Analyzing the Enron Debacle: A Lesson for High School Students

November 7, 2011

A short reading and questions to discuss and debate.

  1. Distribute "The Enron Debacle" for students to read.
     
  2. Discuss: What questions do students have? How might each of Enron's legal activities have contributed to its success? What seem to be reasons for Enron's failure?
     
  3. Divide the class into groups to discuss one of Enron's activities and to decide whether it should continue to be legal. At the conclusion of the group discussion, students should select one person to report to the class. Items 1 and 2 under "What Enron Did" are probably the most accessible for students and include a question and pros and cons they can consider along with what is said in the conclusion
     
  4. Have groups report back for class discussion.
     

THE ENRON DEBACLE

Introduction: Enron's Rise and Fall

Enron began in 1985 as a Houston-based natural gas company operating a pipeline. It grew rapidly, aided by the newly deregulated marketplace it and other energy companies lobbied politicians and regulators to create. To electricity-generating plants and water companies, Enron added many businesses outside of the energy field, such as newsprint, broadband cable, and fiber optics. Its prestige and stock price soared.

But by early 2001 Enron, though valued at $60 billion, began a collapse into bankruptcy. Its extension into unprofitable businesses and accounting practices that disguised the true financial position of the company were among the reasons.

The result is a huge corporate, financial, accounting, federal regulatory and political scandal as well as a disaster for thousands of Enron employees and investors. At least ten Congressional committees are now investigating Enron and its accounting firm, Arthur Andersen. While Enron may have engaged in illegal business activities — for example, both Enron and Arthur Andersen have shredded many business records — much of what Enron did, such as the following, appears to have been legal.

What Enron Did

1. Enron contributed $5.3 million to Congressional candidates, 75% of them Republicans, since 1994, $500,000 to the Bush campaign for the presidency, and $888,265 to the Republican campaign. (The Nation, 2/4/02) Enron had an interest in many issues before Congress and the administration, including energy bills, appropriations, and bills that would affect the company's broadband subsidiary.

Question: Should there be stricter limits on contributions to political candidates and parties?

Yes: Corporations and rich people are able to contribute much more to candidates and parties than other people. This guarantees that they will get more attention to their requests for meetings, their policy suggestions, and their economic aims than other people are likely to get.

No: Making political contributions is the right of every American. Enshrined in the First Amendment to the Constitution is freedom of speech, and making such contributions is part of that freedom.

2. Vice President Dick Cheney held a half dozen secret meetings last year with Enron and other energy executives as the Bush administration formulated its energy plan. The General Accounting Office, an arm of Congress, is suing the Bush administration for information about the energy policy meetings.

Question: After meetings with private citizens on public policy issues, should a president and his/her administration have the right to keep secret their content and the names of those who attended?

Yes: The President, the Vice President, and cabinet officers need to consult with leaders in many fields as an administration works out policies and possible legislation it regards as best for the nation. Details of such meetings and the names of participants must remain confidential. Otherwise citizens may not be willing to give what the President and Vice President call "unvarnished advice" or even to participate, and the country will suffer the consequences. Responding to questions about the Vice President's energy task force report that includes benefits for Enron, President Bush said, "Shortly after the report was put out, Enron went broke." (New York Times, 1/29/02)

No: The President and his administration have every right to consult with anyone they wish to. But in a democracy, the public has a right to know such things as how many meetings were held, when, where, who attended them, and their subjects. A lack of openness makes informed public judgments impossible and can arouse suspicions that policies serve private and not the public interest. This is the case with the Vice President's energy task force recommendations that provide tax cuts to energy companies, soften environmental regulations and open nature preserves to drilling — all of which were important to Enron and opposed by consumer and environmental groups.

3. Six hundred top Enron executives received $100 million in bonuses as the company was collapsing in November 2001. Twenty-nine leaders of the company cashed in $1 billion in stock sales in 2000 and 2001 and, despite the company's weakening financial condition, issued optimistic reports about its future. Meanwhile, thousands of Enron employees who were required to invest in company stock and had 57.7% of their pension money in it were restricted from selling until the stock was almost worthless. Many of these people have lost not only their jobs but also their retirement money. (New York Times, 2/2/02; Newsweek, 1/21/02; The Nation 2/4/02)

4. Enron paid no corporate taxes in four of the last five years even though in March 2000 it was ranked the sixth largest energy company in the world. (Newsweek 1/21/02)

5. Enron established hundreds of offshore subsidiaries (874 in the Cayman Islands alone), tax havens where funds can be kept in secret accounts. This enabled Enron to keep hundreds of millions of dollars in debt off its books and thus to make it appear as if its profits were much greater than they were. (Public Citizen, January/February 2002)

6. Enron won energy contract exemptions from regulation from the Commodity Futures Trading Commission and freedom to trade energy contracts without government examination from the Senate. (Public Citizen, January/February 2002)

Conclusions: Failed company or failed system?

This is only a small part of the story of the Enron debacle. But it is enough to ask what it means to American democracy and the American business system.

The Bush administration's position is that Enron's behavior and its collapse call for investigation and the reform of certain corporate and financial practices, but do not reflect a larger problem in American political and business systems. Secretary of the Treasury Paul O'Neill describes Enron's rise and fall as a natural result "of the genius of capitalism." (Frank Rich, New York Times, 2/2/02) O'Neill also says, "It's clear there are some cracks we need to fix. But I don't think the problems are fundamental." (New York Times, 1/31/02)

President Bush says: "There are some on Capitol Hill who want to politicize this issue. This is not a political issue. It's a business issue.... And, you know, Enron had made contributions to a lot of people around Washington, D.C. And if they came to this administration looking for help, they didn't find any." (New York Times, 1/28/02)

Others say that what Enron did reveals a systemic failure of American democracy and American capitalism. Wrote Jonathan Alter in Newsweek (2/4/02): "Arthur Levitt, the former chairman of the Securities and Exchange Commission (SEC), says Enron is merely the symptom of a much larger problem. 'What has failed is nothing less than the system for overseeing our capital markets,' Levitt testified before a Senate committee last weekÖ.When [Levitt] held the SEC job under President Clinton, he warned repeatedly that a 'culture of gamesmanship' was rigging the system with phony numbers, hyped earnings and worthless stock analysis. His calls for reform were rebuffed by members of Congress legally bribed by Wall Street and the green-eye shade lobby."

"The...obvious deformity exposed by Enron is the insidious corruption of democracy by political money. The routine buying of politicians, federal regulators, and laws does not constitute a go-to-jail scandal since it all appears to be legal. But we do have a strong new brief for enacting campaign finance reform that is real. The market ideology has produced the best government that money can buy. The looting is unlikely to end so long as democracy is for sale." (William Greider, The Nation, 2/4/02)
 


This lesson was written for TeachableMoment.Org, a project of Morningside Center for Teaching Social Responsibility. We welcome your comments. Please email them to: lmcclure@morningsidecenter.org