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The Enron Story By Tom Barkley

Whenever history is written, stories of heroes and villains, triumphs and failures, are all included to paint a fair picture of events that have occurred – and financial history is no different from that written by general historians. In recent years, however, it seems to be the case that there have been more disasters and downfalls to relate than successes. Consider, for instance, the enormous losses in the early 1990s experienced by organizations such as Gibson Greetings, Procter & Gamble, Orange County, Barings Bank and Metallgesellschaft, among others. What did they all have in common? They all resulted from trading derivatives. It may be argued that Enron’s collapse was also due, at least in part, to trading derivatives. Perhaps Warren Buffett, in a recent Fortune article, is not far from the truth when he describes derivatives as “time bombs, both for the parties that deal in them and the economic system, (…) financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Why then does the story of Enron stand out among these others? For one reason, when Enron filed for Chapter 11 bankruptcy protection on December 2, 2001, it was the largest bankruptcy in U.S. history1. Another reason is that there were serious repercussions to the accounting industry and even the government. However, before considering these and other reasons further, some background needs to be painted in order to better appreciate the stage upon which this drama unfolded.

The Setting Enron came into being in July 1985, when two natural gas companies merged: Houston Natural Gas and InterNorth, a gas pipeline company based in Omaha, Nebraska. Ken Lay, having become chairman and CEO of the former company a year or so before, had already fought some battles to develop Houston Natural Gas, and had acquired two other companies: Florida Gas and Transwestern Pipeline. In fact, at the time, InterNorth saw itself as acquiring Houston Natural Gas, but Lay pitched the union to his people as a merger. It was not long before he assumed control of the new enterprise. Richard Kinder, who later became Lay’s right-hand man as the company’s President and COO, connected with Lay from the beginning. Even at this early stage, the company’s aspirations could be seen in its name, which very much resembled that of Exxon, the energy giant where Lay began his career in 1965. Its headquarters were moved to Houston, and Enron became both a natural gas and an oil company. During the late 1980s, the Federal Energy Regulatory Commission (FERC) decided to deregulate natural gas markets. As a result of several FERC orders, most gas sales were conducted through the spot market, leading to unprecedented levels of volatility. Enron seized an opportunity to shift its business
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This changed less than eight months later when MCI Worldcom declared bankruptcy on July 21, 2002.

Skilling. where income and asset values are reported at their replacement costs. Enron began to roll out the “energy network” concept around the world. The company was soon the largest merchant of natural gas and power in Britain and a major presence in all of Europe. Enron established a trading center in London.S. Fastow formed the first of many off-balance-sheet partnerships for legitimate business purposes. with established success in the U. even though the actual money might not be seen for years to come. regulatory barriers for the wholesale power transmission of electricity were removed in 1996. Jeffrey Skilling. This included the acquisition of natural gas pipelines. Participation by CalPERS meant that JEDI was an independent entity from Enron. In 1990.S. In 1994. This allowed the company to earn profits from the partnership. Enron decided to expand its business abroad. In the U. and the 2 . Enron hedged price swings using customized. was designed to invest in natural gas projects.S. The project implemented in two stages: the first burned oil. called the Joint Energy Development Investment Limited Partnership (JEDI). Andrew Fastow. In 1992. were implemented throughout the company. They allowed Enron to calculate revenue from long-term contracts and to book much of it as immediate profit. allowing numerous producers and wholesale buyers to purchase gas supplies at set prices. A year later. and making profits on the transactions. The following year. and often highly complex. The next year. electric and natural gas utilities.. India.strategy to become both a physical supplier of natural gas and a “gas bank” where financing and risk management services were offered to the energy industry. along with General Electric and Bechtel. Enron began trading electricity in the U. and this allowed Enron to create distinct businesses for the transportation and selling of gas. physical contracts and financially settled derivatives contracts. During the same year. The company quickly became the largest U. Shortly afterwards this mutated into Enron Capital and Trade Resources (ECT). Enron formed a limited partnership with an enormous and highly influential pension fund: the California Public Employees’ Retirement System (CalPERS). the government continued with deregulation.S. who had already provided consulting services to Enron. U. was hired from McKinsey & Company to run Enron Gas Services. marketer of electricity. to start as an account director – he rose quickly through the ranks of ECT. Skilling was able to persuade federal regulators to let Enron use “mark-tomarket” accounting. Enron became an intermediary. where it began trading power and gas in Britain. The partnership. but none of JEDI’s debt appeared on Enron’s balance sheet. as power market deregulation intensified. These practices. in turn. hired a promising young man from the banking industry. a mechanism approved for use by brokerages for trading securities.S. At this time. and the implementation of energy services and wholesale commodities trading. Enron’s “gas bank”. where the company acted as a market maker in natural gas. Enron initiated the construction of a $2 billion power plant in Dabhol..

