The Face of Botox Economics
As its former CEO Jeffrey K. Skilling has been recently telling it, bankrupt Enron was not mismanaged. Rather, it was the victim of a “run on the bank” when Enron’s lenders panicked and called in their loans. This is a highly creative analysis of the situation, but, in a way, Skilling may be right. What most of us economic laymen know about Enron is that a crafty cadre of top executives signed off on partnerships designed to shift risk and eventual debt from Enron’s balance sheet to that of the partnerships, where it could be hidden from the company’s lenders and investors. Although Skilling wouldn’t exactly put it this way, he seems to be saying that if only Enron’s lenders hadn’t learned about the company’s mounting debt, or if they hadn’t cared, everything would still be all right, and Enron would be flying high.
Despite the ridicule he has endured, what Skilling and his fellow Enron conspirators are articulating is a new and, it turns out, widely practiced economic theory--one that has less to do with finance than with a larger cultural phenomenon. Call their theory “Botox economics,” after the faddish treatment for wrinkles, because, like that treatment, it is predicated on the idea that the only thing that really matters in America is how something looks. In Botox therapy, muscle tissue is injected with a form of botulinum toxin that paralyzes the surrounding tissues, weakening facial muscles and thus temporarily eradicating wrinkles. The only hitch is that one may also lose a degree of facial control--the little crinkle of the eye, the turn of the lip, the furrow of the brow--that enables us to express emotion. Personality is sacrificed for appearance.
In the same way, Botox economics eradicates some of the nastier financial wrinkles by presenting a neat set of books, but the appearance comes at the expense of substance.
In arriving at their theory, what Skilling, his predecessor Kenneth L. Lay, Chief Financial Officer Andrew S. Fastow and the rest of the Enron gang discovered--and they certainly weren’t the first--is that business is no different from anything else in modern American life. Perception is everything. The Enron boys had only to look around them to see a nation obsessed with image--in the clothes one wore, the car one drove, the neighborhood one lived in, the schools one’s children attended, the books one read, and, yes, the Botox one injected into one’s face. Everyone was performing for everyone else. Or, in historian Daniel Boorstin’s words, Americans had learned to live within their illusions. Enron simply adapted this cultural phenomenon to business. The trick wasn’t making a sound company, which was a difficult thing to do and which depended on too many variables. The trick was making a company that seemed to be sound, which was much easier and much more American.
In traditional economics, investors and analysts examined a company’s fundamentals in determining whether the company was sound. They wanted good management and a vigilant board of directors. They wanted a far-sighted business strategy. They wanted a healthy, which is to say a sensible, price-to-earnings ratio. (For the record, at its height in mid-2000, Enron sold at 267 times its pretended earnings.) Or in everyday language, they wanted a well-run company producing goods or services for which there seemed to be a growing market.
That’s a standard not easy to meet, which is where Botox economics comes in. Botox economics isn’t concerned with fundamentals or price-to-earning ratios or good management or visionary strategies or any of the other hallmarks of sound business practice. It is concerned with appearances. Enron prided itself on being an energy company without actual oil or gas or electricity assets; it simply brokered energy between suppliers and those in need. (In contrast, Dynegy, a rival energy company that was negotiating to merge with Enron late last year, is now running ads proclaiming that it has “real assets.”)
But in fact, Enron did produce something--illusions. The main illusion was that Enron was a booming company on the cutting edge of the economy. To sustain that, it not only jiggered its books, but it engaged in more pedestrian forms of image-mongering. It threw lavish parties with Tiffany glassware as door prizes. It contributed mammoth amounts of money to charity and politics and had friends in high places. It provided Starbucks coffee for its employees and Cristal champagne for its executives at lunch. In 2000, it even bought the rights to put its name on the new stadium of the Houston Astros, which the baseball team has since paid Enron to remove.
But just how insubstantial it all was was revealed in a story first reported by Dow Jones Newswires. To impress a group of visiting Wall Street stock analysts, Enron executives once ordered about 75 employees, including secretaries, throughout its headquarters to come down to the trading floor to man phones and pretend they were making deals. It was a scene right out of “The Sting”--and it worked. The analysts left believing Enron couldn’t make deals fast enough.
While it may be comforting to think of Enron as an aberration, in this respect at least the company’s publicity may have been right. Enron was in the business vanguard. The economic boom of the 1990s was fueled by many factors--among them, increased productivity, expanding technology, growing markets, weakened unions and consolidation. But it was also a product of hype and show and illusion, which is why stock prices could soar whether companies’ fundamentals supported the rises or not.
Companies like Enron pretended to be booming, and gullible investors, caught up in the mania of fast money and the rush of investment itself, were entranced. Increasingly, investors weren’t betting on the success of a company in traditional terms like how many goods it was selling or how much money it was making; they were betting on the success of its stock price, and that was often more a function of the company’s image than of its balance sheet or, as Enron demonstrated, a function of the image of its balance sheet.
There is nothing new in companies’ burnishing their images. What is new is that this wasn’t an adjunct to their main business. For many, this was their business. Enron purveyed its images, and investors stayed within the bubble of these images, giddily bidding up its stock price, which kept going up because it became disconnected from anything but image.
This wasn’t economics, either. This was a form of entertainment that demanded that investors, like the audience of any movie or TV show, suspend their disbelief. And it wasn’t just ordinary folks who fell victim. Some of the country’s largest banks, like Citigroup, poured money into Enron. Virtually the entire tech boom was a testament to investors’ bedazzlement by the illusion of being in the vanguard even when there were no profits to show for it and none in the offing. In the end, then, it wasn’t just Botox economics. Image-obsessed America had created a whole Botox economy, of which Enron was a symptom.
The one check on this hoodoo might have been the financial press, but it had been co-opted by Botox economics, too. Financial journalists used to pride themselves on analyzing which companies were poised to soar and which to fall, based on traditional bellwethers. It wasn’t glamorous or exciting work, but it was functional.
With the rise of cable television and the transformation of investment from analysis to recreation, that changed. Financial journalists seemed less interested in digging beneath a company’s image than in polishing it as a way of enhancing the thrill of investment entertainment. In Enron’s case, Skilling appeared as a cover boy on business magazines, which gave him the same gushy encomiums that entertainment reporters lavish on stars. When one intrepid Fortune magazine reporter did begin doing some old-fashioned spadework on Enron, Skilling lacerated her for being a party pooper.
Instead of providing that kind of investigation, all day long the business cable network CNBC carts out analysts and executives to tout stocks and provide a rosy picture of the market, so much so that some astute investors apparently are now getting an advance roster of guests and then buying the stocks of their companies on the theory that the executives, naturally, will always praise their business. In a Botox economy, that is enough to make the stock price rise.
If all this sounds more like Hollywood than Wall Street, it is. The two have been converging for years, with the latter, like so much else in America, modeling itself after the former. What Enron demonstrates is just how far the transformation had gone, and how much everyone had bought into it. In effect, the company and the economy had become an elaborate show, a blockbuster movie, engineered to entertain investors and enrich executives by doing precisely what entertainment has always done: provide the illusion of happiness. That the happiness didn’t last can be attributed not to the fact that it was all air but, rather, as Skilling has been telling us, to our sudden unwillingness to suspend our disbelief in the face of the flood of red ink that the company was no longer able to conceal. Living by the image, Enron ultimately died by the shattering of that image. Or in Botox terms, the wrinkles finally began to show.
