Decmber 2, 2001: Enron declared bankruptcy, after several months of tanking stock prices, investigations into pervasive accounting fraud, and a failed attempt to find a buyer for the company.

The rise and fall of Enron is an instant classic in the annals of capitalism because, in one calamitous stroke, it wipes out so many sanctified illusions that rule in the magic marketplace. Enron embodies Nobel-class hubris like that of the market sophisticates who brought Long-Term Capital Management to ruin in 1998. It also smells of the raw monopolistic greed common a century ago. An energy-trading company that Wall Street had valued at $80 billion ten months ago is now a penny stock. Meanwhile, California consumers and businesses are stuck with the ruinously inflated electricity prices that Enron rode to brief financial glory. The firm’s gullible creditors include some of the best gilt-edged names in American banking—J.P. Morgan Chase, Citigroup—whose ancestral houses were big players during the first Gilded Age too. Unfortunately, then and now, these venerable financial institutions lured millions of innocents to the slaughter, unwitting shareholders who bought the exuberant promises.

In this case, the victims include Enron’s own employees (thousands of whom are abruptly out of work) because top management cleverly prohibited their 401(k) accounts from selling Enron’s plummeting stock while the big boys were dumping theirs. If the financial losses to banks are severe enough—we don’t yet know the full truth—then US taxpayers may be burned too, their money used once again to rescue delinquent financiers from their just deserts in the name of “saving the system.” Nobody ever said capitalism was pretty.

Markets are imperfect human artifacts and always subject to gross error, not to mention high-stakes fraud, because the transactions are always the work of human beings. Computerization and esoteric mathematical formulations do not change that humble fact; neither does the Internet. This same lesson was learned from great pain and loss in the early twentieth century and led eventually to the political understanding that markets without governors and regulators will repeatedly throw off disastrous consequences—extreme price swings, occasional busts and clever larcenies—so stabilizing rules and limits were imposed. That knowledge was pushed aside by the modern era’s deregulation….

It would be comforting to think this event will turn politics around and put a little spine in our legislators. Certainly many state governments have learned from California’s pain. But don’t count on Washington. Even after Enron’s meltdown, leading Democrats continue to shill for more deregulation, aware that their money patrons will be most upset if they reopen fundamental scrutiny of how wealth is created in the magic market. Elite opinion leaders will probably stick with the laissez-faire dogma, as it continues to fall apart, until the bloody losses lap over their shoes too.

The continuing relevance of Enron is at least two-fold: First, it provides jaw-dropping examples of problematic governance conduct from which no board, at any time, is safely immune. As chronicled in the report of its own Special Investigations Committee (the so-called “Powers Report”), the Enron board—once acclaimed for its performance—committed a series of significant failures of oversight with respect to the fatal related party transactions. These failures were grounded in the “flawed” decision to proceed with the concept of related party transactions with the CFO.

Second, it provides a clear explanation for the corporate accountability environment along with the enactment of Sarbanes Oxley. Indeed, the credibility of the Powers Report was such that it served as a major reference for the governance findings of the U.S. Senate Subcommittee that conducted a separate investigation of the Enron collapse; the investigations that ultimately provided the building blocks for the Sarbanes legislation. These are worthwhile lessons for today’s board members and senior executives, many of whom were not serving in executive or fiduciary positions fifteen years ago.

SOURCE: The Nation and Harvard Law School Forum on Corporate Governance