The scandal that has left the credibility of American politics in shreds

When you think of Texas and melodrama, you tend to think of Dallas. But the Texan city that's currently providing all the prime-time intrigue, back-stabbing and sudden reversals of fortune – on a colossal, improbably scale – is Houston. And, in contrast to the adventures of JR, Sue Ellen and friends, this is for real. Houston today is a city living on its nerves. The lawyers, accountants and political lobbyists who used to enjoy long lunches and fat cigars together are at each other's throats. Thousands of well-to-do families with appearances to keep up and mortgages to pay off have been thrown into destitution. The golf courses are deserted, the country clubs sombre as a funeral party.

The very emblems of the city are at risk, from the ball park to the ballet, because the corporation that bankrolled them all and made Houston proud has sunk into a vortex of bad debts, lawsuits, rip-offs extraordinaire, and scandal reaching into the furthest corners of national politics.

It has been just over a month since the energy trading company Enron – once America's seventh largest corporation and the emblem of the new economy, George Bush style – filed for bankruptcy following revelations of major accounting irregularities and the overnight collapse of investor confidence. But the fall-out is just beginning.

In the past 48 hours, the man who symbolised Enron's meteoric rise by hobnobbing with presidents and steamrollering every conceivable government regulation out of his way, company chairman Kenneth Lay has been forced to resign. The FBI has been all over Enron's corporate headquarters because of allegations of wholesale shredding of incriminating documents, even after the company was ordered to stop doing it.

Suddenly, the Enron name has been transformed from a badge of pride into a cancer eating away at everything it touches. Flagrant conflicts of interest and the whiff of legalised bribery abound at every turn. Most recently, the man who succeeded Mr Bush as Texas governor, Rick Perry, has been flailing around for days over the question of how he came to name the outgoing head of Enron's Mexico operations to the main state energy regulation body in apparent violation of even Texas's notoriously lax guidelines on public appointments. (The commissioner has now stepped down.)

The chief justice of Texas's state Supreme Court, meanwhile, has gone through verbal hoops to explain how he and seven of his fellow judges accepted almost $100,000 in electoral campaign money from Enron over the past eight years, even as they presided over cases in which Enron had a direct interest in the outcome. Intriguingly, Chief Justice Tom Phillips argues that the real impropriety would be to return the money. "To return contributions now from one group years after they were made," he said in a formal statement that must rank as one of the great classics of weaselly self-justification, "could signal that the justices had prejudged any dispute against Enron that might come before us."

Enron's spectacular collapse has now begun to shake the very foundations of American politics. We are not, after all, just talking about some relatively obscure financial transaction that may or may not have involved the man currently occupying the Oval Office. We are talking about the one-time darling of the stock market, the symbol of everything bright and hopeful in corporate America, being revealed as the perpetrator of a grand accounting hoax, in which a handful of senior executives made themselves inordinately rich while sticking it to their rank-and-file employees and, in effect, paying the politicians and regulators to look the other way.

We are talking about a company that managed to insinuate itself into every level of public life, from the sponsorship of local political races in Texas to the hiring of corporate consultants who went on to take prominent roles in the Bush White House. We are talking – perhaps most significantly – about a generalised system of corporate influence-peddling and back-scratching spreading far beyond Enron, a system that has reached epidemic proportions in American public life and which, with Enron's fall, is now being widely exposed as a public outrage and a gigantic scam. Anybody who doubts this – anybody who thinks that the scandal is just an ordinary political one that will leave as little mark on George Bush's presidency as the dodgy Whitewater land deal ultimately did on Bill Clinton's – need look no further than the extraordinary list of people who have already been tainted, embarrassed or otherwise caught with their pants down, even at this relatively early stage.

The rot is spread deep and wide: to the federal judge who, until a sudden change of heart this week, saw no reason to recuse herself from 46 Enron-related cases even though she has disclosed "long-standing friendships" with two of the lawyers representing Enron, including one who was best man at her wedding; to the Republican Senator from Texas, Phil Gramm, who happily worked to lift federal regulations on energy trading even as his wife Wendy served on Enron's board of directors; to the hundreds of congressmen on both sides of the aisle who have been taking Enron money (three quarters of the Senate and almost half of the House) and who now have to try to launch congressional investigations into the debacle even as they seek to avoid any taint of personal wrong-doing.

