Enron et al—The Fiasco of the New US-style
Corruption, fraud, influence peddling, mega-salaries,
privatizations, deregulation of the economy and more…
Everywhere in the world we deal with these realities
with increasing amazement each passing day.
Another economic system has to be possible.
From the late 1990s until 2001, American capitalism was held up as the model. The US President and the chairman of the Federal Reserve did not hesitate to speak of US “genius.” In Europe, most journalists and politicians, including those of the Socialist and Labor parties, followed suit. This model spread gradually to the management of “European” multinationals (Vivendi, Vodafone, Arcelor…) with the encouragement of governments of all political hues and the European Commission. The most frequently heard critics only called for greater speed in applying it. In May 2001, the Jospin government, known as the plural left, had France’s National Assembly pass a law on “new economic regulations” that was directly inspired by the US model still in vogue at the time.
At the end of the 1980s, Japan and Germany had been seen as the models to imitate, but a few years later, Japan sank into a deep crisis from which it has still not re-emerged in 2003. Germany, although in a better situation than Japan, has still not completed the reunification process begun in 1991. Between 1993 and mid-1997, the model was given as South Korea, Thailand and Malaysia, but they were later hit by the East Asian crisis. In short, models may be all the rage but they do not usually last long.
The “New Capitalism: A fiasco and a dramaFar from recognizing the non-reproducible and artificial nature of the US growth achieved between 1995 and 2000 (formation of a stock-market bubble, credit inflation and the enormous influx of European and Japanese capital), potential imitators round the world were mesmerized by the idea of corporate governance. Meant to resolve the conflict between shareholders’ and managers’ interests, corporate governance was seen as being in the best interests of shareholders, most of whom were now institutional investors: pension funds, insurance companies, investment banks.
Indeed, according to its proponents, managers seek to enhance their power and pay by taking advantage of the privileged information they are privy to through their job in the company. “Corporate government” sets its sights on preventing this, on reducing the “information imbalance” between shareholders and managers. The idea is to oblige managers to provide regular information to shareholders via quarterly reports, to incite them to run the business in the shareholders’ interests, doing everything possible to increase the value of shares. To achieve this aim, managers’ pay is (generally) proportionate to the company’s profits.
One of the main techniques used is stock options, whereby executives and managerial staff are offered the opportunity (“buy options”) to acquire shares in the company at lower rates than those on the stock market and sell them off in the future when their value has increased. This is supposed to incite them to make decisions that will obtain a higher share-value on the stock market and increase dividends, which is obviously in the interests of shareholders (i.e. themselves).
What was presented as a new kind of capitalism, however, has turned out to be a disastrous fiasco from the capitalist point of view and a social tragedy for wage earners. From 2001-2002 on, memories of the late 1920s and the crisis of the 1930s have been awakened bybankruptcies on a monumental scale and repeated scandals pointing up systematic criminal practice.
1998 to 2000: A gigantic financial bubbleThe succession of scandals in 2001 and 2002 was preceded by the growth of a stock-market bubble on an international scale from 1998 to 2000 (especially in North America and Europe). Share prices on the Stock Exchange rocketed and the volume of stock-market capitalization expanded impressively.
The growing bubble triggered a mad rush of clearly unviable merger-acquisitions and massive investments (especially in telecommunications and information technology) quite unrelated to any real possibility of selling the products. The bubble hid a phenomenon of great concern to capitalists: a major fall in company profits from 1997 to 1998. In the euphoria of the exuberant markets, institutional investors closed their eyes to the completely speculative and disproportionate nature of the stock market value of companies, some of which—particularly many “start-up” companies—had no profits.
In their frenzied rush to increase prices on the Stock Exchange, managers took their companies into high levels of debt, in full view of the shareholders, in part to buy up other companies in the same sector. (For a given company, one of the aims of these takeovers was to get as big as possible to avoid being taken over by others.)
A second objective in incurring debt was for the company to buy up its own shares on the Stock Market to keep prices high. The method was widespread: 273 companies bought up their own shares to a total of over 11 billion euros on the Paris Stock Exchange in 2002.
