ENRON · 2016-08-12 · Enron withdraws from oil and gas production by divesting its remaining stake in subsidiary Enron Oil & Gas. October 1999: Enron announces the launch of EnronOnline,

ENRONTHE RISE AND FALL

LOREN FOX

JOHN WILEY & SONS, INC.

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ENRONTHE RISE AND FALL

LOREN FOX

JOHN WILEY & SONS, INC.


Copyright © 2003 by Loren Fox. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

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CONTENTS

Preface vTime Line vii

1 Pipeline to Profit 12 Where the Money Is 223 Major Ambition 434 Electrifying Opportunity 595 Culture of Creativity? 776 The Energy Buffet 987 Taking the Plunge 1228 Enron Gets Wired 1439 Power and Glory 170

10 California Dreamin’ 19611 Power Overload 22112 Downward Spiral 24713 Racing the Clock 26714 Endgame 286Epilogue 307

Author’s Note 314

Notes 315

Index 357

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PREFACE

When Enron conducted a name-recognition survey in 1996, it foundthat ordinary people were guessing that “Enron” was a politician or ascience-fiction weapon. It’s now 2002, and “Enron” needs no introduc-tion. Like Watergate, it has entered the collective vocabulary as a one-word symbol of an entire regime. Enron now represents greed andhubris, deceitful accounting and Wall Street favors, and, in short, every-thing that’s wrong with corporate America.

As familiar as the word has become, the actual story of Enron’s declinefrom business superstar to embarrassing bankruptcy is still not well un-derstood. How did a $100 billion company collapse in a matter ofweeks? What were the partnerships that shocked Wall Street and dam-aged some of its venerable reputations? Who were the people behind thiscomplex enterprise? This book is one journalist’s attempt to explain whathappened from beginning to end.

Other accounts of the Enron scandal have concentrated on the com-pany’s decline, but the story really begins with the creation of the com-pany in 1985. The fall of Enron would not be possible were it not for thepreceding rise, and the company’s missteps—both intentional and unin-tentional—were not possible had it not enjoyed successes early on. Thosesuccesses were what drew me to the story originally, and then my interestrose as this flourishing company began to encounter great difficulties.When I proposed a book about Enron in the fall of 2001, I knew itwould make a fascinating topic. The drama then intensified at an amaz-ing pace. In quick succession, Enron’s weakened stock went into freefall,it struck a deal to be acquired, that deal then fell through, and Enronfiled for bankruptcy. The story leapt from the business pages to the frontpages, and then to everyday conversation.

My research uncovered details of the intense corporate culture and therecklessness with which the company pursued strategies. I found an orga-nization that, in the spirit of the last decade, over-reached; ChairmanKenneth Lay, Jeffrey Skilling, and company believed they could trans-form a pipeline operator into a virtual corporation that traded a dizzying

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array of commodities. To support the financial underpinnings of thatmission, Enron eventually cooked its books. While telling that story, mybook highlights the system that allowed such rule breaking. Nearlyeveryone shares some blame, from Republicans to Democrats, from ac-countants to lawyers, and from Wall Street to Main Street.

This striving corporation sat at the epicenter of the most significanttrends in finance, energy, and online commerce. As a result, the storycontinues even as I write this. The dimensions of business have beenchanged forever. Politicians are debating the regulations of energy trad-ing. Enron’s bankruptcy continues to frustrate the creditors fighting overthe scraps. Meanwhile, one ex-employee has pleaded guilty to twofelonies arising from his actions at Enron, and the public awaits criminalcharges against other former Enron officials. We haven’t heard the last ofEnron, as either icon or business saga. With that in mind, the followingpages explain the story behind the symbol.

Loren FoxAugust 2002

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TIME LINE

July 1985: Houston Natural Gas, run by Kenneth L. Lay, merges withInterNorth, a natural gas company based in Omaha, Nebraska, to forman interstate and intrastate natural gas pipeline company with approxi-mately 37,000 miles of pipe.

November 1985: Ken Lay is appointed chairman and chief executive ofthe combined company. Later, the company chooses the name “Enron”after rejecting “Enteron.”

