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Following the trail of Enron--

During the latter 1990s the predominant narratives in the news had to do with the high-tech revolution and the 'new economy' that yielded higher productivity and lower inflation. These were the glory days of the internet boom and the dot.com frenzy of "irrational exuberance." These were the halcyon days of the skyrocketing stock market indices that made everyone an investor and everyone a winner. Mutual funds were everywhere - vehicles for being able to realize our fondest dreams.

Since 2000, however, each of these stories has unraveled - the Dow and the NASDAQ have plummeted, the dot.com bubble has collapsed, the high-tech sectors have fallen prey to old economic forces and tendencies, and the intertwined Enron and Arthur Andersen scandals have brought a new awareness of how fictional capital accounting can be.

Indeed, it seems that capital can now be described as ephemeral and evanescent. Where once we thought of capital as solid and durable, today the spectacle of capital rules - and capital is no longer either solid or durable. Value has become a volatile measure. In fact, the pros have given up on the new methodologies of value that they had cooked up during the big stock market party.

This was not, of course, the worst investment "bubble" that capitalism has produced. As bearish as this bear market has been this is no Great Depression. And so, this is not the first time that value has disappeared rapidly. But the current crisis does speak to how value has become more and more a product of discourse in the market place.

"All that is solid melts into air," wrote Karl Marx (1978) in 1847, referring to the way in which the logic of capital is driven by this contradiction - in his day the driver was the ever-present competitive interest in revolutionizing the means production. Further, as commodities and their markets age, their rate of growth slows, requiring ever more abstracted measures of value in order to offset declining rates of profit. These abstracted measure become realized in "financial tools" called derivatives. Derivatives are securities "whose prices are derived from the prices of other securities or even things. They range from established and standardized instruments like futures and options-to custom-made things like swaps, collars, and swaptions.

The saga of Enron is this, a story about the perils of Wall Street - a story about the illegitimate use of accounting steroids to inflate profits and thus dupe investors into fool's gold, a story about a corporate shell game. Enron02-98Enron grew quickly from a natural gas pipeline company into an energy trading giant that became identified with the new era of deregulation. Enron stood for companies that sought to distance themselves from the fixity and burden of physically located assets (the limits of 'place'), in favor of a virtual electronic presence located throughout the world ('space). Enron wanted not to make the energy, but to market, broker and redirect energy. Though Enron would become the most prominent broker and marketer of electricity in North America, it generated virtually no electrical power of its own, it did not operate power plants.

As it turns out, Enron's vaunted claims to revolutionizing the trading of commodities actually consisted of savvy, but dishonest trading strategies such as 1) Fat Boy: artificially increasing demand; 2) Death Star - Phantom power transfer; 3) Richochet - megawatt laundering 4) Get Shorty - sell high, buy low and 5) load shifts - shifting energy from place to place (see the Houston Chronicle, http://www.chron.com/content/chronicle/special/01/enron/index.html).

Combine these techniques with old-fashioned lobbying and buying influence at the government level (because under deregulation access to the State becomes even more important) with their phantom hedge funds, and the blind eye of their auditor (Arthur Andersen), and Enron grew to be, within a decade, a Fortune 500 firm. Their ranking rose in fact to 5th place in 2001, ironically just as they sank into bankruptcy amidst their wildly inflated claims regarding revenues, on the strength of claiming $138 billion in revenues. Within the space of one year following from January 2001, Enron's price per share of stock fell from $82 to less than 50 cents.

Here's the scenario. The imperative in business today is to boost revenues. Corporations like Enron are (were) run by men, primarily, whose bottom line was the imperative of driving revenue growth. Revenue growth drove stock prices. Stock prices drove multiples - the term for a common value accounting metric on wall street. Price dived by earnings yields a multiple. Prior to the 1990s those multiples - the relationship between price and earnings that told you whether a stock was over or under or properly valued . Growth justifies a higher multiple according to the pros. So by juicing the revenues you get an added booster to the stock price. The stock price, in turn, times the total number of shares gives you the market capitalization.

In this world everything hinges on the rate of growth and the 'metrics' (the measuring devices) that go with it. With Enron we can see what happens with the more complex derivatives and schemes. Once the discursive accounting fictions begin to unravel, things start to slide fast because real material assets are limited, and cannot offset the erosion of the multiple.

While it has long been recognized that capital expands or shrinks in relation to fluctuations in to market conditions and external events, there has been a certain reluctance to implicate fluctuations in our concepts of value. After all, the notion was the capital is an objective category that rests on objectively applied measures and tools. Since the mid 1990's we have become acutely aware of the ultra-fast formation of capital. In the stock market boom of the 1990s companies like Cisco, AOL, Yahoo, Amazon, Qualcomm and Enron grew at exponential rates. But just as speed contributed to the invention of massively capitalized firms, the disappearance of capital has taken place at an even more precipitous rate. While the case of Enron has received the most ink, telecom equipment makers, internet companies, chipmakers, software producers, have all seen dramatic erasures of "value" and "assets" in a very compressed period of time.

In an era where big blocs of capital can emerge in a very short space of time, more than a few of the companies whose ads we are studying have already disappeared - merged, taken over, or gone bankrupt. In addition to Enron and Arthur Andersen, Winstar, PSI, Global Crossing, Covad, and USA Banc have all declared bankruptcy. Microstrategy exemplifies the extremes of valuation, falling from over $300 per share to a $1.10. Apparent heavyweights have fallen just as dramatically - e.g., Nortel and WorldCom and Tyco have all declined precipitously in their market capitalizations.

This page will need to be updated on an almost weekly basis to keep up with declining fortunes of the corporations whose ads heralded an extraordinary new world order just two years ago. In June of 2002 it is now evident that accounting chicanery played a role in puffing up MCI WorldCom. Now all but bankrupt it is doubtful that this firm will survive, with debts of over $30 billion and a stock price of barely 35 cents.


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© Copyright 1998-2003
Robert Goldman, Stephen Papson, Noah Kersey