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Friday, May 26, 2006

Enron's Schemes "The Very Nature of Profit-Based, Market Capitalism" - by Wallace Roberts

Despite the conviction of a couple of bad apples at Enron, its top management is not the real culprit in this case. The real culprit is a bad idea: deregulation of the natural gas and electric power industries.
 
Kenneth Lay and Jeffrey Skilling, the former chairman and CEO respectively, can be said to be just "sharp traders," businessmen who did what the free market demands of rational players: take advantage of every loophole they could find to make a profit.
 
Early in 2004, Jacqueline Lang Weaver, a professor at the University of Houston Law Center, wrote, "In competitive electricity markets, participants can exploit legal loopholes or use market power to make millions of dollars in profits in a very short time period, and there is every reason to expect them to do so; it is the very nature of profit-based, market capitalism."
 
Enron played a unique role in deregulation, Weaver said, and the company's subsequent collapse was, in some important respects, a product of its genius in creating "a business model that tracked the opening of deregulated energy markets'and was accompanied by a powerful and well-financed political lobbying arm that worked to push government regulation out of the markets."
 
This point was echoed earlier this month when Robert McCullough, an independent analyst of the electric power industry who is a consultant to many of the agencies that were victims of Enron's trading schemes, testified before the U.S. Senate Policy Committee and described in detail the consequences of what he called "an unfortunate policy decision" made by the Commodities Futures Trading Commission (CFTC) in 1993.
 
"At the urging of Enron and other energy companies," he said, "CFTC relinquished control of energy-based forward transactions'The purpose of Enron's various market manipulation schemes was to promote an increase in long term prices'an increase that returned over a billion dollars in earnings on an enormous forward position that Enron accumulated just before the onset of the Western [California] Market Crisis."
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