Risk and Ruin

Enron and the Culture of American Capitalism

Gavin Benke

• Publisher: University of Pennsylvania Press
• Year: 2018
• Print ISBN: 9780812250206, 9780812250206
• eBook ISBN: 9780812295078
• Topic: Business
• Subtopic: Business History
• Index: Business

At the time of its collapse in 2001, Enron was one of the largest companies in the world, boasting revenue of over $100 billion. During the 1990s economic boom, the Houston, Texas-based energy company had diversified into commodities and derivatives trading and many other ventures—some more legal than others. In the lead-up to Enron's demise, it was revealed that the company's financial success was sustained by a creatively planned and well-orchestrated accounting fraud. The story of Enron and its disastrous aftermath has since become a symbol of corporate excess and negligence, framed as an exceptional event in the annals of American business.With Risk and Ruin, Gavin Benke places Enron's fall within the larger history and culture of late twentieth-century American capitalism. In many ways, Benke argues, Enron was emblematic of the transitions that characterized the era. Like Enron, the American economy had shifted from old industry to the so-called knowledge economy, from goods to finance, and from national to global modes of production.Benke dives deep into the Enron archives, analyzing company newsletters, board meeting minutes, and courtroom transcriptions to chart several interconnected themes across Enron's history: the changing fortunes of Houston; the shifting attitudes toward business strategy, deregulation, and the function of the market among policy makers and business leaders; and the cultural context that accompanied and encouraged these broader political and economic changes. Considered against this backdrop, Enron takes on new significance as a potent reminder of the unaddressed issues still facing national and global economies.Published in cooperation with the William P. Clements Center for Southwest Studies at Southern Methodist University.

CHAPTER 1

Enron Emerges

Because his upbringing made him an attractive literary subject, in the books that appeared after Enron’s collapse, authors tended to introduce Kenneth Lay as a child, growing up poor in Missouri. The journalist Loren Fox, for instance, wrote about a young Lay sitting atop a tractor and daydreaming about business.¹ The well-known New York Times business reporter Kurt Eichenwald opened his book on Enron with a scene that could have been taken from The Grapes of Wrath, with the Lay family moving across the country in a jalopy.² Bethany McLean and Peter Elkind, the Fortune journalists who cowrote The Smartest Guys in the Room, chose to be direct, stating that Lay “grew up dirt poor” and that “the Enron chairman’s history is a classic Horatio Alger story.”³ The contrast between such humble beginnings and the revelations of wanton excess at Enron in the late 1990s let these writers cast Lay as a man doomed to ruin. Other authors, such as the Texas Monthly journalist Mimi Swartz and Sherron Watkins (the Enron “whistle blower”) considered Lay to be an enigmatic presence.

Still, even if “Enron was a story with a mystery at its center,” Swartz and Watkins also insisted that “no one could understand Ken Lay or the company he built without understanding Houston.”⁴ Despite its obvious importance to Enron’s story, though, writers found themselves struggling to make sense of the relationship between Enron and Houston. Robert Bryce, writer for the liberal-leaning Texas Observer, for example, called Houston a “city of irrepressible optimists” but also judged that Enron’s habit of “buying” politicians at the national level was simply an extension of Houston’s business culture.⁵ Such conflicted feelings about the city’s role in Enron’s story is understandable. The company came together at a moment when the city was in the midst of a deep structural change. Perhaps, then, the best point to begin unraveling Enron’s collapse would be in 1967.

That September, Ken Lay was a young man writing to his former professor at the University of Missouri, Pinkney Walker, about his doctoral exams in economics at the University of Houston. “If they are successful,” he wrote to Walker, “maybe I can get a thesis underway while in the service.”⁶ It must have been an anxious time for the twenty-five-year-old. Though he was entering the armed forces in the middle of the Vietnam War, Lay did not know if he would end up in the air force or the navy, because “befitting the slow-moving military animal, a number of minor problems” had slowed his application “to almost a halt.”⁷ Walker, a conservative economist, surely appreciated Lay’s mild annoyance with an apparently inefficient government bureaucracy. Much like other letters the young man sent to Walker, news of a likely military commission was typed on letterhead for the Humble Oil and Refining Company of Houston, Texas. One of Walker’s favorite students, Lay had moved to Houston in 1965 to work for Humble as an economist and speechwriter.⁸

By the next January, Lay was in Naval Officer Candidate School in Rhode Island, which even decades later he remembered as being “very, very cold” in comparison to the city he had just left. After being commissioned, the newly minted ensign spent the next three years at the Pentagon, during which time he finished his degree. Lay may not have relished leaving Houston, which was still in the midst of a long boom following World War II. Though he would eventually return to Houston, in the interim, the city, the energy industry, and the global economy underwent profound transformations—such as the rollback of regulatory frameworks across the country, the rise of an emboldened financial services industry, and the first stirrings of a new round of economic globalization. It would not be the first time that wider forces played a crucial role in the city’s development.⁹

