Enron stole a page from the '80s S&L scandal
| Offshore: The Dark Side of the Global Economy |
By William Brittain-Catlin
Farrar Straus & Giroux
$25, 261 pages
The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L industry
By William K. Black
University of Texas Press
$24.95, 329 pages
Just when you think the corruption is over, that enough CEOs have traded in their $4,000 bespoke suits for prison denim, something else comes along to remind you that greed never sleeps. No sooner had the country paid off the S&L bailout, along came the corporate accounting fraud of the late '90s and early 21st century. What's wrong with this country?
Well, part of what's gone sour is that the vaunted idea of deregulation - championed by Reagan and the two Bushes - has become rule of law in Washington. Rather than unleash the market to the enrichment of all, however, the lack of oversight in securities and accounting has pushed the spoils of capital into the hands of the few. And opened loopholes for fraud and/or outright stealing so big you could park a doublewide there.
If you've got a good handle on your stress levels and are curious, two new books probe the ins and outs of these loopholes. One focuses on the Savings & Loan scandal of the '80s, the other deals with the manipulation of offshore accounting. Together they paint a portrait of America as the reborn wild west of capitalism, where bandits don't just hold up the banks: They own them, too.
One of the shocking details of Black's narrative is that the tools used to cook books then are exactly the same ones that were used in the Enron scandal - notably what is called "market to market accounting." Only the first time around the logic was doubly bizarre. If Enron was booking profits for work it had at least contracted to perform eventually, S&Ls simply tacked on an entirely arbitrary amount of worth. As in, a failing S&L may be $45 million in the hole, but the fact that someone wants to buy it means that must not be true. Therefore S&Ls could tack on $45 million in "good will" value when they were bought or merged.
The resulting flurry of mergers and acquisitions made the problem worse when it finally came to light - which took a while since the Reagan administration decided to cover up and continue deregulating at the same time. How brazen was this? When the F.D.I.C. knew that it had $150 billion in liability to Savings & Loan banks that were going under, it hid the debt so that the Reagan tax cuts could pass Congress.
And so we wind up in the year 2000. Here's something to think about next time the tax man cometh: Between 1996 and 2000, Texas-based energy giant Enron made more than $2 billion on paper but paid just $17 million (well under 1 percent) in taxes. How did they get away with this? Who benefitted? And is their accountant in jail yet?
Offshore gives a clear primer for anyone interested in how offshore banking works. Companies incorporate in domestic tax havens such as Delaware, which gives them access to corporate tax breaks (or "hand outs" as politicians have begun calling them). Then, through a series of secret holding companies and tax shelters on various, mainly Caribbean, islands, they funnel their profits through tax-free zones. Ford might build cars in Michigan, but its accountants know how to make it look like the company's profits are made in the sunny Caribbean.
This Hummer-size tax loophole explains why there are 65,000 U.S. companies registered in Cayman alone. Why don't they just move there? As Brittain-Catlin explains, no big company will go fully offshore, for that would mean forfeiting political leverage in Washington.
The upshot of all this is that multi-national corporations and the government are more entwined than ever, and in the future we will see more deals like the one that gave a $1.7 billion contract to Haliburton (the company Dick Cheney used to run) to rebuild Iraq. No other bidders were allowed.
Believers call this "access capitalism." The rest of the world has another term for it: imperial greed. And Brittain-Catlin isn't the first critic of globalization to say that if we don't put it in check, America could see more blowback from the world (let alone its voters) of the like it felt on September 11. •
By John Freeman