That is not to mention the White House itself, where no fewer than 35 administration officials have declared that they owned Enron stock at some point, in some cases running into the hundreds of thousands of dollars, and several senior figures, including the US Trade Representative, Robert Zoellick, and the White House economic adviser, Larry Lindsey, who served as paid Enron consultants before entering government. Mr Lindsey has been particularly active in blending his political and his commercial interests. For much of 2000 he remained on the Enron payroll, even as he was in charge of the economic platform on which Mr Bush was running for president. And late last year, before the catastrophic nature of Enron's problems became public, he took it upon himself to conduct an investigation into the possible wider economic fallout of a major energy company – he insists he had no particular one in mind – going bankrupt overnight.

At least until recently, it was never much of a secret that Enron would be a major policy player in the Bush administration. The new president was on first-name terms with Enron's chief executive, Kenneth Lay (he called him Kenny Boy), and was widely known to share his deregulation-happy philosophy. Indeed, part of the reason Mr Bush had some trouble filling the post of Energy Secretary was that Washington insiders believed Mr Lay would be the de facto holder of that office.

The precise extent of Enron's influence over the past year is now a matter for congressional investigation. The White House has disclosed that there were at least six meetings between Enron and administration officials ahead of the energy plan unveiled by Vice President Dick Cheney last May. And Mr Cheney made efforts to help Enron collect a $64m debt on an energy project in India on a recent state visit.

Perhaps more significantly, just about every energy-related decision to come out of the administration has reflected Enron's priorities: the push to open up the Arctic National Wildlife Refuge to oil exploration; the encouragement of mining and logging on public lands; the determination to resist conservation policies; and the unilateral decision to withdraw from the Kyoto Protocol on curbing global warming. The energy plan echoed Enron's line on 17 key points, including a favourable assessment of electricity deregulation – a policy that has earned Enron billions of dollars but which has played havoc with consumer markets, notably in California. Even the economic stimulus package now under consideration in Congress, a package supposed to pull the country out of recession and lift the grim post-11 September mood, offers Enron tax breaks and other concessions worth $254m – more than any other company.

The scandal would be bad enough if it was just about Enron, but it goes deeper than that, to a whole nexus of political and economic interests which, in common with Mr Bush and to some degree in concert with him, used Texas as a springboard to broaden their influence on the national and international stage. The recent revelations about Enron – the hidden debts and offshore subsidiaries, the years of unpaid taxes and the brutal manner in which employees were barred from selling company stock at the crucial moment of meltdown, leaving their retirement packages virtually worthless – have sucked in at least two other major institutions.

The first is Arthur Andersen, the Big Five accounting firm responsible for auditing Enron, which knew of its client's troubles at least as far back as last February but kept defending Enron's erroneous financial statements and even took the extraordinary decision to shred hundreds of Enron documents when it became clear the jig was up. Yesterday, David Duncan, the former Andersen partner who has been blamed for the shredding, refused to testify before Congress, citing the Fifth Amendment. Jim Greenwood, chairman of the House Energy and Commerce subcommittee on oversight and investigations, told him: "Enron robbed the bank, Arthur Andersen provided the getaway car, and they say you were at the wheel."

The second, less well known institution is the Houston-based law firm Vinson & Elkins, which did $455 million in legal work for Enron last year and is a familiar player in corporate lobbying circles in Austin, the Texas state capital. V&E has not been accused of any ethical lapses to date, but it has been shown up for its spectacularly bad judgement. In October it conducted an investigation into Enron's finances following a warning letter written to Mr Lay by a company vice president, Sharron Watkins, expressing fears that the company was on extremely shaky ground. V&E, who were consulted by Mr Lay against Ms Watkins' advice, approvingly described Enron's network of affiliates and secret partnerships as "creative and aggressive". "No one has reason to believe that it is inappropriate from a technical standpoint," the V&E report added, neglecting to notice that the creative accounting had kept some $600 million of debt off the company balance sheet (a "false and misleading" practice, according to the Securities and Exchange Commission, which is also investigating).