Company debt in the US progressed phenomenally in the late 1990s (as did household debt, enabling a high level of consumption to be maintained). The exuberance of the Stock Market, the massive indebtedness of companies, their takeover and merger frenzy, the high level of investment in certain sectors (to increase production capacity) and the tendency for households to consume more using more and more credit, all produced what was called “the wealth effect.” Many pro-capitalist commentators glorified it as “the new economy.”
When the bubble deflated, all manner of tricks ensuedWhen the stock-market bubble showed signs of imploding and prices began to fall in the second half of 2000, CEOs falsified their accounts to simulate profits and convince “the markets” to keep on buying their shares. They further increased “their” company’s debt to buy even more shares to maintain share prices. Some companies pumped up their operating revenues any way they could to fake continued growth. Faced with cheating on such a scale, the US monetary authorities—Alan Greenspan, president of the Federal Reserve, then US treasury secretary Larry Summers and Paul O’Neill, who succeeded him—hypocritically pretended not to know what was going on and made a show of total confidence in the presiding genius of the markets. Yet the practices of directors of companies such as Enron were well known. President G. W. Bush and Vice President Dick Cheney had resorted to such practices themselves a few years before. Greenspan, for his part, had saved the hedge fund LTCM in September 1998 and knew what erring ways had led to its bankruptcy.
The US authorities hoped that, by some miracle, the Stock Exchange would see prices rise again. In fact, it was quite a different story. The downward spiral of stock market prices all over the planet revealed the plight of a number of companies in the US (and elsewhere) that had embellished their accounts. Like gamblers hoping to pick up again quickly, they took ever greater risks and borrowed heavily in the hopes of wiping out their debts. Between March and November 2000, with the fall of stock market values and the partial deflation of the stock market bubble, over US$15 trillion went up in smoke worldwide—$7 trillion in the United States alone.
The Enron scandal: An emblematic case Enron’s rise, fall and bankruptcy will have a special place in the sordid history of capitalist globalization. On seven occasions, Fortune had awarded it the title of Most Innovative Company. On December 2, 2001, when Enron went down, it was considered the biggest bankruptcy case in history, but WorldCom rapidly superseded it.
Before declaring bankruptcy, Enron’s directors helped themselves to over $700 million from the till. The bankruptcy caused losses of $26 billion to shareholders and $31 billion to banks. In all, Enron and its 800 subsidiary companies had employed almost 25,000 staff around the world. Most employees of the parent company were made redundant with a mere $16,500 dollars a head severance pay and some 1,200 of them lost 90% of the value of their pension savings.
As a brokerage firm, Enron speculated on raw materials (oil, gas, aluminum, coal, forests for wood pulp), electrical energy and water, and also on the derivatives markets (one of Enron’s innovations was a derivative product protecting its holders from the effects of climate change!). The company had operations in 40 countries, with electric power stations in India, forests in Scandinavia, and activities in the former Soviet republics. At the time of the bankruptcy, it was trying to buy up the energy sector in the Czech Republic. Enron made 25% of its revenues outside the United States. At its height, it controlled 20% of the electricity market in the US and Europe.
Enron used subterfuge to systematically evade taxes due to the US Treasury and to other countries where it operated. It created 874 subsidiary companies registered in tax havens, where taxation was low or non-existent; 195 of them were in the Cayman Islands. By declaring its profits there, no income tax had to be paid to the US Treasury over the last five years of its existence.
Another subterfuge was to file an official tax declaration containing different information on company accounts from that presented to shareholders. To the taxman, stock options were counted as a cost. For the shareholders, who needed to be shown proof of continued growth, stock options were not included in the balance sheet. Because Enron wanted to hide its losses and debts from the money markets so its shares would remain attractive, the company’s true state had to be concealed. To avoid unwanted scrutiny, Enron’s financial report did not include the records of the whole Enron group.
This manipulation and concealment was possible because Enron paid for the cooperation of all those responsible for monitoring the company’s financial health by sharing out the spoils with them: the auditors (Arthur Andersen), the investment banks (Merrill Lynch, Morgan Stanley…) and the commercial banks (Citigroup, JP Morgan).
