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March 2002

Is Free Enterprise Capitalism Collapsing?

Rampant Greed and Corruption.

By Jim Scanlon

Ten years after the catastrophic collapse of the Euro-asian Soviet Communist system, there is ample evidence that the American Corporate Free Enterprise Capitalist system is so out of anyone's control, and has been so corrupted by the unimaginable selfish greed of it's elite managers, that it too is headed for a collapse similar to it's superpower twin.

The Soviet socialist system evolved from idealistic attempts to rationally manage an industrial society which bred poverty, inequality, war and misery. Its adherents portrayed Capitalism as decrepit and evil which, strangely enough, they turned into. More than likely the system would have collapsed much earlier than it did, except for the unrelenting, unremitting attempts of it's industrialized neighbors to destroy it. Undoubtedly the worst government in modern history was allowed to take over the most developed country in Europe as a "shield" and a "sword" against Soviet Bolshevism. The worst government exhausted itself and was defeated by the second worst government in modern history on the vast plains of the Ukraine with unprecedented misery, death and destruction.

After ten years of being the lone superpower in the world, it is difficult, almost impossible, for ordinary people to comprehend the staggering amounts of money amassed by corporate executives. The corrupting effects of such concentrated wealth fills the Business Sections of newspapers throughout the world, making them really "The Crime Sections."

Retired colonels, generals, admirals and ex-CIA officers shuttle back and forth from government service to lucrative executive positions in the weapons production and service industries. Executives from these industries are often appointed into policy making positions in the government completing a circle of corrupting influence and money. The treasure troves are the huge pools of government money for defense in all countries of the world.

Thomas White, a retired Brigadier General, was the assistant director of Enron Energy Services, the unit that hid hundreds of millions of Enron's debt. He was fortunate in that, when he was appointed Secretary of the Army in order to bring the financial discipline of the business world to the Pentagon bureaucracy, he was required to divest stock that he held in Enron, which, at that time was selling at a high price. Of course he denies knowing of the hidden debt. Is this the kind of executive who should be overseeing the Army's $83 billion budget?

Kenneth Lay, until recently one of the most admired business executives in the United States, sold enormous amounts of company stock when he knew, or should have known, it was overpriced and its value would shortly go down. From February 1, 2001 until September 4, over a six month period, as the stock price went down by half, he made 16 sales netting him $4 million from each sale. Then in October, as the stock price declined by 60%, he made four sales which netted $4.4 million. The total for the year from these sales was $68,400,000.00. (Divide your total yearly income into this figure.)

These figures came from the New York Times and are difficult to reconcile with other figures from the Times that show Mr. Lay's net profits (from stock sales only)for the year 2001 as $87.8 million. (Another report said Mr. Lay sold $100 million in stock in 2001). According to Enron reports, admittedly not a trustworthy source, Mr. Lay, from 1998 through 2000, made annual profits of $13.1, $43.8 and $123.3 million. So, aside from his salary and benefits, Mr. Lay "earned" at least $248.6 and $268 million dollars. His wife, when interviews on television said " We've lost everything."

Mr. Lay, or course also owned property and was involved in other profit making ventures, and held other stock in business ventures. His son did business with his dad's firm.

In another similar and stunning business collapse, Global Crossing, a giant telecommunications corporation, filed for bankruptcy, the forth largest in history. From its founding in 1997 its Chief Executive Officer, Gary Winnnick sold stock worth $743 million. This does not include his salary and benefits. Global Crossing is a corporation based in Bermuda (to avoid US taxes) but nevertheless has a contract pending with the US Department of Defense to provide high speed computer networks valued at $500 million. This corporation also reportedly paid George Bush Sr. $14 million in stock for making one speech. Does this sound like an overpayment? Or perhaps an attempt to influence? Of course the stock is worth very little now, but still... "It's the thought that counts." The elder President Bush, who once headed the CIA is also a highly paid advisor to The Carlyle Group a huge conglomerate of corporations that make and service weapons and weapons systems.

We have auditors who do not audit, regulators not regulating and tax collectors not collecting taxes! It is well known now that Enron paid no taxes in 4 out the last 5 years, but not so well known is that the corporation got a $385 million refund in one of those years, a million times more than the rebate many people got back from money they actually paid. But how about the other years. What did this corporation pay? With creative accounting, how much did they get as "refunds?" What did Mr. Lay pay? And Mr. Winnnick? Were the security guards and the gardeners and the receptionists and the janitors at Enron paying taxes? How much did you, dear reader, pay?