October 1987: Enron discovers that oil traders in New York have overex-tended the company’s accounts, costing the company $142 million.

1988: The company’s major strategy shift—to pursue unregulated mar-kets in addition to its regulated pipeline business—is decided in a gather-ing that became known as the “Come to Jesus” meeting.

1989: Enron launches Gas Bank, which allows gas producers and whole-sale buyers to purchase firm gas supplies and hedge the price risk at thesame time.

October 1989: Enron’s Transwestern Pipeline is the first merchantpipeline in the United States to stop selling gas and become a transporta-tion-only pipeline. Also, Enron sells 16 percent of Enron Oil & Gas tothe public.

June 1990: Jeff Skilling joins Enron after leading McKinsey & Co.’s en-ergy consulting business. He will lead the nascent trading and financeoperation.

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April 1993: Enron’s Teesside power plant in England begins operation,one of the first big successes for the company’s international strategy.

December 1993: Enron and Maharashtra reach agreement to build themassive Dabhol power plant. The $2 billion Indian project would be acontinual headache for the company.

June 1994: Enron conducts its first electricity trade.

November 1996: Chief Operating Officer Richard Kinder announcesthat he’ll leave the company. In December, Skilling becomes Enron’spresident and chief operating officer, beating out rival executive RebeccaMark.

June 1997: Looking to expand in electricity, Enron closes its acquisitionof electric utility Portland General Corp. in a $2.1 billion stock swap.

August 1997: Enron trades its first weather derivative. Enron goes on totrade coal, pulp, paper, plastics, metals, and bandwidth.

November 1997: Enron forms Chewco Investments, managed by En-ron employee Michael Kopper, to buy out CalPERS’ stake in a jointventure. This is the first “independent” partnership run by an Enronemployee.

March 1998: Enron promotes Andrew Fastow to chief financial officer.

April 1998: In a dramatic change in strategy, Enron pulls out of Califor-nia’s residential electricity sector, citing problems with the state’s deregu-lated market.

July 1998: Enron agrees to buy Wessex Water, a British water utility, for$2.2 billion. Wessex becomes the core of Enron’s new water unit, Azurix,run by Rebecca Mark.

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March 1999: Enron’s giant Dabhol plant in India opens.

April 1999: Enron agrees to pay $100 million over 30 years for thenaming rights to Houston’s new ballpark, Enron Field. Also, Enronbegins commercial operation of its nationwide fiber network for high-bandwidth uses.

June 1999: Azurix goes public with a $700 million initial public offering.Also, Enron creates the first LJM partnership in order to hedge its invest-ment in an Internet company. Fastow gets a waiver of the code of con-duct to manage LJM.

August 1999: Enron withdraws from oil and gas production by divestingits remaining stake in subsidiary Enron Oil & Gas.

October 1999: Enron announces the launch of EnronOnline, its Inter-net-based system for wholesale commodity trading. Also, Enron formsthe LJM2 partnership.

December 1999: Enron conducts its first bandwidth trade.

February 2000: Enron launches EnronCredit.com, which buys and sellscredit risk to help companies manage the risk incurred in trading transac-tions.

May 2000: Enron creates the first Raptor special purpose entity. Modeledafter LJM, the Raptors would be used to hedge Enron investments. But,mostly backed by Enron stock, they are risky vehicles.

July 2000: Enron and Blockbuster announce a 20-year deal to providevideo-on-demand service to consumers over high-speed Internet lines.Eight months later, the companies would terminate the deal.

August 2000: Enron’s stock hits an all-time high of $90.56. However,Azurix chairman Rebecca Mark resigns as the water company’s prospectsand stock price tank.

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February 2001: Skilling becomes chief executive of Enron (Lay remainschairman). Also, a group of Andersen partners meet to discuss Enron’saccounting and disclosures, but decide to retain the company as a client.

March 2001: Azurix public shareholders approve a buyout of the com-pany by Enron. Also, Enron buys out the Chewco partnership, nettingMichael Kopper $10 million.

April 2001: Lay meets with U.S. Vice President Dick Cheney to dis-cuss energy policy. Cheney’s energy task force releases its report onMay 17, and the report includes some recommendations favorable toEnron.

