Reason Of Bankruptcy Of Enron
Uncle Sam And Current Business Turmoil
The current economic position we are in is due to the stock market bubble expanding and finally popping directly in our faces. However, the question that needs to be asked is what factors or parties put us in this rigorous situation? The deep pockets and influences of lobbyists, the power and greed of political figures or organization executives, the liberal philosophy of deregulation stemming from Reagan’s presidential term, the ignorance to not listen to cautious opinions, and the pride of government officials, all played important roles in the demise of the free-market.
It all started with three bank executives, who marched into a hearing room in Washington, D.C., with the sole intent and mission to eliminate regulatory barriers that were keeping them from merging businesses of banking and selling securities. The Glass- Steagall Act of 1933 prohibited banks to participate in the business opportunity of selling and administrating investments. Paul Volcker, the former Federal Reserve chairman, was a strong believer in high regulation policies. Volcker believed that the bank’s proposition and intent to sell certain securities; for example, commercial paper and securities that were backed by mortgages and credit-card receipts, was not only opposing to the established act, but extremely detrimental to its purpose. Political parties were coming together to minimize federal control over the banking, energy, and telecommunications sectors. In a sense, once the Glass- Steagall Act was eroded, every investor in the United States became the driver of the free-market and it was their new duty to police inappropriate and illegal activity.
Since banks and corporations had fewer eyes watching their moves, they both began to fish for lucrative business deals. However, the business deals that were being made were made with reckless abandonment to established policy, and the market became an “every man for them self” game. A game in which everyone wanted to play, but not every player should have been allowed. The idea of many Democrats in the early 1980s was that modern deregulation was vital and the market, itself, needed to be in control of the aggregate economic performance. Furthermore, Democrats like former President Ronald Reagan believed this change in philosophy would stimulate innovation and increase the average standard of living. These beliefs occurred and in turn interest rates were at an all time low, the technology sector was booming, and the stock market was not performing coherently.
This is a classical case of when you give someone an inch, in turn, they take a mile. In this example, the government was the giver and the greedy commercial executives were the receivers. Greed, or self-interest, will always be present in some degree in the economy. Essentially, greed is inevitable when you are dealing with such opportunity and power. Firms are profit seekers, but they will seek it where the institutional incentives signal profit is available. In a free market, firms profit by satisfying their customers, investing wisely, and making prudent loans. Regulations, policies, and political rhetoric can change those incentives. Persistence played a major role in the departure of regulation as well. Executives from various large commercial banks insisted on getting their point across that the world has drastically changed. Mr. Volcker pleaded back that if banks are allowed to sell certain securities, they should, according to Volcker in the article Did Washington Set the Stage for Current Business Turmoil, “have a name separate from the bank”. This is rationale reasoning on Mr. Volcker’s part because lenders eyes became so wide, that they dramatically lowered loan standards for customers to pursue public offerings in the financial markets, and as defaults on loans increased, banks were publicly offering commercial paper and other securities that had no chance to liquidate.
Banks and large firms like Enron and WorldCom Inc., became greedy and the long-arm of the law was not there to police the situation. The deregulation decision on financial institutions made it difficult to uncover and reveal fraudulent activity. The objective of keeping up-to-date information on these companies was too large for financial advisors and investors alike. Arthur Levitt, former chairperson of the SEC, created an idea to increase income for the SEC by charging companies who register public stock offerings fees to do so. The idea was shot down by government skeptics. This process came to be true for a lot of formulated opinions that were opposing to the regulatory theorist mold. Numerous government officials believed the SEC would be too powerful if it was self-funded. It is funny, because these officials were most likely being lobbied by bank officials and firm executives to individually gain more political power. “During those years, the number of corporate SEC filings grew 28%. Investor complaints rose 20%. The value of IPO’s rose by a factor of 12. The agency cut back on reviewing financial filings, examining just 11.9% of the statements filed”. Who is at fault, greedy executives or naïve investors? This economic problem is rooted deeper than participants. It is a social, unproductive, morale issue that was established behind closed doors and away from public eye.
Not only did the SEC have limited access to funds and intervention, but the Telecommunications Act of 1996 is held liable as well. This act took the telecommunications sector from a monopoly, to an interconnected sector that combined local market share with the global market share. Reed Hundt, former head of the Federal Communications Commission, desired to mix the industry infrastructure up. Long-distance provider, WorldCom, acquired local businesses due to the new FCC rules enacted by Hundt. Subsequently, WorldCom later imploded, filed for bankruptcy, and was involved in the largest account fraud ever. These regulations and industry juggernauts forced the hand of several small local telecommunication businesses to set prices below cost. The astounding part of this is that Hundt did not apologize and small businesses are the backbone in our economy. If Uncle Sam is out for himself, may be we are doomed regardless.
Soaring stock prices did not grab the bulk of the attention by Federal Reserve members. The main focus was “their fear of impending inflation”. However, once again, a brave member of the Fed steps up and insists people to unclench their fists and just listen. Lawrence Lindsay, the youngest member of the Fed, wanted to take back control of the stock market bubble and increase regulation while there is still hope. Conversely, Lindsay bravely argued that the Fed should cut their losses now and increase interest rates and make it more difficult on the common investor to participate in the market, by resetting margin requirements. Individuals like Lindsay, Volcker, and Levitt had the right intuitive reasoning. The Fed, during this time, moved interest rates to incredibly low levels. The credit this provided helped lower mortgage rates and accelerated the housing boom and sub-prime mortgage crisis that we are currently in today.
This all comes down to individual incentives. Even though these policies were designed with good intentions, the intentions will be undermined by opportunity and personal incentive. Therefore, greed will surface and undermine economic growth and harm millions and millions of investors alike. Short term solutions have been harming this economy over the past several fiscal years, and it is time to think of the harmful long term consequences. Currently, our nation is in the midst of economic change that is filled with hope and progress. However, we still have stories coming out daily like Bernard Madoff, an individual who scammed investors for fifty billion dollars, that stems from the problem of deregulation by Washington, which was earlier discussed. Also, Rod Blagojevich, Illinois’s current governor, was arrested for attempting to sell Barack Obama’s, our current President, Senate seat. Blagojevich was recorded saying as stated in Paraone’s article titled Illinois Governor Arrested for Selling Senate Seat, “I am not going to just give it away for nothing. I want to make money.” These kinds of people are the same individuals who ignored ideas to increase interest rates and regulatory policies. If we would have listened to the caution signs and the fair warnings ten to twenty years ago, we would not be in this sorry state of business turmoil
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