Enron and the deregulationEnron’s operating revenues had taken a great leap forward at the end of 1992 when it obtained exemption from government control over its speculative activities on the derivatives markets. Enron systematically paid out hush money to Democratic and Republican representatives. Over twelve years (1991-2002), it made gift payments into the kitties of both parties’ candidates totaling over $5.5 million (75% to the Republicans, 25% to the Democrats).
of the US electricity market
This ranks Enron among the most “generous” US corporate contributors to the two capitalist parties who take turns in office in the United States. The Republican politician who received the most money was Senator Phil Gramm who, in exchange, used his influence to further Enron’s objectives in deregulating the electricity market.
His wife, Wendy Gramm, had served in the administrations of both Ronald Reagan and George Bush Sr. In 1992, she got the Commodity Futures Trading Commission (CFTC), which she presided at the time, to exempt Enron from its obligation to report on its operations on the derivative products markets. She pushed this decision through with unseemly haste in the very last days of the George Bush Sr. administration. Six days later she resigned, and five weeks after that she was hired onto Enron’s board of directors, where she headed the audit committee, giving her privileged access to a great quantity of financial information. While she was also privy to the scale of account manipulation and criminal financial activity underway at the company, she said nothing to authorities. Between 1993 and 2001, she earned over $915,000.
The California electricity scamThe deregulation of the US energy market started in 1996, during the Clinton presidency. The privatization of numerous public companies producing and distributing electricity was a great boon to companies like Enron. In 1999-2000, it spent $3.5 million on political lobbying to get even greater deregulation of the energy market.
In December 2000, Senator Gramm got the change in legislation that Enron wanted. The company took the opportunity to create a new subsidiary, EnronOnline, which soon controlled California’s electricity and natural gas markets. After the change in legislation, that state’s electricity supply deteriorated rapidly, with continual electricity cuts, to the point that a state of emergency was decreed 38 times during the first half of 2001. Over the same period, Enron’s revenues doubled.
How did Enron’s behavior contribute to creating this crisis and how did it profit from it? First it is important to mention that Enron did not produce energy in California (or at least, very little). Its activity consisted of buying electricity from producers and selling it to the state, to companies and to households. In 2002, several enquiries, particularly some based on internal company documents and on the admissions of Timothy Belden, formerly responsible for commissioning electricity for the West Coast of the United States, showed that Enron had deliberately caused electricity shortages by sending electricity out of the state, only to bring it back in and sell it at bloated prices. This type of operation was nicknamed “Operation Ricochet” within the company.
Enron also used another type of operation, a variation on the first. The idea was to put out a rumor announcing an electricity shortage, then pretend to buy electricity from another state, allegedly for California consumers. In fact, this electricity, sold at extortionate rates, did not come from outside, but from California itself. This operation was known inside the company as “death star.” All this was made possible by the exemption of Enron and its subsidiaries (mainly EnronOnline) from any controls.
In 1999-2000, Enron contributed $1.14 million to George W. Bush’s presidential campaign. In return, Bush, once elected, prevented Congress from taking action to reinstate public price controls on the West Coast electricity market. Not until June 19, 2001, did Congress (where the Democrats had a slight majority) vote to bring back price controls at last, despite President Bush and Enron’s other political supporters. The time wasted by President Bush’s stalling tactics cost the government and California consumers billions of extra dollars.
In the midst of the crisis, secondary players, i.e. private California electricity-producing companies, were singled out for blame, accused of not having invested enough in improving their productivity. While the charges were fair, these companies were neither solely nor mainly responsible. The Republicans, especially President Bush and Finance Secretary Paul O’Neill (asked to resign in December 2002), blamed the crisis on local authorities (the governor of California was a Democrat) and insisted that deregulation was beneficial. Analysis reveals that Enron (and a few others of the same ilk) were most responsible for the power cuts, by deliberately causing the shortages as explained above. Evidence for this is that the single case of “state of emergency no. 3” for energy (declared when operational electricity reserves fall below 1.5%, forcing authorities to carry out massive electricity cuts to increase the “reserves”) in 2000 rose to 38 such cases in the first half of 2001, precisely during the period when Enron had complete freedom to manipulate the markets through its subsidiary EnronOnline. In the second half of 2001, after Congress abolished the deregulation measures, there was again not a single case of “state of emergency no. 3.”