Skilling continued as President of ECT. the project moved forward. In 1997. Amazon. Enron broadened its horizons further in 1998. In 1999. becoming the world’s largest business-to-business trading platform. a water utility company. She was co-chair and CEO of Enron Operations Corp and in January 1997. India had widespread poverty. when it invested $10 million in Rhythms NetConnections. Enron formed Enron Broadband Services (EBS) with the intention of investing in the broadband market and trading bandwidth capacity. a privately held Internet service provider for businesses that use digital subscriber technology. who left with him. pulp and paper. for comparison. Shortly afterwards they were married. but it collapsed later in 1996 when India’s Congress party was voted out of office. there was one factor that also had to be considered: since all transactions were with Enron. Rebecca Mark.second.com was averaging about $3 billion per year. The Dabhol power plant project in India became the world’s largest independent natural-gas-fired power facility. When Indian protestors were forcefully dispersed from the building site. trading volumes could be significantly reduced. went on to become chairman and CEO of Enron International. EnronOnline had the effect of squeezing bid-ask spreads. Since LNG is an expensive fuel. He had a falling out with Lay over a situation involving Lay’s secretary. Lay. chairman and CEO of Enron since 1986. but it continued to be in a troubled state. Rebecca Mark orchestrated the acquisition of Wessex Water in Britain and formed Azurix. Slowly. Enron also launched a business-to-business Internet platform designed to trade commodities: EnronOnline. plastics. The system allowed clients to log on. stage burned imported liquefied natural gas (LNG). who was spearheading the project. Enron was accused of human rights abuses. Enron extended its energy-trading model to new commodities markets. Richard Kinder resigned as President and COO of Enron to start his own company. output from the plant would be four times as expensive as other electricity available in India. larger. 2 At around the same time. Enron Energy Services (EES) was created to bundle wholesale energy delivery and risk management services to commercial and industrial users. The government never cracked down on the theft. and this led to much of the electricity produced being stolen. the platform averaged 6.5 billion daily. During the year.000 trades per day worth $2. had her political work cut out for her. She became the CEO of the new company. including weather derivative products and the development of products in the coal. every customer who traded on the system was taking on credit exposure to Enron. Inside two years. named Skilling Enron’s new President and COO. but lost revenues were made up with increased volumes. As a result of this and widespread opposition to it. 2 Of course. because it was afraid of a popular backlash. replacing Kinder. check bid and ask prices and perform trades directly with Enron while online. metals. one of the most profitable and powerful units within Enron. under a legal cloud and experiencing poor operating results. 3 . and bandwidth capacity markets. If Enron’s credit rating were to falter.