May 2001: Enron attorney Jordan Mintz retains Fried Frank HarrisShriver & Jacobson to review Enron’s LJM dealings; the law firm advisesEnron to stop the LJM transactions. Also, Maharashtra, the Dabholpower plant’s sole customer, says it will cancel its contract.

June 2001: During a public appearance in California, Skilling is hit inthe face with a cream pie as Enron comes under fire for “profiteering”from the state’s electricity crisis, which had begun in May 2000.

August 14, 2001: Skilling resigns as Enron president and chief executiveofficer, citing personal reasons. Ken Lay returns to position of CEO.

August 15, 2001: Enron accountant Sherron Watkins sends Ken Lay aletter detailing her concerns about the LJM and Raptor entities, and ad-mits, “I am incredibly nervous that we will implode in a wave of ac-counting scandals.”

September 21, 2001: After a “preliminary” investigation to follow up onWatkins’ worries, Vinson & Elkins tells Ken Lay there is no cause for alarm.

October 16, 2001: Enron takes $1.01 billion charge related to write-downs of investments, including the buyout of the Raptors. Enron also

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discloses that shareholder equity shrank by $1.2 billion as a result oftransactions including ones undertaken with Fastow’s investment vehicle.

October 19, 2001: The Wall Street Journal reveals that Fastow made atleast $7 million from running the LJM partnerships, raising eyebrows onWall Street.

October 22, 2001: Enron announces that the SEC will begin a probe ofthe company’s “related party transactions.”

October 23, 2001: Arthur Andersen employees begin shredding Enron-related documents, despite knowing of the SEC inquiry.

October 24, 2001: Enron replaces Fastow as CFO with Jeffrey McMa-hon, the 40-year-old head of the company’s industrial markets division.

October 31, 2001: The SEC elevates to a formal investigation its inquiryinto Enron’s financial dealings. Enron forms a special committee of theboard, headed by new director William Powers, to investigate the part-nerships.

November 8, 2001: Deciding it should have consolidated Chewco and arelated partnerhip into its financial results, Enron restates its earnings for1997 to 2001. This reduces net income over that time by $586 millionand boosts debt by $2.6 billion.

November 9, 2001: Dynegy announces a deal to buy Enron for about $9billion in stock. ChevronTexaco will inject $1.5 billion into the deal im-mediately, and an additional $1 billion upon closing.

November 20, 2001: Enron warns that credit worries, asset value declines,and reduced trading could hurt its fourth-quarter earnings. And, in a dis-closure that surprises Dynegy, it reveals that lowered credit ratings willtrigger another $690 million obligation.

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November 28, 2001: Major credit rating agencies downgrade Enron’sbonds to “junk” status. As a result, Dynegy terminates its agreement tobuy Enron. Enron stock ends the day at 61 cents per share.

December 2, 2001: Enron files for Chapter 11 bankruptcy protection in aNew York bankruptcy court. With $62 billion in assets, this is the biggestsuch filing in U.S. history up to that time. Simultaneously, Enron suesDynegy for terminating their merger.

December 3, 2001: Enron secures almost $1.5 billion in debtor-in-possession financing, and lays off roughly 4,000 employees in theUnited States.

December 12, 2001: Ken Lay presents the first reorganization plan forEnron, which envisions emerging from bankruptcy within a year as asmaller energy company.

January 18, 2002: The U.S. Bankruptcy Court approves the sale of En-ron’s trading business to UBS Warburg. Enron gets no cash, but thepromise of one-third of future profits. Enron’s board fires longtime audi-tor Arthur Andersen, but Andersen says the relationship ended when En-ron’s business failed and it went into bankruptcy.

January 23, 2002: Lay resigns as chairman and chief executive of Enronless than 24 hours after the court-appointed creditors committee re-quested his removal.

January 29, 2002: Enron names Stephen Cooper, a principal at NewYork restructuring firm Zolfo Cooper, as acting CEO.

February 2, 2002: Enron’s special board committee probing the partner-ships releases the Powers Report. The report spreads the blame for En-ron’s woes among Lay, Skilling, Fastow, Arthur Andersen, and others.