Enron’s Decline Enron’s rise had seemed irresistible. The story began in 1984, when 42-year-old Kenneth Lay, former Undersecretary of State for Energy under Ronald Reagan, took over management of Houston Natural Gas, which was to become Enron. Between 1990 and 2000, its income rose 1,750 %. On December 21, 1991, Enron shares were priced at $21.50; by August 7, 2000, they had climbed to $90; by December 3, 2001 (the day after bankruptcy was declared), they had fallen to $1.01. Enron’s recorded sales had quadrupled—from $12 billion to $48 billion—between 2000 and 2001 alone, with Enron declaring profits of $401 million in August 2001. Three months later, on October 26, it admitted to losses of $618 million.
The fall was precipitated by a return to more regulation in June 2001, as has just been seen, but the seeds of the crisis were sown much earlier. Stock market capitalization of the company, and for most other US companies, had shown a tendency to fall off since 2000, as had real profits.
To keep Enron’s shares attractive, the CEO had artificially bloated the company’s accounts by recording bank loans as income (especially those granted by the leading world bank group, Citigroup, and by JP Morgan) and other operations. To conceal the losses, they were simply removed from the financial report. With the same aim of maintaining the highest possible price on the Stock Exchange, management had Enron buy up its own shares on a massive scale. Still in the same vein, Enron’s employee Pension Fund was encouraged to increase the proportion of Enron shares in its portfolio to 62%. But in July 2001, while Enron boss Kenneth Lay was inviting his employees to buy Enron shares, he was secretly selling his own off and pocketing a large profit margin over the price he had paid for them as stock options. Between November 2000 and July 31, 2001, he sold 672,000 shares of the company he headed, which only accelerated the collapse of its share prices. At the same time, employees were forbidden from selling their shares as the Enron Pension Fund was undergoing structural reorganization and all operations had to cease.
Kenneth Lay: Jesus was a markets guyThe son of a Baptist minister, Lay was quoted in The San Diego Tribune on February 2, 2001, as saying, “I believe in God and I believe in free markets. That’s the fairest way to allocate and price resources. It does create more wealth and a higher standard of living for people than any other alternative. That ought to be the conclusive statement on markets…. Certainly Jesus attempted to take care of the people around him, attempted to make their lives better. He also was a freedom lover. He wanted people to have the freedom to make choices. The freer the country in terms of its market and political system, the higher the standard of living of the people.”
Jeffrey Skilling, his predecessor as Enron CEO, tended to tell it more like it is: “You must cut jobs ruthlessly by 50% or 60%. Depopulate. Get rid of people. They gum up the works.” In the year 2000 alone, Skilling, while still the executive director, pocketed $62.5 million of stock options. He resigned on August 14, 2001, selling 500,000 of his shares a month later. Lay took over the responsibilities of CEO and vice president.
On October 16, Enron recorded a third-term net loss of $618 million dollars and a week later announced that the Securities Exchange Commission (SEC) had opened an internal enquiry into the company. After reassuring investors at the stockholders’ meeting, Lay approached federal authorities in the Department of Commerce to try to hush up negative information from the brokerage firm Moody’s about Enron’s creditworthiness. On November 9, Dynegy, a rival company in the energy sector, announced it was considering taking over Enron for $9 billion, but by the end of the month, the Dynegy/Enron merger fell through because Dynergy was also spattered by scandal at the time and could not carry its project through. On December 2, Enron was adjudged bankrupt, but its shares remained on the stock market. Not until June 2003 did the Federal Energy Regulatory Commission ban Enron from selling power in the US and the Labor Department announce plans to sue the company, alleging that its actions led to huge losses in employee retirement accounts. The Enron trial began in December.