Lay saw the opportunities that existed in the rapid deregulation of energy markets in the U. learning how to negotiate international power generation projects in a market that was just beginning to attract investors. making it the seventh largest company in the Fortune 500. At Enron during the late 1980s. and attracted subordinates who wanted to seize these opportunities. He established himself both academically and professionally. and around the world. the two most influential were Rebecca Mark and Jeff Skilling.” Like Lay and Kinder. later hired him as a vice president of new energy ventures.S. attention here will be limited to just four players who take center stage and have already appeared briefly: Kenneth Lay. Enron’s board of directors appointed CFO Fastow to be the general partner of two partnerships. It is reported that he received about $200 million in salary. Ken Lay’s style of management was very much hands-off. prudent businessman who kept a tight handle on expenses. From there he worked his way up the managerial ladder. He was an outspoken advocate for free enterprise and had an ideological fervor for deregulation and a knack for making influential friends. In the process. she worked in the electric power division. he amassed a personal fortune as well. until he was in a position to run his own show. she came to have nicknames such as “Mark the Shark” and “Hell in High Heels. Mark was a very attractive and charming woman. Jeffrey Skilling and Andrew Fastow. Mark came to Enron from Houston Natural Gas. Florida Gas. Aggressive and accustomed to getting her own way. in stark contrast to Richard Kinder’s. Of these. Kinder was a tough. Lay was impressed with Mark’s style and facilitated her advancement in the firm. obtaining a master’s degree in economics from the University of Missouri and a doctorate in the same field from the University of Houston. Enron’s revenue exceeded $100 billion. After spending some time in the Navy. the perfect person to oversee the cash-generating prospects of a growing company. Mark convinced Lay to let 4 . He campaigned vigorously for changes in federal energy rules. Ken Lay had dreamed of being a business giant ever since he a boy growing up in rural Missouri. stock and other compensation from Enron since 1999. Along the way. Lay worked for the FERC. In 2000. Rebecca Mark. He can easily be described as Enron’s patriarchal visionary. After taking two years off to earn a Harvard MBA. so that natural gas could be sold on open markets like other commodities. A description of the roles they played follows. he helped create an industry and made Enron into a corporate political powerhouse. and to pay down the firm’s debt. The Players Although the cast of leading and supporting actors in this drama numbers into the thousands. an act which required special approval due to the possible conflict of interests in serving this dual role.During this year. One of the companies he regulated.

S. paper pulp. and with the deregulation of electricity in the U. Some estimates were that the utility would have to make payments totaling $30 billion over the life of the project. Mark was globetrotting around the world. flying back and forth between Houston and India. In the early 1990s. and metals.” Mark promoted the acquisition of physical assets. Skilling was also working to outmaneuver Mark. Skilling was known as a cold-hearted businessman whom Enron employees called “Darth Vader” behind closed doors. Mark seemed to be successful. the project was re-launched. They closed many deals.S.. After some renegotiation. This vision never panned out. For some considerable time. however. In fact. the project was a stunning success.S. He arranged things so that ECT would provide financing to other divisions of Enron. acquiring or building power plants and related projects. many of the deals would later come back to haunt Enron. He earned a Harvard MBA in 1979. The profitability of the deals. While Mark was working on the Dabhol project. plastics. pursuing his “asset light” strategy. ECT started trading in that market as well. When Enron hired Skilling from McKinsey. If Skilling tried to block Mark’s financing. Skilling’s 5 . would not be known for years to come. including Mark’s Enron International. Enron’s deal with the Indian government required the state-owned electric utility to buy power from the plant whether it was needed or not. Lay even asked the Clinton administration to actively pressure the new Indian government to restart the project. Mark could always go directly to Lay or raise financing outside Enron. he suggested that the company get in the business of providing financing to third party oil and gas producers. Still. this would become Enron International. With this success. Skilling started exploring new markets where he could apply the “Enron model. Skilling promoted the use of Enron’s balance sheet for intermediating deals. Eventually. Their competing visions came to be known as “asset heavy” and “asset light. bringing fame and large bonuses. Mark worked tirelessly on getting the Dabhol project restarted after its initial failure. Mark and Skilling were the rising stars of Enron. Skilling was modeling ECT as an investment bank of sorts for the energy industry. For Mark.her form an international division that would pursue more energy projects around the world. Enron Development Corporation was formed in 1991 with Mark as CEO. A fierce rivalry developed between them. Although these were deregulating more slowly than the wholesale markets. in order to ensure adequate supplies of natural gas for ECT. the vision was that some day residences would be able to choose an electricity provider in the same way they chose a phone provider.” These would come to include weather. Skilling was back in the U. for which they earned enormous bonuses. She and her team of dealmakers fashioned themselves as missionaries of privatization. His intention was to trade energies and other commodities the way Wall Street trades capital. Skilling also set his sights on retail electricity markets in the U. He launched ECT into natural gas trading.

