Who Killed Enron

Enron was supposed to be the next new thing, a New Economy company with substance to it. Unlike flaky Internet start-ups that substituted ethereal yardsticks like "eyeballs" and "stickiness" for revenues and profits, Enron had real businesses, real assets, real revenues and what seemed to be real profits. It owned natural-gas pipelines and electricity-generating plants and water companies. Not only would it do well, it would improve the planet by substituting the efficient hand of the market for the clumsy hand of government regulation.

And it seemed to work. From humble beginnings as a natural-gas company, Enron rose in a mere 15 years to No. 7 on the Fortune 500, doing $100 billion of business in 2000. Along the way, Enron became one of America's most admired companies, and a perennial favorite on "best places to work" lists. The guys running the show were hailed as magicians with newfound secrets that would change the future of business.

But Enron turned out to be another bubble. Unlike a Pets.com or a Webvan, whose implosions did little damage outside of costing dice-rolling speculators some money and techies some jobs, the Enron bubble exploded like a grenade. Today Enron is a smoking ruin, the biggest corporate bankruptcy in American history. A year ago the stock market valued Enron at more than $60 billion. Its stock has since lost 99 percent of its value--and still seems overpriced. Stockholders and lenders are out tens of billions of dollars. Many of Enron's 20,000 employees lost their retirement savings when the company collapsed. About 5,000 of them, from computer jocks in Houston to newsprint recyclers in New Jersey, lost their jobs, too. By contrast, chairman Ken Lay made $205 million in stock-option profits in the past four years alone, and other big hitters and board members made out, too. What's especially galling is that a handful of executives and outsiders made millions by investing in off-balance-sheet deals with Enron that played a large role in destroying the company.

The collateral damage keeps spreading. Prominent among the wounded is Arthur Andersen, Enron's outside auditor, which admitted last week that some employees destroyed documents. Andersen's reputation has been tarnished to the point that the Big Five accounting firms might shrink to the Big Four. Wall Street's credibility has been shattered. Utilities deregulation, for which Enron was the poster boy, is now on the back burner. The spectacle of impoverished, unemployed Enronites has thrown a harsh spotlight on the risks of 401(k) accounts stuffed with company stock. Confidence in financial markets has been shaken--and rightly so. With the action in Afghanistan slowing down, Enron shock waves have finally reached Washington, raising the specter of another 'Gate. L'affaire Enron is becoming a classic Washington scandal: criminal probes, investigations of destroyed documents, pols being asked what they knew about Enron and when they knew it. There's no sex, alas--but there sure is lots of money.

Life would be simple if we could blame the whole thing on Enron chairman Lay. Or on George W. Bush, who goes way back with Lay, among the biggest individual contributors to Bush's presidential and Texas gubernatorial campaigns. But Enron isn't that simple. It's something far more scary: a wholesale systemic failure. The multilayered system of checks and balances that is supposed to keep a company from running amok completely broke down. Executives of public companies have legal and moral responsibilities to produce honest books and records--but at Enron, they didn't do that. Outside auditors are supposed to make sure that a company's financial reports not only meet the letter of accounting rules but also give investors and lenders a fair and accurate picture of what's going on--but Arthur Andersen failed that test. To protect themselves, lenders are supposed to make sure borrowers are creditworthy--but Enron's lenders were as clueless as everyone else. Wall Street analysts are supposed to dig through company numbers to divine what's really happening--but almost none of them managed to do that. Regulators didn't regulate. Enron's board of directors didn't direct.

Why did all these people look the other way for so long? Money talks. Or, with Enron, shouts. The company put lots of money in pockets of the people and institutions that were supposed to police it. Enron's incessant dealmaking generated huge fees for Wall Street investment banking houses. And guess what? Wall Street loved Enron, with most analysts rating its stock and bonds as the greatest thing since money was invented, at least until they finally heard Enron's death rattle. Even when it became clear last fall that Enron was engaging in creative bookkeeping, almost no analysts recommended selling the stock, says Chuck Hill, who tracks analyst recommendations for First Call/Thompson Financial. "They should have thrown in the towel a lot earlier," he said. Enron paid huge fees--$52 million in 2000--to Arthur Andersen for auditing and consulting services. Andersen allowed it to get away with accounting that was, at best, aggressive and, at worst, criminal. If Andersen had stood on principle, Enron would doubtless have changed accountants. Enron famously made heavy political contributions. Pols got peanuts compared with what Wall Street and Andersen got, but it was enough to help Enron run roughshod over regulators at the national and state levels.