The Bush family and EnronBoth the Bush family and Enron are based in Texas and have their main economic interests there. Enron and both George Bush Sr. and Jr. have constantly had interests in common, including oil. In 1988, George W. Bush used his influence on the Argentine minister of public works to get a contract involving a pipeline in Enron’s favor. Once he had become governor of Texas, he allowed Enron to violate the state’s anti-pollution laws. Later, Enron had no trouble persuading him to reject the Kyoto Agreement on global warming and greenhouse gas emissions.
George Bush Jr. began his business career in the early 1980s at the head of a small oil company called Spectrum 7 Energy, which was bought out in 1986 by Harken Energy. He received 200,000 Harken shares, a place on the board of directors and a consultancy contract worth $125,000 a year. He was criticized for using his post to get a $180,000 loan with which he bought 105,000 more shares via stock options, a practice that, as President, he put a stop to in 2002. He was also accused of having sold a very large number of those shares at $848,560 two months before Harken announced unprecedented losses of $23.2 million and share prices dropped to half the value he had sold his for. As an administrator, Bush knew of the company’s poor health before dumping his stock—precisely the kind of behavior for which he later criticized the directors of Enron, WorldCom, etc.
George W. Bush is not the only highly placed politician whose business practices have come under fire. It is reported that in August 2000, while Vice President Richard Cheney was the CEO of Halliburton, world leader in petroleum research, (in 2003 under the Bush Administration, Halliburton was involved in operations to check Iraqi oil-production), he made a profit of $18.5 million by selling over 600,000 of his company’s shares. Two months later, the company announced poor results and the share price dropped dramatically.
In 2002, revelations of George W. Bush’s insider trading and his policies favoring big capital rattled US public opinion. A poll conducted in July 2002 for The Washington Post and ABC found that 54% of respondents thought President Bush’s measures against management fraud were “not severe enough.” In another poll published by The New York Times and CBS in the same period, two thirds of those consulted were convinced that the Bush administration preferred to defend big business rather than citizens, and 57% thought the President was hiding something or lying about his past management of Harken Energy. When war broke out against Iraq in March 2003, it came just at the right time to focus public opinion on other issues.
WorldCom: An even more monumental scandalThe WorldCom scandal followed on Enron’s heels. Like Enron, WorldCom was a star, symbolizing the euphoric America of the late 1990s. Like Enron colleague Kenneth Lay, the company’s founder Bernard Ebbers was the darling of the financial world and press. Within about ten years, WorldCom had gone from a little start-up company to a full-blown empire, threatening ATT, the longstanding giant of the telecommunications sector. As the USA’s second long-distance telecommunications operator and world leader in Internet services, it employed a workforce of 85,000 and had 20 million subscribers in 65 countries. Between 1998 and 1999, WorldCom shares on the stock market increased in value six-fold. The company’s revenues for 2000 totaled US$35 billion, but when it filed for protection under Chapter 11 of the US federal Bankruptcy Code, it was $41 billion in debt.
As with Enron, the fall was sudden and hard. Between January 1, 2002, and its declaration of bankruptcy on July 21, WorldCom shares lost 99.38 % of their value. And also like Enron, WorldCom systematically cooked its books. After the SEC enquiry was opened in March 2002, the directors admitted to having fiddled the accounts to the level of $9 billion.
Collusion by collateral playersThese and the many other companies involved in scandals being investigated by the SEC, including Dynergy and AOL Time Warner, did not hoodwink stockholders and others alone. They required cooperation from other players in the business world.
The business banks: The main US investment banks— Merrill Lynch, Morgan Stanley, Credit Suisse First Boston (Credit Suisse Group), Salomon Smith Barney (Citigroup), Goldman Sachs—played a very active role in the fraudulent practices behind all these scandals.
