The collapse of energy giant Enron is the largest bankruptcy and one of the most shocking failures in United States corporate history. In just a little over 15 years, Enron grew into one of the US’s largest companies. It embraced new technologies, established new methods of trading in energy and seemed to be a shining example of successful corporate America.But the company’s success was based on artificially inflated profits, dubious accounting practices, and – some say – fraud.
Enron's dramatic expansion and rise to international prominence
Enron was born in July 1985 when Houston Natural Gas merged with Omaha-based InterNorth.Kenneth Lay, an energy economist who had held academic and government positions throughout his career, became chairman and chief executive. His ambitions for the new company he had helped form went beyond the business of piping gas. He wanted to see an energy trading revolution and place Enron at the heart of it.
By 2001 he appeared to be succeeding in his goal, having created a multinational corporation employing thousands with a turnover of billions of dollars. But suddenly, as if from nowhere, the company unravelled and collapsed. How could a company worth billions come crashing down, destroying the livelihoods of thousands?
In the 1980s, energy corporations lobbied Washington to deregulate the business. Companies including Enron said the extra competition would benefit both companies and consumers. Washington began to lift controls on who could produce energy and how it was sold.
New suppliers came to the market and competition increased. But the price of energy became more volatile in the free market. Enron saw its chance to make money out of these fluctuations. It decided to act as middle man and guarantee stable prices - taking its own cut along the way.
New suppliers came to the market and competition increased. But the price of energy became more volatile in the free market. Enron saw its chance to make money out of these fluctuations. It decided to act as middle man and guarantee stable prices - taking its own cut along the way.
How Enron took a bet on energy
Kenneth Lay had been anxious to expand the business right from the word go. Jeff Skilling, an ambitious thinker from the world famous consultancy firm McKinsey, offered a way to do it. Skilling believed that Enron could profit from trading futures in gas contracts between suppliers and consumers - effectively betting against future movements in the price of gas-generated energy.
Buyers and sellers use futures markets to get what they hope will be a better deal on commodity prices than they would do on the open market. Enron offered to do the same with gas by buying and selling tomorrow's gas at a fixed price today.
In the deregulated energy world, it appeared to make sense to many suppliers and industry consumers who took up the offer. The new Enron was emerging.
In a few short years, Enron became a massive player in the US energy market, controlling at its height a quarter of all gas businessBuyers and sellers use futures markets to get what they hope will be a better deal on commodity prices than they would do on the open market. Enron offered to do the same with gas by buying and selling tomorrow's gas at a fixed price today.
In the deregulated energy world, it appeared to make sense to many suppliers and industry consumers who took up the offer. The new Enron was emerging.
Lobbying and donations on Capitol Hill (1989 - 2001)
One question that was already being asked before Enron crashed was this: how much influence did it have on Capitol Hill?
Enron certainly wasn't the only company lobbying for energy deregulation, but deregulation helped Enron establish the trading markets that became its core business. Directors built relationships with both Democrats and Republicans. Kenneth Lay himself had strong personal ties to two Republican presidents, George Bush Snr and his son George W Bush. As Enron expanded, there was little scrutiny of how it was managing the expansion. But when it began to unravel, the questions began to pour in.
Enron certainly wasn't the only company lobbying for energy deregulation, but deregulation helped Enron establish the trading markets that became its core business. Directors built relationships with both Democrats and Republicans. Kenneth Lay himself had strong personal ties to two Republican presidents, George Bush Snr and his son George W Bush. As Enron expanded, there was little scrutiny of how it was managing the expansion. But when it began to unravel, the questions began to pour in.
Early 2000: Dot.com boom
Enron began 2000 with a plan to move into broadband internet networks and trade bandwidth capacity as the dot.com economy prospered. Enron's dynamic ideas, coupled with its stable old-economy energy background, appealed to investors and the share price soared.
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 custom. But while Enron boasted about the value of products that it bought and sold online – a mind-boggling $880bn (£618bn) 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.
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 custom. But while Enron boasted about the value of products that it bought and sold online – a mind-boggling $880bn (£618bn) 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.
Late 2000: Trouble brewing
By the summer, Enron's shares had hit an all time high of more than $90. But there was also controversy. California was suffering an energy crisis, blamed by many on its poor handling of deregulation.
Some claimed Enron had profiteered by buying futures in electricity supplies and passing them on at higher costs. Enron dismissed the allegation saying it was merely the market-maker.
Enron's 2000 annual report reported global revenues of $100bn. Income had risen by 40% in three years. In reality, real revenue would have been far lower had it not been for the special partnerships established by chief finance officer Andrew Fastow.
Some claimed Enron had profiteered by buying futures in electricity supplies and passing them on at higher costs. Enron dismissed the allegation saying it was merely the market-maker.