The area’s geography helped shape Houston’s long and important relationship to the world economy. The Buffalo Bayou, a curving body of water, wound its way through the north of what would become the city’s downtown, eventually emptying out to the east in the Trinity Bay and the waters of the Gulf of Mexico. Early Houstonians were well aware of how important the bayou would be if the city were to last. The Port of Houston was established in 1842, not long after two brothers from New York state, John Kirby and Augustus Allen, founded Houston in 1836. The modern Houston Ship Channel, though, was not completed until 1914, providing a crucial link that tied Houston to an international cotton market. In addition to early boosters like the Allen brothers, Houston’s growth during the second half of the nineteenth century was influenced by larger regional trends.¹⁰

The city itself had originally been divided into different wards, though the ward system ended during the twentieth century’s first decade. Fourth Ward, just south and east of the central business district, had long since been settled by African Americans, many of whom arrived in Houston after the Civil War in a neighborhood that would eventually be called Freedman’s Town. Ultimately though, African Americans settled in other parts of the city as well. French-speaking creoles fleeing the Great Mississippi Flood of 1917 also migrated to Houston and settled in Fifth Ward, which was north of the Buffalo Bayou. Across the water in Second Ward, a Spanish-speaking Mexican and Tejano community grew in the twentieth century’s first few decades.¹¹

At the edge of Second Ward, a grand railroad station had been built in 1911. Indeed, railroads were a major part of Houston’s economy in the early twentieth century, as well as a major employer of Fifth Ward creoles. Both the Ship Channel and the railroads were a cause of pride for the city’s elite. A 1928 booklet printed by the city’s chamber of commerce entitled Houston: Where Seventeen Railroads Meet the Sea, hinted at the business community’s ambitions to connect to wider markets. While cotton was crucial to the city’s fortunes, during the twentieth century, a different commodity would come to dominate Houston’s economy.¹²

After oil was discovered at nearby Spindletop in 1901, Houston was guaranteed a unique and important place in terms of international trade. However, it would take a number of developments in the twentieth century to make the city synonymous with energy. Even in the few decades after the Spindletop discovery, cotton remained the city’s dominant economic force. However, the New Deal and Second World War proved to be a sea change in the area’s economy. The transformation that began during the Depression years was expertly shaped by Jesse H. Jones, a powerful New Deal administrator and the owner of the Houston Chronicle, the area’s paper of record. As the head of the Reconstruction Finance Corporation, Jones was able to direct federal money toward Houston to be used for infrastructure improvements.¹³

The United States’ entrance into World War II further added to the region’s fortunes. Because of the area’s shipping channel, the city quickly became a center of petrochemical refining during the war. As a part of the war effort, the federal government also provided assistance to develop manufacturing facilities around the area to produce materials like airplane fuel and also built the “Big Inch” and “Little Inch” oil pipelines. These projects would provide the city and its businesses with a major boost after the war, transforming Houston’s political economy. Indeed, the massive federal investment in infrastructure helped petrochemicals become the central fact of economic life in the city.¹⁴

Oil, of course, was the commodity most associated with Houston, but in the 1940s, the natural gas business was also entering a phase of dramatic expansion. Since the nineteenth century, both coal and natural gas had been used for heat, light, and fuel. Interstate pipelines, though, emerged only in the 1920s, when huge stores of gas were discovered in the American Southwest and pipeline construction became much sturdier. As a relatively new industry, natural gas firms became entangled with the excesses of the booming 1920s. Assembling massive utility holding companies that combined electricity producers with gas pipelines, men in the power business, such as the notorious Samuel Insull, displayed a decided flexibility when it came to both the law and finance. Shares of utility holding companies were among the hottest stocks in a frenzied period on Wall Street, and when the market crashed in 1929 and the country fell into depression, utilities quickly became a focus of outrage. Out of concern that a rapacious and monopolistic “Power Trust” was developing, the Federal Trade Commission (FTC) had launched an investigation of these businesses a year before the crash. When the FTC published its findings in a huge report in 1935, unemployment was at 20 percent, and the country had already seen some of the Dust Bowl’s worst storms. Americans were hardly willing to tolerate revelations of stock manipulation and shady financing. Industry regulation was a certainty.¹⁵

