I got bored yesterday and watched again the excellent documentary ENRON, the smartest guys in the Room. While several years out of date, its still worth a watch. Not least because it illustrates that the global banking system were a critical part of the ENRON story. Quite simply put, ENRON would never have got away with what it did for so long without the explicit help and complicity of many major US banks, not to mention the political assistance of the republican party and president George Bush and Governor Arnold Schwarzenegger of California.
The involvement of the banks in not just ENRON but also the many other accounting scandals of the time, should have set off alarm bells in the US government. Recall that the ENRON scandal hit 6 years before the financial crisis of 2007. Clearly it should have been obvious to anyone in the US Treasury that something was rotten at the core of US banks. If they were prepared to go along with the ENRON ponzi scheme, what else were they up to?
Clearly the all important moral hazard condition was no longer in effect and the banks were in the grip of a feeding frenzy, such that they would do anything to make a quick buck, even if it ultimately killed them in the long term. At the very least you would have expected someone in the Bush administration to go around and have a quite word with a few leading bankers, pointing out to them, that if another crisis hit, the administration would hang them out to dry and not bail them out. Clearly this either didn’t occur (Bush was asleep at the wheel) or that such warnings were ignored, as the banks correctly guessed that they were too big to fail.
The psycho in the cubicle next door
On that point, this is another key factor the ENRON scandal exposed, what I regard as the fatal flaw of neo-liberal capitalism. That this extreme brand of capitalism runs the risk, as seen at Enron, of setting in motion an almost Darwinian process, in which the greediest, most corrupt and least ethical people crawl to the top of the corporate pyramid. While psychopaths make up only 1 in 200 of the general population, its estimated that between 1 in 10 or 1 in 25 of top executives are psychopaths.
Indeed we could go further an look at the corporation itself, as covered in another excellent documentary “The Corporation“. Here they point out that as a legal entity a corporation is considered a person and has all of the rights an individual would. But what sort of person is a corporation? Inevitably they apply the well known psychopath test and conclude that most corporations meet the legal definition of “psychopath“. So in some respects, if the corporations themselves are “psychopaths”, then its hardly surprising that psychopaths end up running most of them (I couldn’t see Mother Teresa running a NY Mafia family, nor “Fat Tony” running a homeless charity in Calcutta).
However, this creates a problem. These office psychos will always place their own greedy short term needs (i.e. get rich quick then jump ship), ahead of the long term profitability of the company (or indeed the firms long term survival), or the welfare of rank and file employees, or the environment, or indeed the long term needs of the nation. They also short circuit what is a key check and balance of evolution when it occurs in nature the survival instinct.
All animals are pre-programmed to generally avoid bringing about their own destruction. A Hyena will not chase after an antelope if it sees that its about to run off a cliff. However, pack a couple of hundred of these office psychos together and there instincts to compete against one another, will overwhelm their company’s institutional survival instincts.
Consequently market capitalism, cannot function without strict regulation. ENRON laid bare this fact and showed that the 2007 financial crisis was no bolt from the blue. Nor will the next financial crisis just happen. And quite honestly in the absence of proper regulation, some sort of future crisis is inevitable. Indeed we could well be seeing just that crisis brewing, be it via the fallout from LIBOR, the money laundering scandals or through the collapse of the Euro zone (which will see hundreds of billions worth of EU public and private debts being defaulted on, triggering a major credit crisis in the US and UK), or due to the fact the Euro is in the end saved (ironically enough! as all those bets the markets have made on the assumption of a Euro collapse will turn sour).
In short, world governments need to shut down the casino that we call the markets and impose the sort of strict regulations backed by heavy punishments needed to make sure such rules are obeyed. Perhaps a new charge of grand corporate theft, which would see anyone convicted (even as an accessory) getting an automatic life sentence and a fine equal to several times the economic damage they inflicted (enough to guarantee destitution for anyone convicted). Or possibly we could introduce some like the exams and regulations that control other professions (e.g. a trader or a CEO needs to pass certain tests on a regular basis to operate, if they fail or get caught on a serious charge they get struck off the register and cannot run any company again, not even a a hot dog stall!).
Many of these psychopath led companies simply lack the survival instincts to save themselves in a time of crisis, so this is as much in they’re best interest as it is the global economy’s.
And if you’re banker or fund manager invites you around “for dinner” and mentions something about liver, fava beans and Chianti….don’t go!