Enron's 2000 annual report reported global revenues of $100bn. Income had risen by 40% in three years. In reality, real revenue would have been far lower had it not been for the special partnerships established by chief finance officer Andrew Fastow.
August 2001: Crisis revealed
On 14 August 2001, seemingly from nowhere, Jeff Skilling resigned as chief executive, citing personal reasons. Kenneth Lay became chief executive.
The development was a shock to investors who suddenly began to fear that all was not well in Houston. Investors sold millions of shares. As the price dropped below $40, Mr Lay insisted that there were "no issues". When Mr Skilling resigned, one executive who knew of Mr Baxter's concerns decided to act, and warned Mr Lay that Enron was on the verge of "imploding".
Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting out her fears of an impending scandal. Simply put, Enron's accounts didn't add up - and Enron's brilliantly effective partnerships appeared to be the problem.
Ms Watkins believed that some of the separate partnerships and contracts known as "special purpose entities" were only separate in name. They were run by Enron and funded with Enron stock, instead of outside investors.
As stock slid to $33 a share, nearly two-thirds lower than a year earlier, executives bit the bullet and owned up to their mistakes. They consolidated the complicated outside partnerships within the company's main accounts, dramatically altering the strength of the company.
On Tuesday 16 October, Enron announced its first quarter loss in nearly four years: a massive $618m.
A day later, Enron said that it would slash its quoted assets by $1.01bn because of "errors" in the way that it had accounted for the special partnership. Staff were panicking - and with good reason. Enron's final decision was to block employees from selling stock in their pension schemes.
But by the end of the week, Enron shares were changing hands for just $15. With the empire collapsing, the full details of the maze of financial partnerships and contracts were only just being revealed.
On 8 November, the company took the highly unusual move of restating its profits for the past four years. It effectively admitted that it had inflated its profits by concealing debts in the complicated partnership arrangements.
On 19 November Enron sought to negotiate better conditions for $690m of debt that were due for immediate repayment, but the shares were still falling. Within days the shares plummeted to just $4.01.
And then the final blows came. On 28 November, Enron was left fighting for its corporate life after the major credit rating agencies gave it junk-bond status - a highly symbolic decision to judge the company a massive risk for investors, and with the potential to collapse. The announcement meant that Enron was immediately liable for almost $4bn of its $13bn of debt.
In three months Enron had gone from being a company claiming assets worth almost £62bn to bankruptcy. Its share price collapsed from about $95 to below $1.
"Uncertainty has severely impacted the market's confidence in Enron and its trading operations," Kenneth Lay commented as he saw his company implode. As the business world sat back stunned, 4,000 Enron employees out of the 20,000 strong workforce in the US immediately lost their jobs, on top of 1,100 who had already been made redundant in London.
While America reeled from the bankruptcy and Enron employees, past and present, worked out what they had left, the Justice Dept announced a criminal investigation. Attorney General John Ashcroft, who had received campaign funds from the company in 2000, excluded himself from the investigation along with the 100 federal investigators in Houston.
The following day, Andersen, its role increasingly in the spotlight, admitted that employees had disposed of Enron documents. The White House also confirmed speculation that Kenneth Lay had appealed to members of the administration for help.
Andersen fired its chief Enron auditor David Duncan amid speculation that he oversaw the shredding of documents. Enron, in turn, fired Andersen. It proved to be the largely symbolic final act of Kenneth Lay's reign at Enron. Two days after the FBI entered Enron's gleaming Houston headquarters, he resigned. On 25 January, Clifford Baxter, Enron's former vice chairman and chief strategy officer, committed suicide.
The shockwaves of a corporate crash are always keenly felt - but few failures have led to the kind of investigations Enron and its managers now face.
The development was a shock to investors who suddenly began to fear that all was not well in Houston. Investors sold millions of shares. As the price dropped below $40, Mr Lay insisted that there were "no issues". When Mr Skilling resigned, one executive who knew of Mr Baxter's concerns decided to act, and warned Mr Lay that Enron was on the verge of "imploding".
Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting out her fears of an impending scandal. Simply put, Enron's accounts didn't add up - and Enron's brilliantly effective partnerships appeared to be the problem.
Ms Watkins believed that some of the separate partnerships and contracts known as "special purpose entities" were only separate in name. They were run by Enron and funded with Enron stock, instead of outside investors.
As stock slid to $33 a share, nearly two-thirds lower than a year earlier, executives bit the bullet and owned up to their mistakes. They consolidated the complicated outside partnerships within the company's main accounts, dramatically altering the strength of the company.
On Tuesday 16 October, Enron announced its first quarter loss in nearly four years: a massive $618m.
A day later, Enron said that it would slash its quoted assets by $1.01bn because of "errors" in the way that it had accounted for the special partnership. Staff were panicking - and with good reason. Enron's final decision was to block employees from selling stock in their pension schemes.
