When a rock-ribbed conservative columnist at the Wall Street Journal and the man who was Bill Clinton's chairman of the Securities and Exchange Commission use the same sweeping adjective to describe a situation, you know they're talking about something serious. Testifying before the Senate Governmental Affairs Committee last week, Arthur Levitt, former head of the SEC, identified the Enron affair with "an emerging crisis of systemic confidence in our markets." Three days earlier, Robert L. Bartley had written in the Journal of the "systemic failure" at the root of the matter, one that touched "Directors suspending their ethical guidelines... Accountants and lawyers studiously looking the other way... Wall Street analysts failing in their principal duty."
It's the sense that Enron represents the failure of a system, not just of a Texas oil-and-gas-and-cybertrading company, that gives the case its weight. In capitalism's 700-year history, financial scandals are two a penny. As detailed in Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, some of them had far more devastating impacts than Enron's collapse ever will. John Law's Mississippi Co., for example, bankrupted 18th century France, until Law was chased out of Paris and songs were sung in the streets advocating "the application of all his notes to the most ignoble use to which paper can be applied." From Credit Mobilier to Cendant, from Jay Gould to Ivan Boesky, under Republican Presidents and Democratic ones, wherever and whenever there is a chance to make a dishonest buck, someone will take it.
Enron stands out from this sorry list not by virtue of the company's size but because the scandal is of such a fundamental nature. At the heart of capitalism is the act of investment, which is nothing more than a decision by one party to lend money to another in the hope of a return. The system can't function without trust--trust that the money so lent will not be stolen or applied to illegal purposes, and trust that an enterprise's accounts will accurately reflect the state of its business. Company directors, lawyers and accountants are said to have "fiduciary" duties--the word derives from Latin for trust--that place upon them obligations to do more than collect fees and salaries.
Time was when investors were drawn mainly from those rich enough to look after themselves. But those days are long past. From 1989 to 1998, the number of Americans who invested in shares--either directly or through mutual funds, savings accounts and retirement plans--grew from 52 million to 84 million. Enron matters because those charged with the trust of such investors--many of them new to the markets--let them down. A system that has brought unimagined prosperity cannot survive if such betrayals become commonplace.