Commentary: There's No Positive Spin on This One, Mr. Lindsey

By Howard Gleckman

Even after three decades in Washington, I occasionally hear something so stunningly wrongheaded that it takes my breath away. That's what happened on Jan. 6, when chief White House economic adviser Lawrence B. Lindsey called the Enron Corp. (ENE ) collapse a "tribute to American capitalism." And all this time I thought the demise of what was once the seventh-biggest company in the nation was a massive failure of our modern market economy.

For Lindsey, the great achievement of Enron's fall was that the government let it happen, despite the company's political connections. That's true as far as it goes. And it is nice to know that the U.S. isn't, say, Argentina, where a severe case of crony capitalism helped bring down the economy.

But Enron fell so far so fast that there was nothing its political patrons could do. Once it became clear that the company had repeatedly misstated earnings and, most important, that its employees' 401(k) investments had evaporated, Enron became radioactive. By the time Chairman Kenneth L. Lay called top Administration officials in October, their response was preordained. The man President George W. Bush used to call "Kenny Boy" wasn't going to get any help, despite years of heavy campaign contributions.

Lindsey may find it praiseworthy that Washington didn't throw together a last-minute bailout of Enron, but he ignores all that happened before Lay made his phone calls.

You can start in the '90s. That's when the Commodity Futures Trading Commission decided to let Enron and a handful of other companies run largely unregulated energy-trading businesses. Then, two years ago, Enron used its political clout to get Congress to exempt it from both CFTC and Securities & Exchange Commission regulation of what had become, in essence, a publicly traded hedge fund making its own highly speculative investments.

And, of course, there were the company's internal dealings. For at least four years, Enron misrepresented its earnings by $400 million or more. Top managers were selling chunks of company stock even as its employees were barred from doing so. And Enron's outside directors, the people charged with the responsibility to protect shareholders from the mistakes or avarice of management, seemed to have missed it all.

Capitalism works only when it is played on a level field. The essence of efficient markets, as Lindsey knows better than I, is transparency--the ability of every shareholder to know, more or less, what every other shareholder knows.

But modern American capitalism failed the owners of Enron. Not because the company failed--a basic tenet of capitalism is the freedom to succeed or flop. Rather, it failed because Enron management and its auditor, Arthur Andersen, didn't play by the rules that define a market economy. And they were allowed to get away with it for years.

The great tragedy is that if the system had worked as it should have, Enron would still be in business. Oh, it never would have seen its share price run up to $90. But neither would it have collapsed.

Had Andersen blown the whistle on shaky financial transactions early on, Enron would have been forced to keep its debt from spiraling out of control. Had its outside directors actually represented shareholders and demanded that management stop playing games with its books, Enron would be viable today. Had the government regulated Enron in the same way as other commodity exchanges, it would never have run up the liabilities it did.

In short, Enron would be a thriving--though retrenched--energy trading company instead of a carcass left to be picked over by government investigators and tort lawyers. Thousands of employees would still have their jobs. Their 401(k) plans would still have considerable value. And millions of investors would happily own a a solid, if unspectacular, stock.

No one would ever have noticed if the auditors, outside directors, and regulators had done the right thing. It all would just have worked the way it was supposed to--and that would have been the real tribute to capitalism.

Gleckman covers economic policy from Washington.

    Before it's here, it's on the Bloomberg Terminal.