
and Refining Co. (predecessor of Exxon). 1981
President, Florida Gas. 1982 President and COO
Transco, a Houston pipeline company. 1985
CEO, Enron (Enron: merger of HNG and
• Politically Active: George Bush Sr., Ann
Richards-Texas Governor, Senator Phil Gramm,
George W. Bush
Ken Lay presents a silver platter to George H. W. Bush as
sons George W. and Jeb look on.
• Father sales rep for valve company.
• Childhood in Chicago
• B.A Finance-Southern Methodist University.
• Job History: Loan Officer, First City Bank.
Partner, McKinsey & Co. Consulting (Houston
Office). Enron used McKinsey as consulting
firm. Skilling hired by Lay away from
• Creating a new business model that could
change American capitalism forever.
Passion for commercial innovation in
services. Initially hired to run Enron gas
Jeff Skilling and
• Grew up in New Providence, NJ
• Father buyer for grocery/drug store, mother sold real
• B.A. in Chinese and Economics, Tufts. M.B.A. Kellog
School of Business, Northwestern University.
• Job History: Continental Bank. 1990 Director, Enron
Gas Services, responsibility for raising “off-balance-
sheet money”. 1996 Head, Enron Capital Management
New York Times, Oct 3, 2002
• B.A. Accounting w/honors University of
• Job History: 1988 Accountant, Arthur
Andersen. 1993 Director, Enron Gas
Services. Served in various positions 1993-
2001 including Vice President.
Enron: Brief History
• 1980s one of the largest pipeline companies in
North America. Moving natural gas from the
gulf coast across the U.S.
• 1990s expanded to include finance operations
for natural gas.
• Mid 1990s, started selling and trading electrical
power. Battling across the country to
deregulate entrenched electric utilities.
• Late 1990s took on internet/
telecommunications and “broadband”.
Natural gas pipe line in east Texas during 1960‟s.
Enron Stock 1999-2003
Enron Cast of Characters:
Their Stock Sales
Name Position Shares Sold Gross Proceeds
Ken Lay Chairman Enron co. 4,002,259 $184,494,426
Jeff Skilling CEO, Enron Corp. 1,307,678 $70,687,199
Andy Fastow CFO 687,445 $33,675,004
Robert Belfer Bd. Of Directors 2,065,137 $111,941,200
Lou Pai CEO, Enron Energy 3,912,205 $270,276,065
25 others Executives 8,814,233 $519,405,578
Totals: 20,788,957 $1,190,479,472
“the scale and scope of the
transgressions of the late 1990s
now coming to light, exceed
anything the U.S. has witnessed
since the years preceding the
The Wall Street Journal
Enron Stock Price
CEO LAY, LAWYERS, ACCOUNTANTS
SHOULD BE HELD LIABLE
Enron Corp.'s former chief Ken
Lay, its lawyers and accountants
should all be held liable for claims
against the bankrupt energy giant
a bankruptcy court examiner said
in a report filed on Monday.
-Reuters News Service Nov. 25, 2003
Regulating Electricity in California
1999-2000 Energy Crisis:
Real or Contrived?
• 1990s CA first state to deregulate
electricity. Goal: reduce rate payer bills by
10%. Deregulated wholesale energy market
kept price caps on retail side. Barred
utilities from long term fixed price contracts
forced them to buy in the spot market.
1999-2000 Energy Crisis:
Real or Contrived?
• Enron spent millions on supporting deregulation.
Promised to deliver power more efficiently.
Actually manipulated market to raise price.
– Created false congestion on power lines.
– Transferred energy in and out of CA to avoid price
– Charged for services never actually provided.
Enron: The Silver Peak Incident
• May 24th 1999, Timothy Belden, Enron
– Tried to send 2,900 megawatts of power over a
15 megawatt line to cause congestion.
Normally would have received an electronic
response which would have paid Enron to take
its power off the line. On this day he got a
phone call from the California‟s Independent
Later Government Investigations
• CA used less energy in July 2000 than in
the previous year.
• Demand in January 2001 was 10% lower
than in the previous year.
• Power usage in blackout days was lower
than in previous years.
• CA had built 170 new generation and co-
generation facilities in the 1990s.
Historical Relations between Big
Business and Big Government
• Federal government awards large contracts
and sets policies that can yield huge profits
for big business
• Big business has huge resources that can be
used to support and elect political
candidates of their choice
• “The Revolving Door”
(business gov. business)
President Dwight D. Eisenhower's
Farewell Speech to the Nation, 1961
Military Industrial Complex Speech
January 17, 1961 This conjunction of an immense military
establishment and a large arms industry is new in
the American experience. The total influence --
economic, political, even spiritual -- is felt in every
city, every State house, every office of the Federal
government. We recognize the imperative need for
this development. Yet we must not fail to
comprehend its grave implications. Our toil,
resources and livelihood are all involved; so is the
very structure of our society.
In the councils of government, we must guard
against the acquisition of unwarranted influence,
whether sought or unsought, by the military-
industrial complex. The potential for the disastrous
rise of misplaced power exists and will persist.
