Enron's CEO spent years in prison for fraud. The financial crisis moguls got away with it.
Word came late last month that Jeffrey Skilling is moving from federal prison to a halfway house, on the way to freedom after serving a 14-year sentence. It barely made news.
But Skilling’s story is important, not least because it shows that white-collar criminals can be successfully prosecuted. Also, it shows a striking contrast to the lack of justice done to the perpetrators of the financial crisis of 2008 that nearly caused a second Great Depression.
Skilling was the chief executive of Enron, one of the highest-flying companies of the 1990s.
It was founded in 1985 with the merger of Houston Natural Gas and InterNorth, and was built into a giant energy-trading concern, reaching revenues of more than $101 billion in 2000 (more than $145 billion in today’s dollars). Fortune magazine proclaimed it America’s most innovative company for six consecutive years.
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It was a bulwark of Houston’s corporate headquarters cluster, with a stunning new tower and naming rights for the Astros’ new stadium. Companies aspired to “be like Enron.”
Yet Enron was a massive fraud.
Enron’s impressive profits and assets turned out to be inflated, manipulated or fake, abetted by Arthur Andersen, at one time among the nation’s most respected accounting firms. Enormous debts were hidden from the balance sheets.
Its damage extended to the California energy crisis of 2000, which caused blackouts, as Enron gamed the state’s “market-based” policies.
Lay, especially, was also a big contributor to the 2000 presidential campaign of fellow Texan and friend George W. Bush.
Enron’s Chapter 11 bankruptcy in 2001 was one of the largest in American history.
Yet in the White House, Bush unleashed the Justice Department on the “corporate evil doers.” A criminal investigation was launched.
In 2006, Skilling and Lay were convicted by a federal jury of fraud and conspiracy. At the time, they faced spending the rest of their lives in prison.
“The jury sent an unmistakable message: You can’t lie to shareholders. No matter how rich and powerful, you must play by the rules,” prosecutor Sean Berkowitz said. Lay died soon after the verdict. Skilling’s sentence was eventually reduced to 14 years.
The venerable Arthur Andersen went out of business.
These weren’t the only scalps claimed by the Bush Justice Department, the Securities and Exchange Commission and Congress in investigating the high-profile corporate swindles of the late 1990s.
Among them: Tyco International, whose CEO Dennis Kozlowski served six years; HealthSouth, whose CEO Richard Scrushy faced two criminal trials and received a six-year sentence; and WorldCom (“WorldCon”), whose CEO Bernie Ebbers was sentenced to 24 years in the pen.
In response to the massive frauds, Congress passed the Sarbanes-Oxley Act in 2002. Although it’s been forever groused about in corporate America as an unneeded “burden,” the law has prevented other Enrons.
For younger people, this bringing of the rule of law to powerful companies seems incomprehensible, especially under a Republican president who made many mistakes as the self-proclaimed “decider.”
In these cases, the decisions were right.
These early 2000s cases are a jarring contrast to the aftermath of the financial crisis, which reached its crisis tipping point a decade ago.
In the aftermath of that calamity, nobody of importance went to jail. This despite Democrat Barack Obama being in the White House and Democrats controlling Congress.
Attorney General Eric Holder made little attempt to reconstitute the prosecutorial gunslingers that nailed Enron et al. In 2011, then-U.S. Attorney Jenny Durkan closed the investigation into Washington Mutual, the nation’s largest banking failure, with no executives facing criminal charges.
And so it went, with Lehman Brothers, AIG, Wachovia, Bear Stearns, Goldman Sachs, Merrill Lynch and Countrywide.
They got away with it.
The defense of Holder is that while the bankers’ behavior was reckless and negligent, it didn’t rise to the criminal level. And the big banks paid billions of dollars in penalties.
But those fines were a cost of doing business for these giant institutions. They weren’t the same as CEOs doing time with a cellmate named Big Nate. Many analysts of the 2016 election argue that this failure to see justice done led to the populist surge that elected Donald Trump.
I’m not sure. Cultural and white identity issues were probably more decisive, but it didn’t help that middle America saw these elites skate while its household wealth was vaporized. The lesson was that the rich and powerful didn’t have to play by the rules.
We’ll never know for sure. But the Holder Justice Department could have tried harder to bring the rule of law to Wall Street.
The timeless lesson is that successful capitalism depends on trust, enforced by regulators such as a robust Securities and Exchange Commission and a Justice Department committed to prosecuting white-collar crime.
The more urgent lesson is that we don’t know what corruption is hiding in today’s animal spirits. And the Trump administration, committed to rolling back the modest protections and reforms of the post-2008 era, isn’t curious to find out.
Jeff Skilling might be thinking that Enron’s rackets happened too early. He might never have worn orange.