low-profile type. but there was no one to replace Richard Kinder’s prudence. He rarely attended the quarterly briefings Enron staged for financial analysts.strategy enabled him to slow Enron International and gave him a context to criticize Mark’s heavy spending on projects. 6 . Skilling was appointed to replace him.6 million Gulfstream V for his personal use. However. spending lavishly on Enron International corporate offices and sparing no expense to entertain clients and counterparties. called Chewco Investments. which was worth $383 million. and its debt would have to appear on Enron’s balance sheet. Andrew Fastow was a 1986 MBA from Northwestern University. Lay. Enron wanted to launch a new and larger limited partnership than the one they began in 1993. Mark had already established a reputation as a big spender. Enron now had two business visionaries at its helm. and was appointed Enron’s CFO in 1996 at the age of 37. making him the butt of a Wall Street piece of trivia: “Name Enron’s CFO. He befriended Skilling. Skilling established a harsh corporate culture that pitted employees against each other. The process undermined risk management within Enron. JEDI would no longer be independent. Enron’s staffing doubled. Skilling and Mark were all spendthrifts. including a $41. promoting a circle of cronies into senior positions. Enron couldn’t simply buy out CalPERS’ investment in JEDI. In 1996. Mark remained a significant force within Enron. While everyone in business knew of Ken Lay and Jeff Skilling.555. Skilling won a significant victory over Mark.” Before joining Enron. Enron still had considerable debt. This would make Enron the sole investor in JEDI. going from 7. making him “heir apparent” to eventually take over from Lay as CEO. jet setting around the globe. Risk management became little more than a rubber stamp and a stepping-stone for employees moving around the company. In 1997. In Ken Lay and Jeff Skilling. even people at Enron rarely heard the name of Andy Fastow. he worked at Continental Bank doing asset securitization deals.456 employees to 15. constantly weeding out non-performers or the politically isolated and replacing them with new hires. it was thought that CalPERS would be loath to invest while it was still invested in JEDI. He went on a hiring spree. and its credit rating was barely investment grade. He has been described as a quiet. Between 1996 and 1997. Fastow proposed forming a new venture. With Kinder gone. After Kinder left. Worst of all was Skilling. to take CalPERS’ place as an investor in JEDI. who was not about to let creditors get in the way of his business vision. Risk managers were afraid they would suffer if they blocked deals or did not support favorable mark-to-model valuations. Lay immediately sold off the firm’s fleet of modest corporate jets and purchased a more expensive fleet. but Skilling was consolidating his position. calling it JEDI II. Complex deals and mark-to-model valuations had to be approved by risk management.

The name JEDI was no coincidence. Rebecca Mark was seeking to shape a new role for herself. Fastow decided that one of his subordinates. The Plot Thickens What Mark did not realize is that water is a localized business that lacks the continent-spanning pipelines and transmission systems that allow natural gas. William Dodson. Chewco would allow Enron to keep JEDI’s debt off its balance sheet. her acquisitions were turning sour. The biggest. To keep its debt off Enron’s books.Enron’s culture was heavily influenced by the movie Star Wars. after Wessex Water. oil and power to be moved and traded between locations. This would only work if Chewco were also independent from Enron. She paid $2. she floated a third of the company at $19 per share. preferably as far removed from Skilling as possible. was a 30-year concession to provide water and sewage services to 2 million residents of Argentina’s Buenos Aires province. At the same time. one of England’s most profitable water utilities. raising $695 million. but Mark was ignorant of this hard reality. The concession was awarded in a bidding process in which Mark paid $439 million – three times the second highest bid! Mark was determined to take Azurix public. Rather than find a truly independent investor for Chewco. Fastow’s solution was an elaborate scheme involving multiple special purpose entities and a direct investment by JEDI of $132 million in Chewco – JEDI was investing in Chewco so that Chewco could invest in JEDI. Marlin Water Trust. she purchased Wessex Water. By replacing CalPERS as an independent investor.000 put up directly by Kopper and his domestic partner. salaries and travel. Michael Kopper. Enron had been toying with the idea of developing a water trading market. She overpaid for acquisitions and spent lavishly on office space. Enron’s board approved the Chewco deal without knowing the details of Kopper’s role or specifics of how the deal was financed. Her new water venture was called Azurix. a number of outside investors were found to form an SPE. This would give her an independent company far removed from Jeff Skilling. In 1998. all of Chewco’s funding originated either from Enron or as loans guaranteed by Enron. Water could never be traded the same way. would play the role of independent investor in Chewco. Employees referred to the corporate headquarters as the “Death Star”. Enron treated Chewco as an independent entity for accounting purposes – but it wasn’t! In 1998. She ran Azurix as if money was never an issue. In June 1999. a 30% premium over the utility’s market capitalization. and she perceived this as her opportunity. Kopper didn’t have the personal resources to make such an investment.2 billion. The new partnership’s name was a reference to the Star Wars character Chewbacca. In Argentina. Mark started acquiring more assets. The regulated water business has extremely low margins. Except for $125. to take a 50% stake. Azurix discovered that its new acquisition did not include the home office. This was absurd. Utilities make money by cutting expenses to the bone. staff or billing system of the 7 .

