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Larry Summers' Enron Problem
The supporting role the former Clinton official played in its collapse raises some hard questions about whether he should be the next treasury secretary.
As the incoming Obama administration prepares to find a way out of our latest economic mess, it is worth recalling the forgotten relationship between the man who seems to be a leading candidate for treasury secretary, Lawrence Summers, and the collapse of Enron, which in many ways presaged our current economic crisis.
The supporting role that Summers played in Enron, including his reassuring correspondence with Ken Lay and his laissez-faire approach to the California energy crisis of 2000 and 2001, indicates why he may not be suited to steer the nation through the troubled economic waters that lie ahead.
In his book about Enron, Conspiracy of Fools, Kurt Eichenwald describes Summers’ role in the early stages of the California energy crisis when the state was suddenly faced with power shortages and energy costs that were soaring up to 20 times normal levels. Then-Governor Gray Davis, convinced that Enron and others were manipulating the market, begged the federal government to intervene.
Before Summers is nominated to head the treasury, he should be asked some basic questions.
Even as blackouts shut down dialysis machines and traffic lights from Sacramento to San Diego, Summers and the Federal Reserve chairman, Alan Greenspan, decided to take a few moments to teach the California governor a lesson or two about free markets. In an emergency meeting the day after Christmas 2000, Summers and Greenspan, responding to the governor’s complaints about corporate tampering, lectured the governor that price manipulation was only possible because California had improperly regulated its markets. They urged the governor to take it easy on Enron and the other power companies because, in effect, being too critical of them might make them reluctant to do business in California. Summers and Greenspan pressured the governor to remove state caps on consumer rates.
A second meeting took place a few weeks later, via video teleconference, with Summers, California’s governor, and energy providers—including Enron’s Ken Lay. This time, Summers not only called for consumer rate increases, he also urged the governor to reassure the markets by relaxing environmental controls (Ken Lay’s suggestion) so that more power plants could be built quickly.
Once again, the California governor protested, refusing to raise electricity rates for consumers, declining to eviscerate environmental controls, and instead requested federal price caps on the electricity that power companies sold to California. Remarkably, Summers defended the energy executives, including Ken Lay, as doing “a pretty good job” of serving California, and dismissed the possibility that they were colluding to drive prices up—even though, as we know now, that’s precisely what they were doing, Summers disparaged the governor’s plan; it wouldn’t work because such government intervention would inevitably “distort the market,” he said.
Neither side gave in. Seven days later, George W. Bush was inaugurated as president. At the time, Ken Lay himself was widely discussed as a possible treasury secretary. Blackouts increased throughout California and energy prices continued to soar until, finally, in the spring of 2001, federal regulators imposed price caps on not just California but on all of the western states.
To be fair to Larry Summers, as of early 2001 neither he, nor anyone else outside of Enron, had heard the now-famous audiotapes of Enron traders cackling with glee as blackouts crippled the state and cost Californians $40 billion. Summers also didn’t know then about the traders’ plans, with names like “Deathstar” and “Get Shorty,” which gamed the market by shutting down plants and shipping electricity out of the state to drive up prices. And to be sure, some of California’s pre-existing energy regulations were indeed a little wacky and unbalanced.
Click to watch how Enron made millions by disrupting California's energy supply.
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Benjamin Sarlin is a reporter for The Daily Beast. He previously covered New York City politics for The New York Sun and has worked for talkingpointsmemo.com.
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"New" Obama = "Old" Clinton. Obama's administration is a trip back to the '90's It's full of Clintonites. Obama & Michelle are two Ivy League lawyers playing & pretending in Barbie's White House. Everyone says he "looks" so presidential. While looks don't count. The only thing different is you won't find any really ugly women like Maddie Albright, Janet Reno & Donna Shalala. Read Camille Paglia's latest column for a wake-up call.
Thanks for contributing your negative outlook. Have a beautiful day!