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February 12, 2002: Lay tells a congressional committee he feels “pro-found sadness” at Enron’s collapse, but declines to testify by taking theFifth.

May 3, 2002: Stephen Cooper unveils the latest reorganization plan forEnron to creditors. It envisions a $10 billion company focused onpipelines and power plants.

June 15, 2002: A jury finds Arthur Andersen guilty of obstruction of jus-tice in the investigation of Enron, probably dooming the firm.

August 21, 2002: Michael Kopper pleads guilty to two felonies arisingfrom his dealings with Enron partnerships, marking the first criminalcharges against an Enron insider.

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Kenneth Lay, the chairman and patriarch of Enron. Starting in 1985 he builtthe company into a powerhouse that included pipelines, power plants, and animpressive trading operation. (© Pam Francis)

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[Image not available in this electronic edition.]


Richard Kinder, Enron’s president and chief operating officer until he left at theend of 1996. Kinder made the trains run on time, and the loss of hisoperational skill was a turning point for Enron. Kinder appears here in May2002 in his new firm, a pipeline company that doesn’t trade energy. (Carlos Antonio Rios/Houston Chronicle)

Corporate statesman Ken Lay had many politicalconnections, but the mostnotable was his friendshipwith George W. Bush; hisascent to the presidency in2001 seemed to give Enronspecial access to the WhiteHouse, critics charged. Shown here is a casual letterBush wrote to Lay on April14, 1997, when he wasgovernor of Texas. (Source: thesmokinggun.com)



Jeffrey Skilling, the former McKinsey consultant who masterminded thecompany’s trading strategy and eventually rose to become, briefly, the CEO. (D. Fahleson/Houston Chronicle)

Andrew S. Fastow, thefinancial “whiz kid” who roseto chief financial officer atEnron. Fastow created andmanaged the controversialLJM partnerships thatenriched him and helped lead to Enron’s accountingscandal. (James Essrun/The New York Times)




The Rhythms transaction, carried out in 1999 by a few of the partnershipsFastow created. The idea here was to protect Enron’s investment in an Internetcompany, but the diagram illustrates the mind-boggling complexity that wasused to keep the deal off Enron’s books. (Source: The Powers Report)

LJM Partners, L.P. ERNB Ltd.(CSFB)

Campsie Ltd.(NatWest)

GeneralPartner $1 MM $7.5 MM

Limited Partners

$7.5 MM

$64 MM Note

Put option on 5.4 MMshares Rhythms stock

LJM SwapCo

AndrewFastow

Sole Director

GeneralPartner LJM Swap

Sub, L.P.

ENE shares (1.6 MM)$3.75 MM Cash

ENE shares (3.4 MM)

LJM Cayman, L.P.(LJM1) Enron Corp.

Limited Partner


Rebecca Mark and Joseph W. Sutton, the leaders of Enron International,pictured in their glory days in 1998. Mark’s ability to land projects in England,India, and other foreign locales made her a possible successor to Lay, butSkilling beat her out as Enron moved away from the asset-heavy businesses she’dchampioned. (Ben Desoto/Houston Chronicle)

Enron Vice President of CorporateDevelopment Sherron Watkinslooks on as former Enron ChiefExecutive Officer Jeffrey Skillingtestifies on Capitol Hill Tuesday,February 26, 2002, before the SenateCommerce Committee hearing onEnron. (AP Photo/Ron Edmonds)

Richard Causey, Enron’s chiefaccounting officer. Causey approvedFastow’s partnerships and their dealswith Enron. (© Pam Francis)





Enron accountant Sherron Watkins sent this frank warning letter to Lay onAugust 15, 2001, after Skilling’s surprise resignation from the company. Theletter presciently alerted Lay that Enron might “implode in a wave ofaccounting scandals.”