Corporate Fraud and the “New
Economy”: The Neoliberal
By Jim Crotty, CPE Economist
From The Popular Economist The Newsletter
for the Center for Popular Economics Fall
• Free or Open
• One who is liberal (open minded or not
strict) in the observance of orthodox,
traditional or established forms or ways
– Webster‟s Dictionary
Neoliberal System =
New Free Market System
• Stock Market Boom based on Fraud
– Accounting Firms (Arthur Anderson)
– Brokerage Firms (Merril Lynch, Smith)
• Few bad apples vs. Whole barrel?
• Greed of few or structural changes?
• Which makes greed more destructive and
destabilizing than before?
• Nat. Gov. regulated Domestic Business
vs. International Corp. with free reign.
• Global rate of growth of goods and
services declined in the 1980s and 1990s.
• Impossible for most large non-financial
(NFCs) to achieve adequate profit most of
The Changes: (cont.)
• Modern financial markets pressure NFCs
to achieve ever-rising profits.
• Ownership of U.S. corps. changing from
“patient” individual stock holders to
“impatient” institutional investors.
• Corps. that fail to raise stock prices
became vulnerable to hostile takeovers.
Therefore, managers had to raise stock
price or lose their jobs.
The Changes: (cont)
• Spreading use of stock options for management
(right to buy company stock). Subsequent price
increases generate capital gains for managers.
• SEC failure to regulate because of corporate
• Hostile takeovers loaded NFCs with a trillion
dollars of additional debt.
• Corporate cash flow diverted from productive
investments to financial markets.
What‟s Going On?
• The Problem:
– Major stock brokerage firms gave incorrect and
misleading recommendations to investor
customers for companies whose accounts they
– Salomon, Smith Barney; Merril Lynch; Credit
Suisse First Boston
Corporate Fraud in America
The Proposed Solution
• Congressional action. The Sarbanes-Oxley
Corporate Reform Act (7/02). Creates the
Public Company Accounting Oversight
• Non-Profit Corp. overseen by the SEC.
• Duties: Register public accounting firms,
set standards, conduct investigations, can
Webster, Herdman & Pitt
• John Biggs, Head of TIAA-CREF (College
Investment Fund) first considered for Chair of
Oversight Board. Pressure from lobbyists to nix
his nomination (fear or over-activism).
• Webster appointed as Chair on Oct 25 th.
Tells Pitt and Herdman (before appt.) that he
headed audit committee for U.S. Technologies,
whose CEO had been accused of fraud. Further
irregularities involving Webster are discovered.
Markets Efficient If:
1. Identical products
2. Large number of buyers and sellers
3. B.&S. have perfect (accurate) information
4. No barriers to firms entering or leaving the
5. Satisfactory government infrastructure
Laws (and enforcement of laws) to prevent
Stable Monetary System
Corporate Fraud: Accounting and
• Arthur Andersen
• Merrill Lynch
• Salomon Smith Barney
A room staffed with telemarketers who
use illegal or high-pressure sales tactics to
sell stock, commodities, currency, or land,
Foreign Currency Fraud
• “With more than 1,000 victims, from small
investors to large banks, the losses are in the
– NYT, 11/20/03
• “When the F.B.I. placed an undercover agent in
the foreign exchange world, posing as a bad guy
with money looking for bad things to do, he had
more criminal schemes thrown at him than he
– James Comey. U.S. Attorney
• Mr. Comey: “similar rigged trading involving
bank traders has been defrauding banks for as long
as 20 years. That history and the fact that so many
individuals could apparently pull off the rigged
trading and get caught only after an F.B. I. agent
became involved may serve as warning: the
largely unregulated foreign exchange market, with
trading volume of $1 trillion a day, is vulnerable,
and banks‟ internal controls may not be strict
Mutual Fund Fraud
• Janus, Strong, Bank of America and Bank
One charged with allowing big institutional
clients to trade their funds after the market
– Motley Fool Newsletter 11/21/03
Honesty in the U.S.A.
• Jessica Lynch
• Nate Haasis
Honesty in the U.S.A.
• Nate Haasis, Quarterback for Springfield
Southeast High School (Illinois), set High School
conference passing record after coaches rigged the
pass to break the record.
• Haasis wrote to High School Football conference
asking them to take the record back. “I didn‟t feel
right having it.” “It‟s for past and present football
players, I felt disrespectful when I had the record
the way I got it.”
• A friend said “Haasis didn‟t want to be
remembered for a 30-yard „given‟ pass; he wanted
to be remember for the yards that he actually
• Chairman, Harvey Pitt, resigned 11/5/02
• Robert Herdman, Chief Accountant,
• Chairman of New Accounting Oversight
Board, William Webster, resigned 11/12/02.
“Webster Resigns as Head of
Board to Oversee Audits”
New Panel is in Turmoil
Move Plunges U.S. Response to
Scandal at Corporations Further into
The Securities and Exchange
• Primary Mission: Protect investors and
maintain the integrity of security
Rebecca Mark on Enron jet. She was named vice
chairman of the Enron board.