The world economy was in the midst of a technologydriven bubble. Enron was also sitting on a large unrealized gain on a forward contract it had purchased from Union Bank of Switzerland on its own stock. Fastow proposed a new SPE called LJM after the initials of his wife and two sons. and stock prices were soaring. Enron played the game skillfully. Enron had established a reputation as a preeminent global enterprise. but it was also dazzled by Enron’s successes in trading new markets and launching EnronOnline. If the prices of both Rhythms stock and Enron stock were to fall. There has long been a conflict of interest for investment banks whose equity analysts must rate a firm’s stock for investors at the same time its investment bankers are wooing that firm as a client. It was the envy of competitors. LJM would be a private equity fund with Fastow as general partner. From a financial standpoint. That same month. so every firm on Wall Street rated Enron’s stock a “buy”. which LJM would issue to Enron. U. which would use this asset to hedge a put option on Rhythms stock. involving a $1 million investment by Fastow and $15 million from outside investors. The Internet was going to change all the rules. Enron was the 800-pound gorilla that shaped markets to its will. In energy markets. Enron could not take the gain as income because accounting rules prohibit firms from including in net income gains made on their own stock. Wessex Water would be sold to a Malaysian company for a fraction of the price Enron had paid. The net effect was to transfer the forward on Enron stock to LJM. LJM would be under water. Enron would later buy back outstanding Azurix stock at $7 per share. the deal had little merit. The Argentina investment would be written off. The day of the IPO. It disguised rather than eliminated the problem 8 . By May 1999. Four SPEs were formed specifically for the deal. Ultimately. Most of Rebecca Mark’s staggering losses on international power and water projects had not yet been realized.existing utility. Wall Street knew there were problems. The accounting was dubious for many reasons. Capital was cheap. In 1998. The firm was constantly doing deals: buying. To protect these gains and recognize them as income.. Azurix cut its staff by a third. selling and merging firms or orchestrating SPEs. regulators ordered a 12% cut in the prices Wessex could charge customers. an implicit quid pro quo of “buy” recommendations in exchange for investment banking business became increasingly blatant. Enron was barred from immediately realizing this gain. In the bubble market of the late 1990s. which meant people would be receiving water. The structure was extremely complicated. but Azurix would have no idea as to who they were or where to send bills. Skilling and Fastow were careful to spread the business around. In 2002.K. Because of a six-month lockup provision. By the late 1990s. Enron invested $10 million in an Internet startup firm called Rhythms NetConnections that was about to go public. Enron's investment was worth $300 million. Thousands of billing records were mysteriously missing. incurring a one-time hit to earnings of $30 million. In November 1999. this is what happened. Rhythms shares soared from $21 to $69.