On November 9, 2001, then Enron chairman Kenneth Lay appeared with ChuckWatson, chairman and chief executive officer of Dynegy, to announce that Dynegywould rescue Enron by acquiring it. The deal fell apart three weeks later.(Christobal Perez/Houston Chronicle)

The Enron headquartersin Houston, as seen atdusk in April 2002. Enronemployees had routinelyworked long hours in thebuilding as they jostled forpromotions in thecompetitive culture.(Andrew Innerarity/Houston Chronicle)




Choosing not to testify about his role in Enron’s demise, Lay asserts his FifthAmendment right against self-incrimination before the Senate CommerceCommittee on February 12, 2002. At those hearings, he was comparedunfavorably to a carnival barker. (Paul Hosefros/The New York Times)

Arthur Andersen’s lead Enron auditor, David Duncan, is followed by themedia after he pleaded guilty to obstruction of justice on April 9, 2002, in theHouston federal courthouse. (Steven Ueckert/Houston Chronicle)




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PIPELINE TOPROFIT

Politicians, journalists, laid-off workers, and curious onlookersmilled about Washington, D.C.’s Russell Senate Office Building.Traditionally this dignified, marble-laden building is the scene of bud-get conferences, discussions of international treaties, and historic hear-ings such as those on Watergate. But on the morning of February 12,2002, the building was abuzz with a different kind of subject: the fallof Enron Corp.

The columned, high-ceilinged hearing room grew quiet at the appear-ance of Kenneth Lay, Enron’s former chief. Lay, in a gray suit, sat calmlyin the front row while members of the Senate Committee on Commerce,Science and Transportation—Democrats and Republicans alike—glow-ered down from the raised dais and disparaged him with zeal. “The angerhere is palpable,” explained Senator John Kerry (D-Massachusetts).“Lives have been ruined.”

“The bankruptcy of this corporation is not a garden-variety businessfailure,” said Senator Byron Dorgan (D-North Dakota).

Indeed, Enron’s failure was anything but typical; it was one of themost thrilling rise-and-fall sagas of recent years. Staring in 1985, Enrongrew in a decade and a half from a large natural-gas pipeline company toan energy-trading firm that bought and sold gas as well as electricity. Inthe late 1990s, Enron had even evolved beyond energy trading, traffick-ing in metals, paper, financial contracts, and other commodities. By that

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time, so much of its business came from trading that Enron had essen-tially stopped being an energy company and functioned as a kind ofbank. That transformation spurred massive expansion, so that from rev-enue of $4.6 billion in 1990, Enron grew to $101 billion in revenue in2000. That made Enron the seventh-largest company in the UnitedStates, bigger than IBM or Sony. Lay and other top executives landed onthe covers of business magazines, and the company was hailed as a modelfor innovation.

Ken Lay was at the Senate hearing, however, not because of Enron’srise but because of its downfall. To help sustain its rapid growth, thecompany played fast and loose with its accounting, hiding debt and in-flating profits. The previous October, the company revealed that its useof semi-independent investment partnerships, some of which were runby Enron’s own chief financial officer, reduced shareholder value by $1.2billion, and that sparked an accounting scandal that spiraled out of thecompany’s control. On closer examination, these partnerships appearedto do nothing more than shuffle debt and hide losses. The Securities andExchange Commission, which oversees the stock markets, launched aninquiry that caused trading partners to back away from Enron. Enron’sstock price tumbled from a high of $90 to a piddling 36 cents, wipingout more than $60 billion of shareholder value—even as Lay and othertop officers sold much of their own stock for millions of dollars. After themarket lost confidence in Enron and a last-minute merger attempt fellthrough, Enron’s descent came to a thundering crescendo on December2, 2001, when it filed for bankruptcy; with assets of roughly $62 billion,it was at the time the largest bankruptcy in U.S. history. Enron was fac-ing hundreds of creditors, more than four thousand angry ex-employees—some of whom had lost all their retirement savings—and a criminal probeby the U.S. Justice Department.

In that hearing room, senators took the opportunity to lecture Lay be-cause, as Senator Conrad Burns (R-Montana) put it, “it was on his watchthat the wreck occurred.”

Senator Peter Fitzgerald (R-Illinois) called Lay an “accomplished confi-dence man,” and went on to lambaste him: “I’d say you were a carnivalbarker, except that wouldn’t be fair to carnival barkers. A carnie will at leasttell you up front that he’s running a shell game. You, Mr. Lay, were run-ning what purported to be the seventh largest corporation in America.”