In 1935, the same year the report was released, President Franklin Delano Roosevelt signed into law the Public Utility Holding Company Act, which took aim at the threat of monopoly power, and split natural gas operations from electricity companies. Other New Deal actions that focused on the world of finance, such as 1933’s Securities Act, as well as the Securities and Exchange Commission’s creation, also had implications for the power industry.¹⁶ Finally, 1938’s Natural Gas Act located the industry’s regulation at the federal level, with prices set by the Federal Power Commission (FPC). In contrast to the free-for-all that characterized the power business during the 1920s, the FPC would now grant access to markets and set prices for pipelines based on a “just and reasonable” rate of return. The commission also began breaking apart natural gas companies. Soon, the natural gas industry was split into three different segments—producers, pipeline companies, and local distribution companies. In this way, the shape of the natural gas industry moved in a parallel fashion with much of the U.S. economy. Through the trauma of the Great Depression and policy experimentation of the New Deal, an emphasis on stability emerged, meaning regulation for large portions of the economy. Laws, such as the Glass-Steagall Act, which separated commercial and investment banking, reflected this impulse. Even after the Depression’s end, industry regulation and a Keynesian approach to managing the business cycle through “countercyclical fiscal policy,” dominated the federal government’s economic and industrial policies. Despite deliberately exercising more government control over economic activity, in the immediate postwar era, U.S. pipelines grew. Not only did construction increase, but other pipelines—including Houston’s Big Inch and Little Inch—were converted to transport natural gas. These pipelines were to play an important role in Houston’s development.¹⁷

Two brothers, Herman and George Brown, who had operated the Brown and Root construction company since 1919, purchased the Big Inch and Little Inch pipelines from the federal government after the war, enabling the creation of the Texas Eastern Transmission Company, a natural gas pipeline operation.¹⁸ Gaining control of the pipelines and establishing the gas company ushered in the brothers’ heyday in the postwar era, when they “just formed one corporation after another.”¹⁹ No doubt the Brown brothers and other businessmen seized on the opportunities presented to them, but these opportunities would not have existed without an emerging political economy that was running on fossil fuels, as well as the stuff’s abundance around Houston. George and Herman Brown were at the center of a group of businessmen who exerted tremendous power in the city. Just as he had during the New Deal and the war, as both a politically connected mover and a powerful local businessman, Jesse H. Jones helped usher in the city’s postwar boom. Downtown, at the Lamar Hotel, which Jones owned, local business interests including Jones and the Brown brothers would meet in Suite 8F, which was leased to Herman Brown so he could have a place to stay when he was visiting from the state capital in Austin.²⁰

The suite itself was expansive, consisting of two bedrooms, a living room, a dining area and a kitchen. During the city’s postwar heyday in the 1940s and 1950s, when the Lay family was struggling to stay afloat in the Midwest, the Brown brothers and the other members of the 8F Crowd, including a local judge, James A. Elkins, and businessmen, including Gus Wortham, Jim Abercrombie, and William A. Smith, cemented commercial and social ties over drinks, exercising power through “interlocking directorates.” Because they served on the boards of each other’s companies, the business affairs of these men were all intertwined. Similarly, united by a common sensibility when it came to city affairs, the men of Suite 8F pursued measures to create a friendly business environment. For these men, business and civic interests were perfectly aligned. The group’s political influence was also formidable. Some historians have likened a local politician visiting the Lamar Hotel as the equivalent of a job interview. In addition to their local power, the 8F group’s influence also extended to Washington. In particular, the Brown brothers had close, long-standing ties to two Texans in D.C.—then senator Lyndon B. Johnson and the Speaker of the House, Sam Rayburn. Nor was the group’s clout limited to the hard worlds of business and politics. In addition to their shared business interests, the men also got in the habit of supporting each other’s local charities and other activities around town. Because of this, much of Houston’s postwar development was directed from 8F in the Lamar Hotel.²¹

Iconic symbols of Houston’s midcentury ruling class, the members of the Suite 8F Crowd saw themselves as working to raise Houston’s profile nationally and generally contributing to the city’s greatness, though the manner in which the group worked was inherently undemocratic. These men did not concern themselves too much with garnering public support for their plans but masterfully exercised power and pressure behind closed doors. Accounts of the meetings in Suite 8F emphasize drinking and playing cards. The men also hunted together on excursions outside of Houston. Hard-drinking, gambling, hunting, cementing deals in the privacy of a hotel room, entirely white and male, the Suite 8F Crowd seemed to be the very definition of an “old boys” club.

This mix of fraternity and privilege was often reflected in the specific issues the group championed. It was a conservative group of men, and the city grew in a way that reflected their values. Unsurprisingly, the group also pursued anti-union activities, lobbyin...

Table of contents

• Cover
• Half title
• Title
• Copyright
• Dedication
• Contents
• Introduction
• Chapter 1. Enron Emerges
• Chapter 2. Making Sense of the World After the Cold War
• Chapter 3. From Natural Gas to Knowledge
• Chapter 4. Selling Instability
• Chapter 5. A Very Bad Year
• Chapter 6. Making Enron Meaningful
• Conclusion. Learning from Enron
• Notes
• Index
• Acknowledgments