Thanks for the interesting article as it provided me with some insight that I will need to read about further. Here's hoping that the Obama team does their homework in this area and not rush to fill the position because of political pressure. This reminds us how those who appear to have our best interest may in fact be blinded by ambition.
Thank you for this article.
I mentioned the Enron thing in a comment under one of those "never again" caveats. I live in Texas and had relatives in CA who told me about the evisceration via energy bills there. And when the dust settled lo and behold CA has some of the cheapest energy bills around. In Texas we pay much for gas even though we are sitting on huge gas fields.
Enron the name, has insider meaning "entrail" they were truly laughing all the way to the rigged-prices bank at we the people.
Enron crooks went to jail and none too soon. Summers is not the only man suited for this job...thanks for pointing that out too.
While you're at it--WTF is happening to our bailout money? I call it "Bailout meet Bonfire" Paulson et al bears watching...really.
As for car makers--"let them eat cuts" and collapse into one giant maker just like they deregulated the phone company--remember that one? Ma Bell had a bunch of baby bells and then there were none.
The split caused high prices. Let them collapse into a monopoly of ONE. And make cars people WANT to buy...not the 8 cylinder crap...made no sense at all. They should pay for that Ford (faux) pas. Now they GM, Ford and crysler are all "Running on empty."
Heloise
Thank you for this article.
I mentioned the Enron thing in a comment under one of those "never again" caveats. I live in Texas and had relatives in CA who told me about the evisceration via energy bills there. And when the dust settled lo and behold CA has some of the cheapest energy bills around. In Texas we pay much for gas even though we are sitting on huge gas fields.
Enron the name, has insider meaning "entrail" they were truly laughing all the way to the rigged-prices bank at we the people.
Enron crooks went to jail and none too soon. Summers is not the only man suited for this job...thanks for pointing that out too.
While you're at it--WTF is happening to our bailout money? I call it "Bailout meet Bonfire" Paulson et al bears watching...really.
As for car makers--"let them eat cuts" and collapse into one giant maker just like they deregulated the phone company--remember that one? Ma Bell had a bunch of baby bells and then there were none.
The split caused high prices. Let them collapse into a monopoly of ONE. And make cars people WANT to buy...not the 8 cylinder crap...made no sense at all. They should pay for that Ford (faux) pas. Now they GM, Ford and crysler are all "Running on empty."
Heloise
I have been on-board with Obama for the past 18 months, should this man be selected to the position of Treasury Secretary, perhaps I will be able to get a bail-out for the millions I lost on his watch from Enron, if not I most certainly will be re-thinking my vote...seriously..foxes in the chicken coop?!? Sounds like bushie and darth....
This article made some good points - but it also made some good points BEYOND the scope of the article. Compare what California was seeing in their energy prices to what we are now seeing in the stock market.
During the Enron days, California was seeing that someone (it turned out to be primarily Enron) was manipulating energy prices, thereby costing California taxpayers literally billions of dollars. Today, we have individuals manipulating stock prices which will cost the American taxpayer literally hundreds of billions of dollars in this bailout.
It took awhile to find the major culprit in the energy scandal. It may take somewhat longer for investigators to discover who has been manipulating the stock market, but there are definitely culprits to be found.
Look at who has profitted the most through "short-selling" and that should point investigators in the right direction just like looking at who profited most from spiralling energy prices helped them find Enron. I don't think they will find that politics were behind it. I believe it will be much simpler - greed. Just trace the money and you'll find the criminal(s).
The problem will be to avoid the cover ups. Remember when gas prices soared over the past several months? Harry Reid, Senate Majority Leader, announced that there was some price manipulation and gouging going on. He committed to get to the bottom of it and to go after the offenders. Has anyone read about the results of his investigations? Of course not. They have been swept to the side.
I agree with Harry's initial suspicions. There was price manipulation going on. I don't know if he became distracted in his search for the truth or if he found the truth and decided to bury it. I believe the same kind of manipulations have been going on in the stock market. Much of the drop is due to consumer panic, but the things that got that ball rolling were not. They were orchestrated by folks who know how the market works.
