New York Times
September 17, 2002


By Paul Krugman Krugman@Nytimes.Com

In 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 1Q."

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

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

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 naive 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 Dick Cheney.