What Happened to Enron?

What Happened to Enron?

The collapse of Enron caught almost everyone by surprise, from employees and investors to analysts and creditors. But how did the seventh largest company in the Fortune 500 plummet into bankruptcy and implode so quickly?

The Enron story comes in three stages.

Stage 1: The Company leveraged itself through debt, which it used to grow its non-core wholesale energy operations and service business. Some of this debt was reportable on the company's balance sheet, and some was not. No problem for the company, as long as the stock price held up.

Stage 2: The stock price fell. When that happened, off-balance-sheet liabilities put pressure on debt agreements, and eventually led to credit downgrades.

Stage 3: The margins in this business are very thin and lower credit quality increased Enron's cost of borrowing to the point where the whole company fell into a liquidity trap.

Enron: A Background

Enron was born in July 1985 when Houston Natural Gas merged with Omaha-based Inter-North. Kenneth Lay, an energy economist became chairman and chief executive. As the energy markets, and in particular the electrical power markets were deregulated, Enron's business expanded into brokering and trading electricity and other energy commodities.

The deregulation of these markets was a key Enron strategy as it invested time and money in lobbying Congress and state legislatures for access to what traditionally had been publicly provided utility markets. Some of Enron's top executives became frequently named corporate political patrons of the Republican Party. Enron needed the federal government to allow it to sell energy and other commodities. According to the Center for Responsive Politics, between 1989 and 2001, Enron contributed nearly $6 million to federal parties and candidates .It was one of the first amongst energy companies to begin trading through the Internet, offering a

free service that attracted a vast amount of customers. But while Enron boasted about the value of products that it bought and sold online – a mind-boggling $880bn in just two years – the company

remained silent about whether these trading operations were actually making any money. At about this time, it is believed that Enron began to use sophisticated accounting techniques to keep its share price high, raise investment against it own assets and stock and maintain the impression of a highly successful company. Enron's 2000 annual report reported global revenues of $100bn.

Income had raised by 40% in three years.

The Chronology of the fall:

20 Feb, 2001

A Fortune story calls Enron a highly impenetrable Co. that is piling on debt while keeping the Wall Street in dark.

On 14 Aug, 2001

Jeff Skilling resigned as chief executive, citing personal reasons. Kenneth Lay became chief executive once again.

12 Oct, 2001

Arthur Anderson legal counsel instructs workers who audit Enron's books to destroy all but the most basic documents.

16 Oct, 2001

Enron reports a third quarter loss of $618 million.

24 Oct 2001

CFO Andrew Fastow who ran some of the controversial SPE's is replaced.

8 Nov 2001

The company took the highly unusual move of restating its profits for the past four years. It admitted accounting errors, inflating income by $586 million since 1997. It effectively admitted that it had inflated its profits by concealing debts in the complicated partnership arrangements.

2Dec,2001

Enron filed for Chapter 11 bankruptcy protection and on the same day hit Dynegy Corp. with a $10 billion breach-of-contract lawsuit.

12 Dec 2001

Anderson CEO Jo Berardino testifies that his firm discovered possible illegal acts committed by Enron.

9 Jan 2002

U.S. Justice department launches criminal investigation.

Hence within three months Enron had gone from being a company claiming assets worth almost £62bn to bankruptcy. Its all in the share price of the company price collapsed from about $95 to below $1.

Role