by Dr. Mark H. Shapiro
Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen....
...Woody Guthrie, The Ballad of Pretty Boy Floyd, 1940 version.
Commentary of the Day - January 29, 2002: Educator Pension Funds Lose Big in Enron Collapse.
Each day brings new revelations about the consequences of the collapse in the value of Enron's stock and the subsequent bankruptcy of the company. By now every one knows that former Enron chairman and CEO Kenneth Lay and numerous other Enron board members and top executives sold more than $1 billion worth of stock before word got out to the general public that the company was cooking the books. We also know that while Lay (or as President Bush calls him "Kenny Boy") was dumping his Enron stock, he was lying to his employees about the financial condition of the company so that they would continue to purchase more (about to be worthless) shares for their 401K retirement plans.
We also know that large numbers of the politically well connected were bought and paid for by Enron. Virtually every legislator and office holder of consequence in the State of Texas received campaign contributions from Enron. Likewise, at the national level Enron and its partner in crime, auditing firm Arthur Andersen, spread their largesse far and wide in a largely successful attempt to free the company from federal oversight and regulation. Perhaps the most egregious example of the corrupting effect of these contributions is the case of Wendy Gramm, wife of the former U.S. Senator from Texas Phil Gramm.
Wendy Gramm served as chairwoman of the Commodity Futures Trading Commission from 1988 to 1993. Shortly before her departure from this post she pushed through a key regulatory exemption that ensured that Enron's electricity trading operations would not be subject to CFTC oversight. Five weeks later she was appointed to a lucrative post on the Enron board of directors. Meanwhile, her husband Phil was collecting campaign contributions from Enron that totaled nearly $100,000. Ms. Gramm served on the audit committee of the Enron board. Obviously, with her background and experience, she was in a good position to understand that Enron was misleading the public about the financial condition of the company. Perhaps this is why Phil Gramm chose not to run for reelection this year.
There are numerous other examples that could be cited. Some 75% of the members of the U.S. Senate and 50% of the members of the House of Representatives received campaign contributions from Enron, and numerous Bush administration functionaries have ties to Enron. In addition, numerous journalists from both the financial and the general press received generous "consulting" fees from Enron to keep pumping out rosy stories about the company. (For the record, The Irascible Professor has never directly owned Enron stock, nor has he received any "consulting" fees from these bandits.)
The results of the Enron meltdown may well eclipse such recent financial disasters as the savings and loan scandal (which also had its genesis in the wild west business climate of the State of Texas), the 1998 collapse of the Long Term Capital Management hedge fund, the junk bond excesses of Michael Milken, and Ivan Boesky's insider trading scams. Thousands of Enron employees have lost their jobs and their life savings and thousands of other small investors have lost billions of dollars in the scandal as they watched the value of their shares decline to penny stock level.
What is somewhat more surprising is the extent to which sophisticated money managers were taken in by the Enron scam. According to a recent story in the San Francisco Chronicle by Lance Williams, public employee pension funds lost more than $1 billion when Enron stock nose-dived. The biggest loser was the Florida state pension fund, which lost $345 million. Next in line was the University of California pension fund, which lost $145 million. Two other California pension funds also lost big time. The California State Teachers Retirement System (CALSTRS) lost $49 million, and the California Public Employees Retirement System (CALPERS) lost $40 million. CALPERS serves the faculty and staff of the California State University system as well as numerous other state and local government employees. The pensions of most California public school teachers are covered by CALSTRS, while the UC pension fund serves both faculty and staff in the University of California system.
Of the three funds CALPERS is by far the largest, and the $40 million loss it suffered represents only a tiny fraction (about 1%) of its assets. However, it is disturbing to note that CALPERS was involved in one of the private partnerships that Enron was using to hide its trading losses. Fortunately, CALPERS got out of the partnership before the collapse with a profit. The UC pension fund purchased some 1.5 million shares of Enron in mid-2000 at an average price of $70 per share, and another 200,000 shares later on at an average price of $73 per share. This past November the shares were sold at prices that ranged from $5 to $1.50 per share.
At present the University of California is jousting with the Florida State Pension Fund to become the lead plaintiff in a class action suit against "Kenny-Boy" Lay and 28 of his Enron cronies who cashed out before the crash in Enron share prices. This group of about 60 pension funds and other institutional investors hope to recover some part of their investment from the people who profited from their inside knowledge. Given the vagaries of the legal system and the large number of potential plaintiffs in suits against the Enron board members and executives who profited from insider knowledge, it seems unlikely that the pension funds will recover any significant portion of their investments.
Enron attorneys and Enron money played a significant role in the writing and passage of the flawed electricity deregulation bills that were passed by the California Legislature and signed into law by former governor Wilson. This program cost California consumers and taxpayers billions of dollars. That should have been reason enough for California pension funds to avoid investing in the company no matter how rosy the investment scenario might have looked at the time.
© 2002 Dr. Mark H. Shapiro - All rights reserved.