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The senators also seized on Lay’s well-known political connections,which included strong ties to the Republican Party. He had been a topcontributor to George W. Bush long before Bush rose to the presidency,earning the affectionate nickname “Kenny Boy” from the Texas politi-cian. Enron had also enjoyed a swaggering reputation as a powerful lob-bying force in Washington, arguing for the deregulation of energymarkets that created the opportunities for Enron’s trading business. Sen-ator Ernest “Fritz” Hollings (D-South Carolina) said, “There’s no betterexample than ‘Kenny Boy’ for cash-and-carry government,” and said hehoped this would lead to campaign finance reform.

And Enron, which once championed the liberation of energy marketsfrom government oversight, was accused of tainting free-market econom-ics. “This is not capitalism,” said Senator Gordon Smith (R-Oregon).“This is a conspiracy that may be a crime.”

Lay did not respond to the hail of criticism, and everyone knew hewould stay silent. He’d twice backed out of previously scheduled appear-ances before the committee, and Congress went so far as to issue sub-poenas to compel his testimony. A few weeks before appearing in frontof the committee, Lay’s attorney had written to Congress to explain thatthe 59-year-old executive felt he wouldn’t get a fair hearing. “Judgmentshave been reached and the tenor of the hearing will be prosecutorial,”the attorney wrote. So Lay took the Fifth Amendment—his constitu-tional right to remain silent rather than say something that might in-criminate himself.

Instead of answering the senators, Lay waited until every member ofthe committee had spoken. Then he read a brief statement. “I come heretoday with a profound sadness about what has happened to Enron, itscurrent and former employees, retirees, shareholders, and other stake-holders,” he said.

He explained feeling torn about taking the Fifth. “I am deeply trou-bled about asserting these rights, because it may be perceived by somethat I have something to hide. But after agonizing consideration, I can-not disregard my counsel’s instruction. Therefore, I must respectfully de-cline to answer, on Fifth Amendment grounds, all the questions of thiscommittee and subcommittee and those of any other Congressionalcommittee and subcommittee.”

Meanwhile, in League City, Texas, Robert Smoot was watching the

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hearing on television with mixed feelings. Smoot, married with an 11-year-old daughter, had been laid off from Enron that December. As hewatched Lay get humiliated by Congress, part of Smoot felt sorry for theformer CEO, but part of him felt Lay had it coming. “Someone had tosay that,” he said. “He should’ve known what was going on. He’s the cap-tain of the ship.”

An electrical engineer, Smoot was out of work and hadn’t had a job in-terview since January. In addition, he and the others laid off in Decem-ber had received just $4,500 of severance pay, rather than the sort ofseverance to which they would normally be entitled, larger sums basedon how long they had worked at Enron. For him, that would be worthseveral months’ salary—if the bankrupt company ever paid it. Instead,Smoot was spending down his savings. “We’re doing okay right now, butthat money’s going to run out,” he said. “I’m angry at what happened—treating the people who were laid off like trash.”

The dramatic collapse of Enron took people like Robert Smoot com-pletely by surprise. But most people were surprised. There were innocentvictims like Smoot, who lost not only his job but also thousands of dol-lars in worthless stock options and in the Enron stock he’d bought withhis 401(k) retirement savings plan. There were public pension funds,which had seen their Enron investments plunge to minuscule value.There were small investors who’d had their faith in the market shaken.There were the banks that had lent Enron billions and could expect toget just a small portion of the loans back. There were the politiciansscrambling to distance themselves from this omnipresent campaign con-tributor. And there was the U.S. stock market, which was convulsingwith fears that more accounting implosions lay hidden in any number oflarge corporations.

The senators disapproving of “Kenny Boy” were frustrated becausethey’d wanted to grill him for answers that might explain what happenedto Enron. But even if Lay had testified that day, he could have given onlypart of the explanation. Because the Enron story was much larger thanjust Lay.