What could prove most damaging to Mr Bush is the fact that all these companies were part of a close-knit corporate culture whose dominance in Houston, Texas's business capital, went unquestioned for years. Andersen successfully lobbied to lift the ban on audit firms acting as consultants for their clients, and promptly went to work for Enron. V&E, meanwhile, serviced them both and joined in their various lobbying efforts to lift all kinds of government regulations on business. Crucially, all three companies were massive donors to Mr Bush's various campaigns. Enron has given more than $500,000 since Mr Bush's first run at Texas governor in 1994. V&E gave $335,000, and Anderson another $230,000. No fewer than five individuals from the three companies, including Mr Lay and a managing partner from Andersen laid off last week for his role in the document-shredding debacle, were named as "Pioneers" by the 2000 presidential campaign team because they each raised more than $100,000 for the Bush coffers.

For a long time, it all seemed so cosy. The lawyers, accountants, corporate lobbyists and political operatives all lived in the same swanky Houston neighbourhoods. They all played golf together, sat on the boards of the same charities, went to the Enron-sponsored Houston opera, had their cancer treated at the Enron Clinic and watched ball games at the city's proudly named baseball stadium, Enron Field. They enjoyed power lunches at Tony's (house speciality: truffle-scented baby hen) and took frequent lobbying trips to Austin and Washington. After all, the politicians seemed so willing to do their bidding: for a few hundred thousand dollars in campaign contributions, tax breaks and business opportunities opened up like Ali Baba's cave of treasures in the Arabian Nights. When Mr Bush took office a year ago, their prospects only looked sweeter. After all, the whole direction of the Republican Party had shifted markedly towards the energy industry (both Bush and Cheney are former oilmen) and towards Texas (thanks partly to the president, but also to such influential Texan figures as Senator Gramm, the House Majority Leader, Dick Armey, and the House Chief Whip, Tom DeLay).

Clearly, the companies overreached, and the system they exploited so effectively is now turning to bite them on the backside. The Enron meltdown may be having a traumatic effect on those who chose to get caught up in the headiness in the first place, but it also feels like a long-anticipated vindication to the few watchdogs brave enough to have kept an eye on the orgy of political spending over the years and to denounce the effective sale of American democracy to the highest bidder.

"Their attitude was, they throw money like most others take a piss, two or three times a day, wherever it lands they don't care, it's going to do them some good somewhere," said a characteristically colourful Jim Hightower, a former Texas politician turned populist author and radio commentator. "What's going on now has ripped the mask off the whole corrupt system. These are delicious times, to see them squirm like this."

There is almost certainly more to come, and one place to look for signs of trouble could be Halliburton, the oil company that Vice President Cheney ran for five years before jumping back on to the election campaign trail. Like Enron, Halliburton's shares have been in free fall since last summer, losing 75 per cent of their value – the reason being the looming threat of an astonishing 260,000 asbestos-related lawsuits. Like Enron, Halliburton has been a generous political donor, funnelling almost $500,000 to congressional candidates in the past four years, much of it to support representatives who wanted to limit the ability of workers to sue companies for asbestos exposure. And of course it has close ties to the Bush administration – aside from the Cheney connection, its board includes Lawrence Eagleburger, who Secretary of State under the first President Bush.

This scandal season will almost certainly not result in an easy political "gotcha!" – a clear instance of illegality with the power to bring down a senior politician. The Enron debacle is likely to be too murky, too wrapped in swirls of obsfuscation, for any realistic chance of that. In any case, the point is not what political leaders may have done illegally. The point is how much they are being seen to get away with perfectly legally under the present set of campaign finance rules. It is the shamelessness of the system that is likely to anger the public most effectively. And that will be the biggest liability of all for the man in the Oval Office.