Enron’s Export-Import Bank (‘Smartest guys in the room’ at work)

“There were times when Lay’s lobbying seemed at odds with his oft-stated belief in free-market solutions. A classic example was Enron’s dependence on such government agencies as the Overseas Private Investment Corporation and the Export-Import Bank, which provided loans and loan guarantees for development project in the third world.”

“Like most Wall Street frenzies, the international development craze was wildly overhyped…. [S]ome of Enron International’s assets were almost comically awful, and others were fields of dreams.”

– Bethany McLean and Peter Elkind, The Smartest Guys in the Room (below)

A best-selling Enron book by Bethany McLean and Peter Elkind, The Smartest Guys in the Room (Penguin: 2003), told of Enron’s many interactions with government. Their treatment of the subject is only the beginning, however. My forthcoming book, Political Enron: A Business History (Part I: 2016), will chronicle Enron’s unprecedented rent-seeking as a warning about the perils of a mixed economy where the worst can get on top.

Concentrated benefits for Enron; diffused costs for taxpayers. That sums up the crony side of Enron, which was substantial.

Enron International (later Enron Development) was one of the poorest performing divisions of Enron. EI/ED loaded up on infrastructure projects in developing (overwhelmingly anti-capitalistic) countries, enabled by government loan guarantees and other taxpayer assistance, mainly from the U.S. side but also from foreign agencies.

The charter for the Export-Import Bank (EXIM) expired last July 1. This victory for taxpayers and blow against institutionalized crony capitalism deserves to be permanent: the agency closed and its staff dispersed to productive parts of the economy. To see why: WHEN YOU THINK OF EXIM, THINK OF ENRON.

Here is what authors McLean and Elkind wrote in Smartest Guys in the Room (p. 74):

One thing the developing countries needed was energy–cheap, plentiful, reliable energy…. Government development agencies such as the Overseas Private Investment Corporation and the Export-Import Bank were willing to loan money to fund big energy projects, as were the big banks [following OPIC and EXIM], which meant that companies such as Enron had to invest only a tiny sliver of their own capital to get a project off the ground. Wall Street Analysts talked about the potential for 30 percent returns on equity, about triple what U.S. pipelines were earning.

And on pages 88–89:

“There were times when Lay’s lobbying seemed at odds with his oft-stated belief in free-market solutions. A classic example was Enron’s dependence on such government agencies as the Overseas Private Investment Corporation and the Export-Import Bank, which provided loans and loan guarantees for development project in the third world.

In many cases, these agencies were an important source of financing, since banks were often leery of the risks. Rebecca Mark’s business would have been much smaller without such backing; between 1989 and 2001, some 20 government or quasi-governmental agencies, including OPIC, the World Bank, and the Export-Import Bank, approved $7.2 billion in public  financing for 38 separate Enron International projects in 29 countries, according to a study done by the Washington, D.C., Institute for Policy Studies. Jeff Skilling, who was always Mark’s biggest critic, used to heap scorn on her reliance on government-backed financing, claiming it was hypocritical for a company that supposedly worshiped at the altar of the free market.

But Lay had no such qualms. In congressional testimony in 1995 he said: ‘Public finances agencies are the only reliable sources of the financing that is essential for private infrastructure projects in developing countries.’ The following year, amid threats to cut funding for OPIC and the Ex-Im Bank, Lay warned that such moves ‘will change our strategy.’ And in early 1997, he asked Bush, then the governor, to lobby on behalf of OPIC and the Ex-Im Bank, saying that ‘these export credit agencies … are critical to U.S. developers like Enron.'”

Enron International’s bad investments (some were money losers; others were very low performing) helped to sink Enron. Summarized McLean and Elkind:

Like most Wall Street frenzies, the international development craze was wildly overhyped…. [S]ome of Enron International’s assets were almost comically awful, and others were fields of dreams. A power plant built in China was never commercially operated. The Dominican Republic plant was padlocked for a time. The plant in Cuiba, Brazil, was hundreds of millions of dollars over budget.

In Poland, there were difficulties getting the government to pay Enron for a plant it had built. A planned pipeline in Mozambique never happened, nor did a $500 million plant in Indonesia or a $200 million plant in Croatia. And that doesn’t even include the greatest debacle of them all–Dabhol, the $3 billion project that remains shuttered to this day.”