It may take years before we find out who created this mess, but I believe that eventually we will. I hope and pray that we don't unwittingly put one or more of the culprits of this debacle in a position of power so he/she can do more damage.
I think that anyone with Enron, MCI, the stock brokerage houses, mortgage brokerages, and/or big oil companies on their resumes should be excluded from serving in the cabinet until we sort this mess out and find out who was innocent and who was guilty. As far as I'm concerned, those industries are tainted and we need to be very cautious of any advice or guidance we receive from them until we can once more trust their motives.
Thanks for writing this. I had forgotten what the connection was with Larry Summers/Ken Lay. It is now 9 yrs later, and Greenspan has gone before the nation and done his befuddled old man act and now they are wanting to shove Larry Summers down our throat? My God, hasn't Henry Paulson raped this country enough? Isn't there somebody who isn't a crook that can run the treasury?
Yeah, it doesn't make any sense to me why would Larry Summers be considered for Treasury Secretary. Robert Rubin, Larry Summers, Arthur Levitt, Alan Greenspan,Tim Geithner are all deregulators and are reponsible for the Enron mess and the current financial mess that the country has to endure because of selfish, greedy men. Obama needs to stay away from the Clintonites, the republicans, the lobbyists, and the Wall Streeters. Warren Buffet would be my only exception from that group.
I also heard that when Summers worked for the World Bank, he penned a memo, essentially urging investors to consider the opportunity in shipping more waste from the developed world to be disposed of in Africa--because, in his infamous phrase, Africa was "under-polluted." Talk about a tin ear.
Summers and Lay were friends, scratching one another's backs...
http://www.openleft.com/showDiary.do?diaryId=9759
Please consider signing the related petition to stop President-Elect Obama from appointing Summers.
Enron is just one of MANY, MANY reasons that Larry Summers should not be our Sec. Treasury.
The blackouts occured durring the BUSH administration. This is a bogus article with blatant lies.
Californian had nearly the highest electric rates in the country when Southern California Edison's CEO pushed through AB 1890 bringing "deregulation" to "California. UNintentionally, the regulatory structure for deregulation (if that is not contradictory in nature, I don't know what is) was flawed and incapable of keeping up with traders throughout the country and Canada (yes our friends to the north were involved in manipulation). California continues to have some of the highest rates in the country now that deregulation has been abandoned.
Gibney's analysis in this article is as impressive as his filmmaking. I also believed, at the time, that California's energy crisis was being manipulated. Summers' role in this fraud needs to be made public. Obama would do himself nothing but harm by dusting off Clinton-era political relics.
I believe it is safe to assume, the media has successfully destroyed Summer's chances and we can expect an announcement soon from President-Elect Obama on his choice for Secretary of the Treasury.
Why?
Let's jump back to real time and have a quick reality check.
It is 68 days and counting and NO ONE is in charge. President Bush..and he is still the only President...has packed his bags, moved to Crawford and fills his days in search of a publisher for his memoirs. Members of Congress are either basking in the afterglow of the election or plotting their 2010 comeback. Paulson is running amok with NO oversight or transparency, no overdue reports filed. Wall Street is spiraling downward at accelerating speed in fear of the next wave of bad news...no credit, no confidence, no consumer spending, no jobs, NO PRESIDENT. The press is obsessed with Palin's whirlwind media blitz.
...And 68 days is more than enough time to completely destroy this country.
Excellent reporting! Folks on Facebook should check out the new group "Is Larry Summers Really the Best We Can Do?"
http://www.facebook.com/group.php?gid=43314915989&ref=mf
Maybe there are innate differences in his psychology which led him to be duped by Ken Lay, et.al.
''Research in behavioral genetics is showing that things people previously attributed to socialization weren't" due to socialization after all.
http://www.boston.com/news/local/articles/2005/01/17/summers_remarks_on _women_draw_fire/
So sorry, Ken could not be with us to see his stooge.
Thank you.
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