But by the end of the week, Enron shares were changing hands for just $15. With the empire collapsing, the full details of the maze of financial partnerships and contracts were only just being revealed.
On 8 November, the company took the highly unusual move of restating its profits for the past four years. It effectively admitted that it had inflated its profits by concealing debts in the complicated partnership arrangements.
On 19 November Enron sought to negotiate better conditions for $690m of debt that were due for immediate repayment, but the shares were still falling. Within days the shares plummeted to just $4.01.
And then the final blows came. On 28 November, Enron was left fighting for its corporate life after the major credit rating agencies gave it junk-bond status - a highly symbolic decision to judge the company a massive risk for investors, and with the potential to collapse. The announcement meant that Enron was immediately liable for almost $4bn of its $13bn of debt.
In three months Enron had gone from being a company claiming assets worth almost £62bn to bankruptcy. Its share price collapsed from about $95 to below $1."Uncertainty has severely impacted the market's confidence in Enron and its trading operations," Kenneth Lay commented as he saw his company implode. As the business world sat back stunned, 4,000 Enron employees out of the 20,000 strong workforce in the US immediately lost their jobs, on top of 1,100 who had already been made redundant in London.
While America reeled from the bankruptcy and Enron employees, past and present, worked out what they had left, the Justice Dept announced a criminal investigation. Attorney General John Ashcroft, who had received campaign funds from the company in 2000, excluded himself from the investigation along with the 100 federal investigators in Houston.
The following day, Andersen, its role increasingly in the spotlight, admitted that employees had disposed of Enron documents. The White House also confirmed speculation that Kenneth Lay had appealed to members of the administration for help.
Andersen fired its chief Enron auditor David Duncan amid speculation that he oversaw the shredding of documents. Enron, in turn, fired Andersen. It proved to be the largely symbolic final act of Kenneth Lay's reign at Enron. Two days after the FBI entered Enron's gleaming Houston headquarters, he resigned. On 25 January, Clifford Baxter, Enron's former vice chairman and chief strategy officer, committed suicide.
The shockwaves of a corporate crash are always keenly felt - but few failures have led to the kind of investigations Enron and its managers now face.
Part of an amazing document about Enron entitled: Enron - The Smartest Guy in the Room
To sum up
Possible discussion topics
Enron is an example of managerial greed, flagrant conflict of interest and callous disregard for the well-being of the thousands of employees and shareholders who, in good faith, had invested their sweat and equity in the company's operations; and that's not to mention, in the case of California, a whole citizenry denied electrical power.
Possible discussion topics
- Have you ever heard about the Enron case before?
- In your opinion, is Enron’s corporate culture values of risk taking, aggressive growth and entrepreneurial creativity essential to succeed in business?
- Would you agree with a statement that the corporation is the vehicle for the crime?
- Greed or conceit? What do you think is the motive and the rationalisation for choosing to break the law?
- Also, I wonder what's your opinion about corporate honesty and loyalty to both its' clients and employees. Have you heard about any suspicions or evidences of corporate criminality in Poland?
Sources
- 'Conspiracy of Fools: A True Story' (Excerpt: http://wwwebooks. com/ebooks/book_display. asp. IID=208804)
- 'Enron - The Smartest Guy in the Room' movie
- Center for Responsive Politics / Federal Election Commission
- BBC, The New York Times, wikipedia websites
For those wishing to see the whole film 'Enron: The Smartest Guys in the Room': http://videosift.com/video/Enron-The-Smartest-Guys-in-the-Room
ReplyDeleteThe fall of the Enron was quite loudly, it was hard to not hear about it. Their corporate culture could be very successful, but there is always huge risk which isn't good for a long term investment. I don't agree that corporation is the vehicle for the crime. Some corporations works legally, some don't - it's too simple to put all to the same basket.
ReplyDelete"Greed or conceit?" - definitely both could lead to breaking the law.
"Corporate honesty and loyalty" - most of them are honest and loyal as it's goes along with their strategy for making money. I don't remember any similar case to Enron here in Poland. Of course from time to time there are some local scandals like that with Constar and their products 'refreshing' ( http://www.newsweek.pl/artykuly/sekcje/polska/jest-wyrok-za-odswiezanie-kielbasy,49962,1 ).
I’ve never heard anything about the Enron. I agree with you, that the corporation is the vehicle for the crime, sometimes these car is a small, but sometimes is like a big bus ;) , and I do not mean only violations of the law – In many cases, people are forced to make unethical decisions for the good of corporation, its hard but it is true.
ReplyDelete"Greed or conceit?" - definitely both but greed is on the 1st place.
