Enron: Money For Nothing?

by Caleb Hellerman

ENRON: MONEY FOR NOTHING?

It is the "genius of capitalism," Treasury Secretary Paul O'Neill observed, that productive companies make big money and unproductive ones go kaput. By O'Neill's reasoning, it makes perfect sense that thousands of Enron employees lost not only their jobs but their life savings, which were tied up in Enron stock. After all, their company was bankrupt.

It's harder to see why the executives who ran Enron into the ground were so richly rewarded. Former CEO Jeffrey Skilling, for his part, accumulated roughly $66 million. Founder Kenneth Lay, having sold about $100 million worth of Enron stock before the company crashed, has now retired on a pension of $900,000 a year. Enron executives also received $320 million in bonuses just 10 months before the company went bankrupt — payments based on Enron's profits, which later turned out to be an illusion.

Less famous executives also made out. In December, as creditors fought to be paid and laid-off employees stared numbly at their 401(k) statements, Enron handed out another $105 million in bonuses. Jim Fallon got $1.5 million for his leadership of Enron Broadband Services, which lost roughly $1 billion over the past two years. John Lavorato, president and CEO of Enron America, the company's energy-trading service, received $5 million while his deputy, Louise Kitchen, got $2 million. John Nowlan, who ran Enron's crude/products trading operation, received a $500,000 bonus just weeks before taking his entire trading team to rival Transammonia, Inc.

Making millions from business disasters — is that, too, part of the genius of capitalism? Gary Winnick, co-founder and chairman of Global Crossing, appears to have pocketed close to three-quarters of a billion dollars from the timely sale of stock in Global Crossing, another bankrupt company whose accounting practices are being scrutinized. His friend Terry McAuliffe, now head of the Democratic National Committee, made a reported $18 million on a $100,000 investment in Global Crossing.

The actual business, however, was a disaster. Setting out to build a 100,000 mile fiber optic network at a time when (it soon turned out) the country suffered from a serious fiber optic glut, Winnick went through five CEOs in five years; they all profited handsomely, too. Robert Annunziata, who lasted only 13 months in the job, received $20 million worth of stock options, a $10 million signing bonus, and a new 1999 Mercedes SL500. "I thought it was the worst employment contract in the world," said analyst Nell Minow of thecorporatelibrary.org. "If the board can't say no to such outrageous demands, then what can they say no to?"

His predecessor, Jack Scanlon, was given a reported $170 million severance package after just 10 months. And his successor, John Legere, received a $150 million signing bonus when he took the job in October. Just four months later, with Global Crossing itself on the brink of bankruptcy, Legere got a $2.75 million severance deal for giving up his secondary post as CEO of Asia Global Crossing. He also had the $10 million balance of a $15 million loan forgiven. That's small potatoes, however, compared to the nearly $200 million in loans that WorldCom has agreed to cover for its CEO Bernard J. Ebbers. WorldCom seems to have been acting as Ebbers' "personal piggy bank," says Brian Foley, an executive-pay consultant.

At Enron, billions of dollars in the form of a soaring stock price were created from no more than an illusion — that Enron was an ahead-of-its time band of geniuses. While some of the company's accounting methods were questionable, "Much of what Enron did was not illegal," says Joseph Stiglitz, former chief economist and senior vice-president at the World Bank. "Its auditors claim that its central practices were within the law; that thousands of firms do the same. They are right."

Last November, Cisco reported as profit $290 million "earned" by selling off excess inventory that had been written off earlier as worthless. The Center for Economic and Business Research, Ltd., a respected British think tank, conducted a study comparing the earnings reports of companies on the New York Stock Exchange with statistics from the U.S. Commerce Department's Bureau of Economic Analysis. It found U.S. corporate profits in 2001 to be overstated by roughly 27 percent, or $130 billion.

Since so many executives are paid in stock options or other packages based on a company's stock price — which in turn is driven by the company's earnings reports — one has to wonder how much of America's staggering executive wealth was truly earned.

"Enron Paid Huge Bonuses in '01; Exerts See Motive For Cheating." Kurt Eichenwald, New York Times, 3/1/02

"Enron's Last-Minute Bonus Orgy." Jake Tapper, Salon, 2/8/02

"The Fall of Enron." Laura Goldberg, Houston Chronicle, 12/8/01

"A Gadfly Who Raised Some Early Questions." Geraldine Fabrikant, New York Times, 2/12/02

"How Executives Prospered as Global Crossing Collapsed." Geraldine Fabrikant and Simon Romero, New York Times. 2/11/02

"The $20 billion." Thomas Easton and Scott Woolley, Forbes, 4/19/99

CBS Evening News, Anthony Mason reporting. 1/29/02

"Global Crossing: Where's the Outrage on Capitol Hill." Amy Borrus, with Lorraine Woellert. Business Week, 2/25/02

"Crony Capitalism, American-style." Joseph Stiglitz, The Straits Times (Singapore), 2/15/02

"As Their Companies Crumbled, Some CEOs Got Big-Money Payouts." Joann S. Lublin, Wall Street Journal, 2/26/02