The US Export Import Bank, a government agency which helps foreign companies buy US goods and services, lent $675 million to companies affiliated with Enron starting in 1993. Many of these loans are still outstanding and it is not clear what will happen with them in bankruptcy court.

Several large Wall Street banks and investment houses have huge outstanding loans to Enron. They went along with, or promoted, the dubious, deceptive business practices that fooled investors and got Enron and other corporations into trouble causing disastrous losses to ordinary people. They made loans that were not loans but recorded as income to create the illusion of profit. Bogus sales were made, promising to deliver say, natural gas, which was made in the morning and purchased back in the afternoon for the same price plus a "fee," suspiciously like a "loan."

Naturally, insurance companies don't want to pay for something that didn't exist, because it wasn't delivered: a promise sold and bought back the same day. Insurance companies also do not want to pay for legal costs of directors and executives who may be found to have committed fraud. It is through this sort of wrangling over money that the full extent of business criminality may eventually seep out. But one will have to carefully read the "Business Sections" of the world's newspapers, "The Crime Sections".

Kenneth Lay was the head of the Bush transition team as it took over the government last year. He got to influence who would regulate his corporation and this certainly raised his status with other CEOs seeking to influence who their regulators would be. It is well known by now that this company spent millions in seeking to influence federal and state legislatures. This is a slow, inefficient process when compared to having the power to appoint your regulators. Feeble efforts are now underway in the Congress to regulate donations to public officials. These efforts are similar to the usual attempts at reform that debauched people make when they are being scrutinized. But when scrutiny fades, so does repentance and reform.

It is unlikely that stock options will be charged as a business expense, which is what they are. Giving executives millions of dollars in stock options is an incentive to do everything possible to keep up the stock price high. Microsoft will not allow it.

All of the federal regulators of accounting firms were formerly associated with accounting firms and are advocates for "self policing." How can one expect that these people will reform. Who can now trust any corporate "bottom line?" With so many rich and super rich federal, state and local officials serving the "public interest," is it any wonder that middle and lower income people are not prospering?

Strangely, one luminary, one hero has emerged from the Enron mess, Sheron Watkins, a mid level accountant, inappropriately labeled a "Whistle blower." While not underestimating or deprecating the courage it took for this woman to write an unsigned letter to Kenneth Lay outlining the catastrophic trajectory the corporation was following, she never went public with her concerns. She acted prudently in protecting herself and even sought and received support from others within the corporation. Her motivation, stated clearly in her memo, was her job prospects if the company "imploded."

Her memo was released, or leaked, by someone else after the damage was done and her co-workers lost their jobs and pensions. Although allegedly threatened with dismissal, she is still an Enron employee and is even a defender of, and an apologist for, Kenneth Lay-even though he explicitly did not follow her advice on using a different law firm to investigate. When she appeared before congress no one asked her if she had received a bonus as the corporation prepared for bankruptcy, or if she had held stock and sold it before it started to free fall. And if she didn't, why not? Would she have been a fool to hold Enron stock when she knew what she knew?

Whistleblowers, who go public, for one reason or another, are vilified, insulted, abused, fired and mostly ignored. An excellent local example is Marin's former Chief of Environmental Services who complained openly about disruptive, intrusive political interference in matters involving public health and was thrown out of his office and fired. After a long costly struggle he was allowed to retire. That's what happens to real whistleblowers.

Hitler said about the Soviet Union that it was so rotten that all he had to do was to kick in the front door and the whole house would fall in. In the 1950s, US Secretary of State Dean Achison said that the Russian system was rotten and ripe for collapse. They were both right, although their timing was off-which had serious consequences for Hitler and 30 years of the cold war.

Free Enterprise Free Market Capitalism, also known as Milton Friedman University of Chicago School of Economics, or Margaret Thatcherism, is relatively new, although something like it used to be called lassiez faire capitalism. Just let businessmen do whatever they like, don't interfere in markets-and everything will be all right. Supply and demand will balance out and the "magic of the market," the "hidden hand of he market," will make everyone, if not happy, then at least well fed and content. This is as idiotic as saying that when the workers control the means of production the state, i.e. coercive government, will wither away.

It could happen here. On September 11, 2001 one tower collapsed in less than an hour. The other one took a little longer.

 

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