it was predicted that demand for bandwidth would increase dramatically. with Skilling and Fastow aggressively behind LJM. The vision was never to be. including general partner Fastow himself. Arthur Andersen. The SPEs also generated extraordinary returns for investors. Enron’s vision was to apply its trading model for energies to create a global market for trading bandwidth. More importantly. At a June 28. and the selling party would recognize income. In many respects. The net effect was to allow Enron to disguise debt. so assets could be transferred at any prices he chose. The deal caused significant dissention both within Enron and its accounting firm. While this was going on. board meeting. Still. on another front. who were too afraid of losing Enron’s investment banking business to refuse to invest. If an asset changed hands at an inflated price. but it was not. Enron’s board approved them. III and IV. There were technical challenges in the way. It signed off on the deal so long as Enron’s board approved of Fastow being general partner. Andersen was earning tens of millions of dollars a year from Enron and was determined to keep its client happy. Some of the ventures were financed primarily with Enron stock. bandwidth was like natural gas or electricity. Fastow started doing deals between LJM. and for the most part. Enron and Chewco. it flowed through fiber optic cables. which means they would be in trouble should the stock price fall. Fastow busily pulled the strings. As applications such as video-on-demand and teleconferencing became more popular. park assets that were losing money. Fastow ran them. In negotiating deals between the two entities. II. Enron had been aggressively amassing a fiber optic cable network in the U. He was effectively representing all three in “negotiating” the deals. Internet usage was growing. Outside investors were found among Wall Street firms. With too 9 . With Fastow as general partner. Andersen signed off on them. The market was substantially overbuilt. Instead of flowing through pipes or wires. the deal moved forward. including LJM 2 and Raptors I. and assign inflated mark-to-market valuations to other assets. it would be marked-to-market at that new price. LJM was not independent from Enron – its balance sheet should have been consolidated with Enron’s. 1999. Larger and increasingly dubious SPEs followed. The board set aside its own ethics rules prohibiting company officers from doing deals with the firm and approved LJM. Investors also included several Enron employees. Ken Lay presented LJM.of Enron booking income resulting from increases in its own stock price. many other firms had been building fiber optic networks.S. Enron realized millions of dollars in market value gains from LJM. Fastow – as general partner of LJM and CFO of Enron – would sit on both sides of the table. allowing Fastow to be general partner of LJM posed serious conflicts of interest. More importantly. flipping deals back and forth between Enron and the various SPEs. Assets were transferred between Enron and LJM at below market values. At the same time LJM was earning high returns for its investors.

In the days following the announcement. (ii) India had stopped making payments for electricity generated by the Dabhol plant. Between January and August 2001. The Last Act of the Drama Skilling’s resignation shocked Wall Street. Skilling could see the writing on the wall. Enron’s stock dropped from $42. was facing the prospect of writing off its entire $900 million investment. (iv) Severe shortages of electricity in California had led to rolling blackouts and accusations that Enron had manipulated prices.much supply. The technology bubble was over. She outlined essential steps that Lay should take to turn the situation round. a former Andersen employee who had joined Enron in 1993. There was no longer an easy way out of Enron’s problems. despite the Bush administration pressuring India on Enron’s behalf. was to be short-lived. If it kept falling. Many had been liquidating their holdings in Enron stock for months. (v) The venture in bandwidth trading failed lamentably.93 to $36. however. several of Fastow’s SPEs – those primarily financed with Enron stock – would be under water. Lay passed the title of CEO to Skilling. and ventures in metals and pulp trading were racking up losses. The Beginning of the End On July 13. but she may have been too late. Lay received an anonymous memo from an employee who later identified herself as Sherron Watkins. Lay remained Chairman. In August 2000.85. Skilling resigned as CEO. On August 15. She had a meeting with Lay to discuss her concerns. Enron had shuttered the plant in May and. Skilling was now President and CEO. Mark resigned as Chairman and CEO of Azurix and left Enron for good. The company was in a cash crunch and was trying to sell assets to raise cash. Rather than follow Watkins’ 10 . Skilling’s tenure as CEO. Skilling himself sold about $20 million in Enron stock. Enron’s own network became almost worthless. 2001. 2001. and prospects for trading bandwidth evaporated. The real reason was that Enron was heading for trouble. and stocks were entering a bear market. but so could most of Enron’s senior management. He claimed it was for personal reasons. In February 2001. netting an estimated $82 million. There were at least five reasons that could foreseeably lead to disaster: (i) The firm’s stock was down about 40% for the year. (iii) The company had recently spent $326 million to buy back shares of the failed Azurix water company. She currently worked in accounting. and he didn’t want to face the music. She sold her Enron stock. reporting to Fastow. It was also a wakeup call for Enron employees. who knew something was amiss.