In Poland we have many examples where companies break the law to workers and customers – product “refreshing” as it wrote Adam is one of them, next could be:
1. Breaking employees law in Biedronka company:
http://www.radio.kielce.pl/page,,Oskarzenia-w-sprawie-lamania-praw-pracownikow-Biedronki,262a6b93f4296e6647569c41e3927672.html
http://www.pracownik.net.pl/kierownicy_sklepow_biedronki_zostali_oskarzeni_o_lamanie_praw_pracowniczych
2. 200 tons of over 20 years old canned meat consumed by polish people:
http://www.polskatimes.pl/fakty/kraj/165962,polacy-zjedli-200-ton-konserw-z-lat-80-tych,id,t.html
3. Breaking customers law by the polish banks:
http://www.finanse.egospodarka.pl/19856,Banki-lamia-prawa-konsumentow,1,48,1.html
4. “40 percent. company violates consumer rights”:
http://www.twoja-firma.pl/wiadomosc/16043872,40-proc-firm-lamie-prawa-konsumentow.html
5. Some other examples written in polish:
http://grono.net/prawa-czlowieka/topic/12788967/sl/korporacja-patologiczna-pogon-za-zyskiem-i-wladza/
To me, an average person living in a place that's rather distant from the "sweet land of liberty", Enron has always been a very obnoxious example of everything that is wrong in capitalism.
ReplyDeleteLebowitz once said "In the Soviet Union, capitalism triumphed over communism. In this country, capitalism triumphed over democracy." - a very true quote especially when Enron is discussed. Michał gave some excellent figures that show how much money was actually pumped into the Congress and the White House to gain control over the law and the country for some very egoistic purposes. You read something like this and you understand in an instant why so many conspiracy theories about "people of true power that manipulate whole governments and countries" exist in the modern society and culture.
I think that Enron proves clearly that human greed knows virtually no bounds. Once the chief executives of a company start using shady practices to increase share values and falsify income statements they will usually keep doing it to the end. The company becomes more and more bloated, stuffing it's mouth with more and more lies until finally crumbling beneath it's own weight to a shock of the general public.
You don't have to look really far to find examples of rotten companies on our own turf. Many of those that were created shortly after the political transformations happened in Poland were caught or suspected of forbidden practices. Names like Mr. Stokłosa, Mr. Rywin, Mr. Bagsik, Mr Kulczyk or Mr Gudzowaty. Incidents related to the polish coal, polish copper, fuel or recently gamble. Companies like Optimus, Bartimpex, Bank Inicjatyw Gospodarczych or Fundusz Obsługi Zadłużenia Zagranicznego. There is a lot of filth here.
That was a really long text with lots of numbers. First thing I thought was:
ReplyDeletehttp://biokompost.files.wordpress.com/2009/11/tldr.jpg
I heard about Enron, but never actually understand what it was about. Maybe because I am not really interested in such cases.
I realize there were many Companies in Poland that went bankrupt from different reasons. For me, the most famous was Optimus, but it is probably because I heard it at our school :)
Yes, it was broadly covered in news as it was truely example of empire fall.
ReplyDeleteOf course without creativity and risk decision making Enron woudln't grow up that much, but question is wheter ethically and legally they didn't cross the line too many times.
A corporation might became a vehicle for the crime as everything else - it's a matter of people who run it and that it depends on their characters, sometimes they can be
driven by ambitions and conceit, others by greed.
I heard about this case although it was so long time ago.
ReplyDeleteFor me problem here is neither greed or conceit but simply dishonesty, Enron case was in fact quite similar to the case of Bernard Maddoff.
Both of them were in fact criminal activities based on cheating.
In my oppinion blaming capitalism is unfair because it's like blaming car manufacturers for the victims of drunken drivers.
Neither have I heard anything about the Enron but I agree with you that the corporation is the vehicle for the crime.
ReplyDelete"Greed or conceit?" - both but greed is my favourite.
"Corporate honesty and loyalty" - there is not such thing in world of corporate unless it bring some profits.
"In my opinion blaming capitalism is unfair because it's like blaming car manufacturers for the victims of drunken drivers."
Capitalism encourages such activities while car manufacturers don't.
Like many of you, I've heard only a little about Enron. Now I feel more informed after that long text :)
ReplyDeleteI really don't have an opinion on the vehicle of crime. For me, it's just an oversimplification, but I may be wrong.
I just don't like the corporations' attitude towards anything not standard. There are corporate processes for great amount of things, but when something non-standard happens, it's a pain to do something. It's really annoying. But I consider it's just a case of a corporation I'm working in.
Would you agree with a statement that the corporation is the vehicle for the crime?
ReplyDeleteSometimes yes. The same situation was in Poland in PTC Era where whole management was involved in fabrication of invoices.
1. Yes I heard about Enron before.
ReplyDelete2. Most corporation in this sectore do the same but it's not good. They success can be achieved in another way...
3. I agree with it.
4. Greed