These investment banks perform several functions, one of which is to analyze the financial health of companies to advise investors on the stock market. This includes recommending buying or selling shares in this or that company and managing very big portfolios of shares for themselves and for third parties such as Pension Funds, which entrust them with huge amounts to invest on the Stock Exchange. They also deal with bringing companies onto the stock market and issue loans when companies, states or municipalities want to raise funds on the money markets. Some of them, such as Credit Suisse First Boston and Salomon Smith Barney, are the business-banking affiliate of a larger banking group, allowed by the repeal of the Glass-Steagall Act in 1999.
The Glass-Steagall Act had been passed in 1933 during the Depression to separate investment banks (holdings companies) and savings banks and thus avoid repeated catastrophic bankruptcies of financial institutions that combined the collection of savings with stock-market investments and capital participation in businesses. In 1999, in full neoliberal euphoria with the financialization of the economy proceeding apace, big groups like Citibank were successful in influencing the Clinton administration to get the obstacles to their expansion removed.
All of these investment banks have been accused of collusion with the directors of Enron, WorldCom and other bankrupt companies. Authorities have plenty of evidence, made public in April 2003, that analysts from these banks deliberately issued recommendations to buy shares in companies that they knew very well were in difficulty. They did it because the business banks that employed them were themselves shareholders in the companies concerned. A fall in their stock-market value would have gone against the interests of the business bank.
The rating agencies: Three firms dominate the rating agencies sector on the global market. Two are American (Moody’s and Standard & Poor’s); the other is French (Fitch). These three companies evaluate the financial health and seriousness of all big borrowers: states, municipalities, companies and investment funds. The ratings they assign play a decisive role in fixing the interest rates that borrowers will have to pay to their creditors. With a debt volume of US$30,000 billion in 2002, they obviously wield considerable power. These agencies are anything but independent of the companies they rate, which are the ones who pay them, although in some cases they give unsolicited rates—usually less favorable than if they had been paid for to force the clients to use their services.
These companies have been strongly criticized for the role they played during the crises of the 1990s. In addition to being particularly targeted during the East Asian crisis of 1997-1998 for maintaining favorable judgments of private East Asian companies when they were borrowing massively and had been in difficulty since 1996, they have also come in for heavy criticism of their role in the various US scandals that broke out in 2001-2002. In 2001, Moody’s maintained a very high rating for Enron just as it was hanging on the cliff edge.
Audit firms: The Enron affair brought to light the collusion between Enron’s directors and Arthur Andersen, the audit firm responsible for checking the accounts, in which the latter was found guilty of obstruction of justice in June 2002 and forced out of business. Arthur Andersen had helped disguise the accounts for Enron, which had paid it US$50 million in 2000 for all the different services rendered. To get rid of the evidence of its collusion, Arthur Andersen destroyed tens of thousands of compromising documents in October 2001 when the SEC began its investigation.
Clearly, connivance between audit firms and the companies whose accounts they review is widespread; Arthur Andersen is no exception. Indeed, the four other leading audit firms—Price Waterhouse Coopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young—are all under investigation by the SEC. Before Arthur Andersen went bankrupt, these five audit firms had control of almost the entire global auditing market.
Audit firms have other functions than merely checking company accounts. Their main source of income comes from the advice they proffer. For every dollar earned through auditing, they earn three more as consultants.
A half-hearted attempt to clean up the situationIn 2002, no fewer than 25 big companies, 150 CEOs or top executives (45 of whom intend to plead guilty) came under full investigation and/or became the object of legal proceedings on behalf of the market watchdog, the SEC, and the Justice Department. The charges include falsification of accounts, insider dealing, personal enrichment at the company’s expense, tax evasion, association to commit offenses and obstruction of justice. Criminal behavior has become so widespread and general that the US President had to intervene directly to threaten CEOs with prison.
Federal Reserve chairman Alan Greenspan presents things philosophically: “It’s not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously. Thus our market system depends critically on trust—trust in the word of our colleagues and trust in the word of those with whom we do business. Falsification and fraud are highly destructive to free-market capitalism and, more broadly, to the underpinnings of our society.”
