September 17, 2002 (
New York Times
Cronies in Arms
By PAUL KRUGMAN
n February 2001 Enron presented an imposing facade, but insiders knew better:
they were desperately struggling to keep their Ponzi scheme going. When one
top executive learned of millions in further losses, his e-mailed response
summed up the whole strategy: "Close a bigger deal. Hide the loss before
The strategy worked. Enron collapsed, but not before insiders made off with
nearly $1 billion. The sender of that blunt e-mail sold $12 million in stocks
just before they became worthless. And now he's secretary of the Army.
Dick Cheney vehemently denies that talk of war, just weeks before the midterm
elections, is designed to divert attention from other matters. But in that
case he won't object if I point out that the tide of corporate scandal is
still rising, and lapping ever closer to his feet.
An article in yesterday's Wall Street Journal confirmed what some of us have
long argued: market manipulation by energy companies — probably the same
companies that wrote Mr. Cheney's energy plan, though he has defied a court
order to release task force records — played a key role in California's electricity
crisis. And new evidence indicates that Mr. Cheney's handpicked Army secretary
was a corporate evildoer.
Mr. Cheney supposedly chose Thomas White for his business expertise. But
when it became apparent that the Enron division he ran was a money-losing
fraud, the story changed. We were told that Mr. White was an amiable guy
who had no idea what was actually going on, that his colleagues referred
to him behind his back as "Mr. Magoo." Just the man to run the Army in a
two-front Middle Eastern war, right?
But he was no Magoo. Jason Leopold, a reporter writing a book about California's
crisis, has acquired Enron documents that show Mr. White fully aware of what
his division was up to. Mr. Leopold reported his findings in the online magazine
Salon, and has graciously shared his evidence with me. It's quite damning.
The biggest of several deals that allowed Mr. White to "hide the loss" —
a deal in which the documents show him intimately involved — was a 15-year
contract to supply electricity and natural gas to the Indiana pharmaceutical
company Eli Lilly. Any future returns from the deal were purely hypothetical.
Indeed, the contract assumed a deregulated electricity market, which didn't
yet exist in Indiana. Yet without delivering a single watt of power — and
having paid cash up front to Lilly, not the other way around — Mr. White's
division immediately booked a multimillion-dollar profit.
Was this legal? There are certain cases in which companies are allowed to
use "mark to market" accounting, in which they count chickens before they
are hatched — but normally this requires the existence of a market in unhatched
eggs, that is, a forward market in which you can buy or sell today the promise
to deliver goods at some future date. There were no forward markets in the
services Enron promised to provide; extremely optimistic numbers were simply
conjured up out of thin air, then reported as if they were real, current
earnings. And even if this was somehow legal, it was grossly unethical.
If outsiders had known Enron's true financial position when Mr. White sent
that e-mail, the stock price would have plummeted. By maintaining the illusion
of success, insiders like Mr. White were able to sell their stock at good
prices to naïve victims — people like their own employees, or the Florida
state workers whose pension fund invested $300 million in Enron during the
company's final months. As Fortune's recent story on corporate scandal put
it: "You bought. They sold."
It was crony capitalism at its worst. What kind of administration would keep
Mr. White in office?
A story in last week's Times may shed light on that question. It concerned
another company that sold a division, then declared that its employees had
"resigned," allowing it to confiscate their pensions. Yet this company did
exactly the opposite when its former C.E.O. resigned, changing the terms
of his contract so that he could claim full retirement benefits; the company
took an $8.5 million charge against earnings to reflect the cost of its parting
gift to this one individual. Only the little people get shafted.
The other company is named Halliburton. The object of its generosity was