) Enron stock closed at $26. but there was pressure on Enron to make more complete disclosures. started to complain that the firm’s financial disclosures were opaque. They didn’t withdraw their “buy” recommendations. Lay had lawyers look into whether it would be advisable to fire her. These acknowledged that Chewco. (Over the lives of the various SPEs. In the following days. including Azurix and the bandwidth venture. They advised against it.2 billion arising from the repurchase of 55 million shares of Enron stock from SPEs. By the end of October. All that was preventing a downgrade was a glimmer of hope that Enron might be able to arrange a merger with its competitor Dynegy.05. $35 million of it was due to losses on transactions with LJM. as 11 . and she was transferred to another department. and the stock closed at $13. who had previously assigned the company’s stock a “buy” rating without question. Enron was under investigation by the SEC. were not truly independent entities. which simply referred to “early termination during the third quarter of certain structured finance arrangements with a previously disclosed entity. This was in addition to millions of dollars Enron paid him in salary and bonuses. a dozen class action law-suits were filed on behalf of Enron shareholders. Enron was in serious risk of having its credit rating downgraded to below investment grade by Moody’s or S&P. That same day.20. It increased Enron’s debt by $2. and the plummeting stock price made them insolvent. Merger negotiations dragged on for several weeks. Equity analysts.advice. Ken Lay was feeling out officials within the Bush administration to see if a bailout might be possible. Fastow is estimated to have personally pocketed $45 million as an investor. Trading was Enron’s primary source of revenue. On November 8. These had been financed with Enron stock. the Wall Street Journal published a series of bombshell articles.6 billion. employees were shredding documents.” Analysts were stunned. An October 18 article traced the $1. On October 16. and hence JEDI. Enron filed restated financial results with the SEC. Consolidating their financials with Enron’s for the period 1997 to 2000 resulted in a $586 million reduction in Enron’s earnings for the period. Worst of all. Enron reported third quarter earnings that included a one-time charge of $1. LJM wasn’t named in the press release. and now it was drying up. That day. counterparties were refusing to trade with Enron. Enron’s stock dropped to $29.01 billion.00. Much of the hit was due to writing down bad investments.2 billion hit to shareholder equity to Enron’s unwinding of the Raptor SPEs. Rumors were swirling about Enron. Enron’s stock price slid to $32. At Arthur Andersen. The next day brought an article detailing how Fastow made millions from his LJM 2 investment. Lay mentioned that the firm was reducing shareholders’ equity by $1. but there was more to come. Fastow left the company. in a conference call to analysts.90. but no help was forthcoming. One on October 17 detailed how Fastow and other investors had pocketed millions of dollars from LJM.

and most of the SPEs fall in the first category. Arthur Andersen was convicted of obstruction of justice for its destruction of Enron documents. Spending controls and risk management were discarded in the process. which was once the largest accounting firm in the U. 182 million shares of Enron stock changed hands. The energy industry went through a crisis. Employees were more interested in making lots of money. the real culture was one of greed. since other companies in the industry were Enron copycats and had very similar deals and trading positions in place when Enron went down.61. setting a record for one-day volume in a single stock. making a merger seem increasingly less likely. Enron’s investments in the Bolivia-to-Brazil natural gas pipeline. disdaining competitors along the way. Andersen. after its credit was downgraded. Who was hurt? Many people suffered from Enron’s failure. communication and excellence. arrogance and fear. but employees were hit especially hard. Enron filed for bankruptcy. software experts. integrity. and financial wizards. computer programmers. as many politicians had Enron as a major contributor to their campaigns. On a more personal level. And investors took a big hit. In June 2002. Over the course of a decade. The Dabhol project. all types of engineers. alongside the mark-to-market accounting employed.500 in severance pay. Enron’s financial situation was deteriorating rapidly..S. The latter also fall in the second category. the main reason for the debacle was the corporate culture present in the company. Employees who had foolishly done so lost pension savings as well as their jobs. It is not surprising 12 . Dynegy backed out of merger negotiations. claiming Enron had misrepresented its situation. it could be argued that there were three reasons: failed investments. Enron brought together some of the best and brightest people in many different fields: energy experts in exploration and marketing. selfinterest. On December 2. On the New York Stock Exchange. inappropriate accounting and the absence of a “white knight” during the time of most distress. Enron had encouraged employees to invest their pension assets in the company’s stock. for themselves rather than the company. Azurix. subject to remaining employed in the fiercely competitive environment they were in. neither the government nor a friendly rival were able to step in to save the firm in its dying days. The share price closed for the day at $0. Enron Broadband Services. where these offbalance-sheet partnerships were improperly disclosed.bad news continued to pile up. While lip service was paid to virtuous ideals such as respect. But the experience was not all bad. Conclusion What were the main reasons for this tragedy. On November 28. In the third category. Moody’s and S&P downgraded Enron’s debt to below investment grade. was barred from auditing clients. Thousands were laid off with just $4. The government nearly had a scandal on its hands. and who were the victims in the end? From a financial perspective.

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