The Fall of Enron

The Fall of Enron

The History

Enron began as a pipeline company in Houston in 1985. It profited by promising to deliver so many cubic feet to a particular utility or business on a particular day at a market price.

That change with the deregulation of electrical power markets, a change due in part to lobbying from senior Enron officials. Under the direction of former Chairman Kenneth L. Lay, Enron expanded into an energy broker, trading electricity and other commodities.

The Business of Enron

Enron became a giant middleman that worked like a hybrid of traditional exchanges. But instead of simply bringing buyers and sellers together, Enron entered the contract with the seller and signed a contract with the buyer, making money on the difference between the selling price and the buying price. Enron kept its books closed, making it the only party that knew both prices.

Over time, Enron began to design increasingly varied and complex contracts. Customers could insure themselves against all sorts of eventualities such as a rise or fall in interest rates, a change in the weather, or a customer’s inability to pay. By the end, the volume of contracts to actually deliver commodities, and Enron was employing a small army of PhDs in mathematics, physics and economics to help manage its risk.

The Failure of Enron

As its services became more complex and its stock soared, Enron created a constellation of partnerships that allowed manages to shift debt off the books.

Some partnerships’ losses would have to be paid for out of Enron stock or cash in 2003, bringing the debts back home. There are indications that Enron executives and its accounting firm, Arthur Andersen, had warnings of problems nearly a year ago. According to an email sent February 6, 2001, Andersen considered dropping Enron as a client. In August, Enron Vice President Sherron Watkins wrote an anonymous memo to former Chairman Kenneth Lay, detailing reasons she thought Enron “might implode in a wave of accounting scandals.”

On October 16, Enron announced a $638 million loss for the third quarter, and Wall Street reduced the value of stockholders’ equity by $1.2 billion. Enron announced November 8, that it had overstated earnings over the past four years by $586 million and that it was responsible for up to $3 billion in obligations to various partnerships. A $23 billion merger from rival Dynegy was dropped November 28 after lenders downgraded Enron’s debt to junk bond status.

Who’s to Blame?

Kenneth Lay, (former Enron Chairman and CEO) and Enron poured millions of dollars into both political parties, cultivating access and using the entrйe to lobby Congress, the White House and regulatory agencies for action that critical