In August 2002, nearly 2,500 CEOs were legally obliged for the first time to certify and sign off on their company’s accounts. The threat of the big stick was to force them to clean up their accountancy in a desperate attempt to restore public confidence and avoid what could result in a cascade of bankruptcies. On the whole, the executive and legal authorities have stopped at mere intimidation, however; no sitting CEO was locked up in 2002, despite having accumulated tens, even hundreds, of millions of dollars through criminal behavior, causing bankruptcies that drove some redundant employees to suicide, ruining hundreds of thousands of lives and costing taxpayers hundreds of billions of dollars. Meanwhile, for minor crimes such as shoplifting, tens of thousands of ordinary US citizens languish in overcrowded prisons. Between George W. Bush and his predecessor Bill Clinton, the politics of double standards has carried on regardless: prison for the poor and golden retirements for rich friends.
In September 2002, Congress passed a law called the Sarbanes-Oxley Act, aimed at preventing the repetition of the kind of behavior revealed by Enron, WorldCom, etc. The law provides tougher sentences for different financial crimes. Penalties for obstructing the course of justice and destroying vital evidence were doubled to a maximum twenty years in prison. Concerted operations with the intent to deceive shareholders are henceforth considered criminal offenses liable to ten years’ incarceration. A false declaration is punishable by twenty years’ imprisonment. Banks and brokerage firms are forbidden from penalizing analysts who produce unfavorable opinions on client companies. Directors are no longer entitled to privileged loans from their companies.
The winners and the losers In the end, however, CEOs and capitalist companies alike got off lightly. The fines that companies were (or will be) sentenced to pay can be deducted from taxable income. If this weren’t enough, George W. pushed through a law in 2002 by which dividends distributed among shareholders are now also deductible. Just a little booster to get the motor started again, with the usual suspects in the driver’s seat.
While the bosses got off lightly thanks to the good graces of the executive and legislative authorities, things were less rosy for the workers. Company profits were on the rise again in 2002, according to the World Bank report of April 2003, but workers’ pensions are still under threat. The “pay-as-you-go” pension system is rare in the US and those entitled to it draw only a small income of about 40% of their salary. Under the Reagan administration, the already widespread system of pensions by capitalization was strongly encouraged within the framework of what was known as the 401 K plan (enacted in 1982). As long as the stock markets were rising, even euphoric, this system seemed highly attractive to some, as a large proportion of workers’ savings was invested in the form of shares.
Then what had to happen, happened: 40 million workers with a 401 K plan pension-scheme found themselves in trouble as they had neither guarantee nor security. Their savings, which totaled about $1.5 trillion, were put on a forced slimming diet to the tune of $175 billion a year following a series of auditing scandals, bankruptcies and a creeping stock-market crash. Workers from Enron, Global Crossing and WorldCom with 401 K plan pension schemes lost practically everything. Many companies had invested their employees’ savings in their own shares, hardly even consulting the workers about it. Some examples for 2001 are Procter & Gamble’s 401 K plan whereby 94.7% of savings were invested in the company; Coca Cola, 81.5%; General Electric, 77.4%; Texas Instruments, 75.7%; McDonald, 74.3%; Enron, 62%.
The other major category of workers whose pension depends on the system by capitalization is the 44 million private sector workers. They are part of a pension scheme known as “defined benefit” (which predates the “defined contribution” 401 K plans). A large number of workers in the automobile, air transport, metallurgy, petroleum, pharmacy and telecommunications sectors depend on this system, which guarantees a fixed monthly income paid by the company they work for. Unlike the 401 K plans, they do not depend on the ups and downs of the stock market…in theory.
The trouble is that the companies responsible for financing these funds have not done so sufficiently. The situation is all the more serious as company revenues are falling and a large proportion of the funds to finance pensions come from profits on capital placed on the Stock Exchange by the companies. According to studies published in 2002, 26 large companies should see their financial situation deteriorate when they re-float their pension funds and some would be forced into insolvency.
The biggest pension funds in the US are those of the civil service, and the biggest of those is the California Public Employees Retirement System (Calpers), with assets of US$150 billion spread over 1,800 companies in 2002. Total assets for all the different civil service pension funds came to over US$1.5 trillion. Calpers lost US$585 million in the bankruptcy of WorldCom alone, while Enron’s failure resulted in a loss of US$300 million for the third largest civil service pension fund.
