The History of Enron
Once a New-Economy Trailblazer, Now Beleaguered and Bankrupt
Jan. 22, 2002 -- In 1985, Kenneth Lay, using proceeds from junk bonds, combined his company, Houston Natural Gas, with another natural-gas pipeline to form Enron. From the get-go, the company worked to move beyond just transporting and selling gas. It decided to become a big player in the newly deregulated energy markets by trading in futures contracts. In the same way that traders buy and sell soybean and orange juice futures, Enron began to buy and sell electricity and gas futures.
In the mid-1980s, oil prices fell precipitously. Buyers of natural gas switched to newly cheap alternatives such as fuel oil. Gas producers, led by Enron, lobbied vigorously for deregulation. Once-stable gas prices began to fluctuate, spooking buyers. That's when Enron started marketing futures contracts -- guaranteeing a price for delivery of gas sometime in the future. The government, again lobbied by Enron and others, deregulated electricity markets over the next several years, creating a similar opportunity for Enron to trade futures in electric power.
In 1990, Lay hired Jeffrey Skilling, a consultant with McKinsey & Co., to lead a new division -- Enron Finance Corp. Skilling was made president and chief operating officer of Enron in 1997.
Skilling was the company's biggest proponent of the trading businesses. He took Enron into new markets -- with the company sometimes creating markets itself. Besides energy contracts, Enron traded industrial commodities such as steel and wood fiber, financial derivatives such as default insurance, and such innovative items as broadcast time for advertising, futures to allow hedging against bad weather, and Internet bandwidth capacity.
Even as Enron was gaining a reputation as a "new-economy" trailblazer, it continued -- to some degree against Skilling's wishes -- to pursue such stick-in-the-mud "old-economy" goals as building power plants around the world.
The company invested several billion dollars on the trading side of the business over just a few years in the late '90s. The trouble was, it wasn't earning much of anything on those investments -- a fact that went largely unreported until December 2001, when the company announced it was going into Chapter 11 bankruptcy.
A major factor in Enron's collapse seems to be the partnerships the company created for some of its trading operations.
Through its chief financial officer Andrew Fastow, new entities were created, with their debts kept separate from Enron's books. In October 2001, the firm's auditor, Arthur Andersen, announced that some of those partnerships' debts and losses should have been included on Enron's financial statements. Adding them back, along with other charges, forced the company to report losses of more than $1 billion. The Securities and Exchange Commission launched an investigation, and Fastow was replaced.
To cover for its shortfalls, Enron drew down a $3 billion line of credit -- pretty much all it had left. Ratings agencies downgraded the company's debt, automatically triggering stepped-up payment schedules on outstanding credit.
Enron's stocks and bonds went into freefall. Its debt was downgraded once again, to junk status. In desperation, Enron entered talks to be taken over by its rival Dynegy, but that company accused Enron of deceitful bargaining, and pulled out of negotiations after a few weeks. Enron was left with no choice: On Dec. 2, 2001, it filed for bankruptcy protection. Meanwhile, the SEC expanded its investigation to determine whether Enron or its auditor were guilty of accounting fraud. More than 4,000 people were laid off at Enron's Houston headquarters.
Congress began investigating the company in mid-December. Lay declined to appear at two congressional hearings.
Soon after the New Year, details of the off-the-books partnerships began to emerge. Documents indicated that much of the company's apparent success came from foisting off losses and debt on the partnerships -- several of which were both created and run by Fastow, and financed with Enron stock.
Arthur Andersen disclosed that its employees had destroyed documents related to Enron. An Andersen memo, dated Oct. 12 and made public Jan. 14, apparently directed auditors to abide by Andersen "company policy" to destroy documents related to the audit.
On Jan. 15, another damning document surfaced -- this time, a letter written to Lay by Sherron Watkins, an Enron executive. The letter was written on Aug. 15, a day after Jeffrey Skilling left the company. It warned Lay that Enron could "implode in a wave of accounting scandals" unless something was done about the partnerships. The letter prompted an internal investigation, but its warnings were apparently not heeded.
Details continued to be revealed in the days leading up to the start of congressional hearings in the last week of January. On Jan. 21, allegations surfaced about documents being shredded even after the SEC had formally launched its investigation, and perhaps even continuing into January.
As they examine the allegations of malfeasance and a possible cover-up by Enron and Andersen, Congress and investigating regulatory agencies also will be looking into the whether government policies are at least in part to blame for the Enron debacle. "Something went dreadfully wrong here," said Sen. Joseph Lieberman (D-Conn.), who heads the Senate Governmental Affairs Committee. "And we've got to ask the question -- why?"
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