Cooking the Books:
From GE to Enron

Jun 17, 2002

After the sudden collapse of the formerly high-flying Enron Corporation last year under a cloud of accounting scandals, top executives at many other companies have been forced out, either fired, resigned or retired. Some committed suicide. These were not just the executives of some fly-by-night internet companies, but top executives at Global Crossings, MCI, Adelphia, Dynergy, and CMS Energy, to name just a few.

At the same time, a shadow has been cast over many of the very largest companies, including General Electric, AT&T, American International Group (or AIG, the second largest financial company in the world, after Citicorp), AOL Time-Warner (the largest media company).

It turns out that many of the largest companies in the country–and the world–have more in common with the now-defunct Enron than they would like to admit–and everyone knows it. To one degree or another, they cooked their books to make it seem like they were bigger and richer than they really were. Even though they reported vast revenue increases, these companies did not have more money coming in, nor were they selling more.

Some of them simply engineered fictitious trades. Others attached a much greater value to deals than what they were really worth. At the same time, real costs and expenses were kept off the books they made public. The expenses might be deferred to a later date that never came, or else they were relegated to off-the-books footnotes in financial reports.

GE, for decades considered the “most admired company in America,” was famous for what seemed like a steady march of profit growth. Year after year, profits increased by 15%. Its chief executive, the now-retired Jack Welch, used to say that this very predictable increase fed the stock market.

In fact, GE’s profit statements were too good to be true, more a product of hundreds of billions of dollars in short-term debt that was constantly being rolled over, than a product of actual production and sales.

How to inflate a financial “bubble”

Of course, these companies had plenty of incentive for cooking their books. The higher the fictitious profits went, the higher the stock prices went. And this fed the frenzy on the stock market. So long as stock prices kept going up, the companies could hide the problems with their fictitious account books, just as Enron did.

The entire capitalist class fattened on the financial “bubble” which resulted. Top executives made millions of dollars each year on the stock “options” they cashed in. Some executives actually made over a billion dollars in just a few short years’ time. The rise of stock prices then boosted all the other speculative markets: bonds, commodities, currencies, real estate–all of which are controlled by the same tiny minority. Five% of the population owns 81% of all stock.

Of course, the companies that specialized in financial activity–banks, brokerages, accounting companies, investment bankers, insurance companies–grew stupendously. They brought in mathematicians and physicists, who invented trading strategies they said couldn’t lose.

The financial companies were also indispensable to the major industrial companies, granting them credit, floating new stocks and bonds, engineering mergers and acquisitions. Of course, they did all this at a very high profit in interest, fees and commissions.

“Analysts” employed by the big financial companies recommended the stocks of their client companies to the ordinary traders. These analysts became celebrities, since the stocks they hyped all seemed to go up. It has now come out, with the threatened prosecution of Merrill Lynch and ten other brokerage houses, that these analysts knew that the companies they praised were not worth very much. The analysts simply touted their stocks because it fed business and profits.

At the height of this speculative frenzy, government regulators and agencies supposedly in charge of policing these companies turned a blind eye. In 1996, Alan Greenspan, the chairman of the Federal Reserve, warned of “irrational exuberance” on Wall Street. But a few short months later, with the market going down, he changed his advice, pushing the stock market like all the other hacks.

As for the other government agencies, such as the U.S. Treasury Department and the Securities and Exchange Commission, they were not about to blow the whistle and risk bringing down the whole house of cards.

Sooner or later, financial bubbles burst

Of course, all this speculation could not last forever. In March 2000, the bottom fell out of stocks traded on the NASDAQ, many of which were issued by the so-called “new economy” technology sector. In fact most of these new companies did little more than ... sell stocks!

This was only the first, smaller financial bubble to burst. Since then, other sectors–including energy trading, telecommunications, and large conglomerates–have also seen their stocks drop considerably. And some major companies have been forced to declare bankruptcy, including Enron, K-Mart, Bethlehem Steel, Polaroid, Federal Mogul, Sunbeam, W.R. Grace, Fanny Mae Candies, etc. The question is whether this is only the beginning of a catastrophic collapse–and with it a grinding economic crisis–or a new period of slow stagnation and decline.

Of course, the future is impossible to predict in detail. But the past couple of years show that much of what we have been told about the “new” economy during past decade was false. The supposedly unprecedented economic expansion was little more than a financial bubble, fed by fraudulent accounting by the biggest companies.

Capitalism does not have any new miracles up its sleeve–just the same old lies and theft.1