Why Bush Didn't Bailout Enron

by Alexander Cockburn

Read first some striking remarks about the role of pension funds by the former British Labor minister, Tony Benn, in his 1979 book "Arguments for Socialism." "The financial institutions ... do not necessarily use the huge sums put at their disposal in a manner compatible with the common interest. This is one area where there will have to be change ... These savings belong to the workers, they are their own deferred earnings. Workers want them not only as income when they retire, but while they are at work, and so to guarantee that they will retire in a buoyant economy."

Of course we've been listening over the last few months to many tragic stories of workers watching helplessly as their prospective pensions, stored in some 401(k) have shriveled overnight, while senior management in a company like Enron cashed in their chips while the going was good. As always the apex predators survive, while the small fry perish. At the end of 2000, Enron's 401(k) had $2.1 billion in assets, but a year later had lost 94 percent of its value.

Why didn't Bush try to bail out Enron, just as Clinton and Rubin bailed out Long Term Capital management? Long Term Capital Management, you'll recall, was a hedge fund that collapsed in 1998, victim of staggering wrong-way bets by its executives. Banks, even central banks, hedging their positions through LTCM stood to lose vast sums.

The Federal Reserve intervened, persuading 14 banks to put up $3.6 billion as part of the bail-out.

Now, when Enron went belly-up, the losses were vast, perhaps as much as $60 billion, but the losses were widely distributed among a lot of different institutions. The company's two largest creditors, Citi and JPMorgan/Chase, well aware of the dodgy state of the company, had packaged up their Enron debt as "credit derivatives" and sold them on to pension funds. So Enron's crash was not going to bring down the big banks or even damage their profits (which have remained good).

But if the big banks had stood to lose out big time, then it would have been a different story. The Senate hearings last week confirmed that the banks knew that there were big problems with both Enron and WorldCom -- in fact, they helped devise the "prepays" (loans disguised as trades) and other devices which concealed how highly leveraged the companies were. The recent hearings in Congress have yielded some remarkable material. Here's an internal e-mail exchange at Chase: One executive wrote simply: "$5 bn in prepays!!!!!!!!"; the other replied, "Shut up and delete this e-mail," an exchange later variously described as "misstatements by young bankers" or simply as jokes.

These issues won't go away because the big pension funds are taking the banks to court. CalPERs and CalSTRS (teachers) and LACERA (Los Angeles County Employees Retirement Association) have taken action against the large banks, including Citi and Chase, which underwrote Enron and WorldCom bonds, even though they knew the dreadful state of their finances.

Which brings us back to those basic arguments about how the accumulation of wealth should properly be managed. This summer sees the publication of Robin Blackburn's remarkable "Banking on Death," (Verso) which sets out in fascinating detail not only the scandalous misapplication of savings by the corporate giants but also pioneering attempts to "socialize" accumulation by visionaries such as the German-born Rudolf Meidner, in Sweden.

Blackburn reminds us that back in the mid-1970s, Peter Drucker, philosopher of management, published "The Unseen Revolution," which focused on the growing weight of pension funds and their role in economic development.

In Drucker's view, Blackburn writes, "pension fund collectivism offered an alternative to both state socialism and free market individualism." For as Drucker puts it, "The pension fund movement is not 'individualism' a la Herbert Hoover. Pension funds are collectives. And the agents are other collectives, the large employing organizations. But they are 'non-government' and, in that sense, 'private.' They offer one example of the efficacy of using private non-government institutions of our 'society of organizations' for the formulation and achievement of social goals and the satisfaction of human needs."

Needless to say, pension fund managers tend to be fixated on shareholder value (however meretricious, as with Enron and other book-fixers) with scant regard for social goals. But Drucker's basic point remains valid.

In the coming months, amid public indignation, there may be a few modest reforms seeking to curb accounting "excesses" and kindred shenanigans. Then, when the dust settles, the foxes on Wall Street will be attacking the chicken coop again, trying to capture all the money going into Social Security.

Now's the time to outmaneuver the foxes by taking the debate over pensions and pension fund management to a higher level, recognizing that with an aging population this is indeed one of the crucial discussions about this society's priorities and direction in the new century.