3.3 Enron Fiasco
In order to gain perspective on our current state of affairs, we shall travel back 18 years in time, to the Enron fiasco. Enron was a Texas-based Resource Company that enjoyed a meteoric rise in the 80’s. The company was the darling of
stock analysts. Its CEO, Ken Lay, was hailed as a captain of industry and moved in the highest circles (including that of the President of the United States at the time, George Bush).
In 2001, the bubble burst. Word leaked out that there were serious irregularities in Enron’s accounting practices. A Pandora’s Box was opened, revealing a quagmire of greed and extortion that extended back over a decade. Perhaps even more startling than the magnitude of the fraud (totaling in the billions of dollars), were the strong indications that their bankers, the financial analysts on Wall Street and their auditors, were all complicit in the cover-up.
This, then, begged the question: if this could happen in a company analyzed by some of the best brains on Wall Street and whose numbers were attested to by one of the world’s most prestigious accounting firms, then what of the other companies listed on the various stock exchanges in the U.S. and around the world? Regardless of how we answer this question, the mere fact that it should be asked publicly, is already in itself, a harbinger of doom.
In the wake of the Enron debacle, the Bush administration went to great lengths to assure us that the financial system was healthy and functioning, and that the Enron case was an isolated incident. Meanwhile, the seeds which created the sub-prime crisis were already germinating. Rather than legislating stronger scrutiny of the market, the regulatory authorities did the exact opposite. Inspired by some obscure logic, the great minds of finance and economics maintained that the markets were self-regulating and the inherent market dynamics would effectively police the market. Added to this, was some baroque logic, which posited that the greater complexity of the various financial instruments on the market, meant that the various risks associated with the individual factors which impacted the economy were mutually off setting, ensuring that the aggregate risk in the system was greatly reduced, and thus completely manageable.
Looking back, this logic appears so absurd that we are left wondering if it was the result of delirium, or worse, cynically motivated sophistry. It reminds me of the story of cousin Eberhard, in Selma Lagerlof’s classic The Saga of Gosta Berling. Cousin Eberhard, is characterized as the type of philosopher who is capable of placing his hand in a fire, watching it burn as the flames lick the exposed flesh, yet maintain his conviction that his hand could not be melting, as his theories posited that it could not be so.
The Game is like a magician’s trick. It is nothing more than a house of cards, built on the manipulation of impressions. In order for it to function, we must believe that the politicians, the CEOs, and the newspapers, are in the main, telling us the truth. We can tolerate a degree of embellishment here and there. We can even forgive the odd sexual indiscretion by those in power. However, if the public begins to suspect that they have been played for fools, they will not remain subservient indefinitely.
One point that bears mentioning is that even if the sub-prime bubble’s collapse were to turn out to be the event that triggered an economic meltdown, it would not be its root cause. It is merely a point on a continuum; the inevitable outcome in a society dominated by the Game. The Game, like a bubble, is filled by air. As it grows, it becomes progressively more unstable, until inevitably it bursts. From the perspective of history the sub-prime bubble will merely be the latest in a succession of similar falls.