Salaries: An adjustment variableDuring periods of economic slowdown, when companies face falling profits and exacerbated competition, the workforce is the main adjustment variable to ensure improvement or stabilization of the company’s results. The first item to get axed is both staff and staff pay. Shareholders do not want economic uncertainty; they want the workers to bear the burden of risk.
Since the Ronald Reagan and Margaret Thatcher years, the gap between workers’ pay and that of the CEOs (who are capitalists, even though they are paid a salary) has widened dramatically. According to Business Week, the average managing director (CEO in US parlance) earned 42 times more than a blue-collar worker in 1980, 85 times more in 1990 and 531 times more in 2000.
A similar state of affairs exists beyond the US borders. In 2001, while Vivendi Universal was sliding into the red, Jean-Marie Messier’s salary increased by 19% (a 66% rise after tax). Unbeknownst to shareholders, Jean-Marie Messier sold more than 300,000 shares at the end of December 2001, yet in May 2002 he claimed he was still buying them. In Switzerland, Mario Corti, top director of Swissair, received 8.3 million euros to turn the failing airline company around; a few months later, it went bankrupt.
CEO pay is made up of a salary, stock options (which, on average, represented twice the salary in 1999-2000), and bonuses. Add to that a golden retirement pension, the provision of one or several flats, unlimited expenses, use of one or more cars, a chauffeur and sometimes even an airplane, not to mention the revenue earned from their capital and gifts from client companies (which include packages of free shares). The stock options that were all the rage in the 1990s and until 2001 also netted colossal sums of money for several thousand CEOs.
Obviously, if there are winners, there must be losers. These are on the side not only of the workers but also of the public treasury and modest taxpayers. Indeed, the way companies accounted stock options did the US Treasury out of $56.4 billion in 2000.
What crowns it all are the fabulous severance packages for bosses who led their companies to bankruptcy. ABB’s CEO Percy Barnevik, who left behind a shortfall of 793 million euros, received 98 million as a severance package in 2002. This is the very man who provided an infamous definition of globalization: “I would define globalization as the freedom for my group to invest wherever it likes, for as long as it likes, to produce whatever it likes, buying and selling wherever it likes, and having to bear the fewest possible constraints as regards labor laws and social conventions.” The proponent of this viewpoint was also the creator of the informal Global Compact in 2000 between the UN and the planet’s main transnationals, officially designed to promote a “code of good conduct” for transnationals in the Third World. In fact, it ensures extra money for the UN from the private sector in exchange for which the donor transnationals gain a little respectability.
Need these crises concern the rest of the world? Twenty years of deregulation and market liberalization on a planetary scale have eliminated all the safety barriers that might have prevented the cascade effect of crises of the Enron type. All capitalist companies of the Triad and emerging markets have evolved, some with their own variations, on the same lines as in the United States. The planet’s private banking and financial institutions (as well as insurance companies) are in a bad way, having adopted ever riskier practices. The big industrial groups have all undergone a high degree of financialization and they, too, are very vulnerable. The succession of scandals shows just how vacuous the declarations of US leaders and their admirers around the globe are (see Ahold, Parmalat,…).
A mechanism equivalent to several time bombs is underway on the scale of all the planet’s economies. To name just a few of those bombs: over-indebtedness of companies and households, the derivatives market (which in the words of billionaire Warren Buffet are “financial weapons of mass destruction”), the property speculation bubble (most explosive in the US and the UK) and the crisis of insurance companies and pension funds. It is time to defuse these bombs and think of another way of doing things, in the United States and elsewhere. But it is of course not enough to defuse the bombs and dream of another possible world. We have to grapple with the roots of the problems by redistributing wealth on the basis of social justice.
Eric Toussaint is a political scientist and historian, president of CADTM (Committee for the Abolition of the Third World Debt). This article was translated by Vicki Briault Manus, extracted and edited by envío. For more information: www.cadtm.org