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Economics: Enron's Collapse Follows a Familiar Pattern

by Andrew M. Schocket

Mr. Schocket is an assistant professor of history at Bowling Green State University, a scholar of the origins of corporate power in the United States, and a writer for the History News Service.

The crash of Texas-based energy trading corporation Enron is so spectacular that many observers have called it the worst corporate collapse ever. But it's not the first time that corporate political influence and politicians' fanatical opposition to regulation have caused economic ruin.

Nearly identical actions on the part of corporate insiders and sympathetic deregulators resulted in even bigger debacles--including the first such failure in U.S., history, in the 1830s, and the most recent, in the 1980s. Now it's up to the President and Congress to break with historical precedent and prevent further mishaps.

Within fifteen years, Enron executives transformed their company from a middling firm into the seventh-largest American corporation--on paper--without actually building a profitable business. Instead, they used political influence to avoid regulation and took advantage of the resulting regulatory vacuum. Then they covered their tracks with complicated transactions that lined insiders' pockets.

In order to gain government favors, Enron¹s leaders spent millions of dollars lobbying and donating to political campaigns. They targeted the elimination of any government oversight of its business.

Enron's executives followed a path that led to American financial havoc before. The first such episode began in 1833. After prodding from men who ran the nation's many state banks, President Andrew Jackson began putting federal deposits into the"pet banks" of his political cronies. By withdrawing federal funds from the Bank of United States--that day's version of a central bank--Jackson destroyed the Bank's ability to ensure that state banks would only issue loans that they could cover. The resulting lack of restraints on state banks led to a financial meltdown that started a massive depression.

Similar regulatory failures helped trigger depressions in 1873 and 1929. Most recently, during the early 1980s Congress deregulated the savings and loan industry after S & L operators cozied up to federal legislators. By decade's end, thousands of Americans had lost their deposits, and the federal government was left with a multi-billion dollar cleanup.

In the 1990s, Enron's executives took advantage of the loose regulations that governed corporate revenue reporting. They greatly exaggerated the company's cash flow. Enron's chiefs were following previous formulas for disaster to the letter. After Jackson's killing of the national bank, many state banks were free to claim much higher deposits than they actually had, and they began issuing far more loans than they possessed in their vaults. During the 1980s, many S & Ls similarly inflated their assets because no regulators were looking over their shoulders.

To create illusions of profitability, Enron's executives also used accounting procedures that confused potential watchdogs and enriched themselves. They played a bookkeeping shell game by establishing hundreds of dummy corporations. Enron took credit for the dummies' profits, but not their losses. Meanwhile, Enron executives transferred the company's debts to the dummies to make Enron's debts appear much smaller than they were. They gave the people who ran those companies--the executives and their pals--big money for their services.

They were following a familiar script here, too. During the 1830s, state bank insiders often bought bank stock by taking out a loan from the bank, which accepted the same shares as collateral. That way, they got large amounts of stock and collected dividends without investing their own money. One hundred fifty years later, savings and loan operators were equally devious. One of their tricks was to sell a property back and forth between insiders and the savings and loan, each time for more money--on paper, that is--thereby boosting the institution's theoretical value. As with Enron's transactions, S & L insiders profited from these bogus exchanges.

These dealings have frequently shielded corporate bigwigs from public accountability until it was too late. In 1837, the public panicked. People rushed to withdraw their deposits when they realized that overextended banks could not cover their loans. Dozens of banks failed during the Panic of 1837, one of nation¹s deepest depressions. In the late 1980s, when the S & L house of cards collapsed, the fallout cost thousands of Americans their life's savings and taxpayers billions of dollars in cleanup. This fall, Enron employees lost their jobs; many lost retirement savings, too, as did countless other Americans whose pension plans invested heavily in Enron stock.

What has been the result of such corporate scams? Not much. After the Panic of 1837 and the 1980s savings and loans scandals, legislators saved face by enacting safeguards that should have been there all along. Congress will probably try to do the same after Enron.

But if that's all that happens, the basic parts of the problem will remain. Corporations will still be able to use campaign donations to get legislators to do their bidding, and many legislators will still blindly oppose the most basic oversight of business. There's another disaster waiting to happen.

This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.