The heart of the story, of course, is Enron. The company, which at itsheight had more than 20,000 employees and operations in 40 countries,pioneered real innovations, many of which are still in use; rather thanjust sell energy to a factory, Enron could package that energy in an array


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of customized contracts, delivering more energy in December than inNovember, or making sure that contract provisions guaranteed certainprices. It created or entered new markets—allowing financial calculationson even the weather itself—and eventually built an Internet trading sys-tem that handled billions of dollars in commerce. But the early successesfueled an ever-larger ambition, causing the company to overreach. As itsmarkets matured and became less profitable, Enron was forced to contin-ually enter new fields to keep up its rapid growth. Fixated on its stockprice, Enron pursued a strategy of growth and more growth, often at theexpense of profits.

A big part of the story was that energy trading operation—a Byzantinemarket that exists behind the gas and electricity business and is every bitas large and sophisticated as the stock market. Enron handled roughlyone-quarter of all trading in electricity and natural gas in the UnitedStates, a dominance that would be unheard-of in the world of stocks. Asthat market developed over the course of the 1990s, it became so com-plex that even after Enron’s collapse it was difficult to tell whether someof Enron’s maneuvers to hide loans as trades and to bury debt in specialpartnerships had violated any rules.

The stars of the story were Enron’s top executives, including Lay andthe man who became his trusted lieutenant, Jeffrey Skilling. Enron’s lead-ers had been held up as a creative force that had injected “New Econ-omy” spark into an old-economy, industrial company by emphasizingintellectual prowess over pipelines and power plants. But somewherealong the line, either at the behest of Lay and Skilling or under theirnoses, Enron executives in the late 1990s began to fool around with thebooks in order to support the huge growth engine. They created specialpartnerships that weren’t reported on Enron’s books, which were able tomake its earnings and debt levels look better than they really were. AsEnron grew as a financial firm, it increasingly relied on such accountingtrickery to keep its credit rating high, making it seem a solid and reliabletrading partner.

The story cannot be told without describing Enron’s corporate cultureof innovation and competitiveness, where employees enjoyed autonomyif they produced quarterly results. That culture fed its appetite for newideas and for creative, hardworking people. But the drive and indepen-dence also helped enable financial deception, because the company en-

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couraged experimentation but discouraged anything other than success.In its effort to create new markets, Enron inevitably had some missesalong with its hits; for instance, it had an energy outsourcing businesswhose profits were questionable, and a business trading telecommunica-tions network capacity, known as bandwidth, which lost hundreds ofmillions of dollars. Reluctant to acknowledge stumbles, the company re-lied even more on accounting trickery to paper over the losses.

The story included Enron’s accounting firm, Arthur Andersen. Ander-sen, which, like other big accounting firms, also did consulting work forEnron, signed off on the company’s questionable accounting practices.Frankly, the accounting rules were vague enough and the company’s dealscomplex enough that it was often difficult to tell when Enron violatedrules. But Andersen downplayed questions about the accounting. It wasonly in October 2001 that Andersen reined in some of the more creativeaccounting moves, and that began Enron’s downward spiral. Andersenthen compounded its errors by shredding Enron-related documentswhen it knew the company was being probed.

Wall Street also had a big part in the story, because it wanted somuch to believe in Enron’s wondrous story and it helped keep the stockinflated. Analysts touted Enron’s stock, even as the investment banksthat employed them tried to get business with Enron. Although En-ron’s financial statements were opaque, that didn’t bother the WallStreet machine so long as Enron’s stock continued rising throughoutthe jubilant stock market of the mid and late 1990s. They were held inthrall with the Enron story, even if the company wasn’t really quite assuccessful as it portrayed itself. That’s why Wall Street and the businesscommunity so easily felt betrayed by Enron when Andersen revealedone accounting mishap. When the world got a peek at its rickety finan-cial underpinnings, the market lost confidence in the company. With-out confidence, hence without trading partners, Enron’s core businesswithered quickly. The cash stopped coming in, the debt grew, and thecompany came crashing down. The result was the bankruptcy, thou-sands of layoffs, several congressional investigations, and the potentialfor criminal charges.

The Enron story, with all its moving parts, is a tale of genuine achieve-ment, but also of arrogance, ambition, and deceit. It’s the story of how somany people and agencies missed the cracks in Enron’s facade, in part be-


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ENRON · 2016-08-12 · Enron withdraws from oil and gas production by divesting its remaining stake in subsidiary Enron Oil & Gas. October 1999: Enron announces the launch of EnronOnline,