Who Killed Enron

With so many dollar signs floating around and the company's stock soaring, no one was interested in bad news--a problem that's hardly limited to Enron. "A lot of people don't want to hear the straight truth," says Thomas Donaldson, a business-ethics professor at the University of Pennsylvania's Wharton School. "Investors don't want the CEO to say something negative that will drop the stock, even for the short term. There's a culture of puffery, a culture of winking." The winking stopped last year when regulators and the financial markets finally reined in Enron--at least five years after its big-time financial shenanigans had begun.

Enron started out innocently enough, born of a mildly innovative 1985 deal to combine two boring businesses: an Omaha-based natural-gas-pipeline company called InterNorth and a Texas pipeline company called Houston Natural Gas. Ken Lay, a soft-spoken statesman kind of guy with a Ph.D. in economics, found a hyperaggressive financial whiz named Jeff Skilling working in McKinsey & Co.'s energy practice in Houston. They had a brilliant insight. Instead of just delivering gas to customers at a modest profit, Enron could use newly deregulated pipelines to match buyers and sellers. In other words, Enron became a gas trader, as well as a gas company. Because trading was much more fun and much more lucrative than building pipes and drilling wells and selling gas at regulated, low-profit prices, Enron morphed into a trading company with a utility attached to it.

And make no mistake, these guys were deregulation's True Believers. At a dinner I had with Skilling in the late 1990s, he was like a religious zealot who couldn't stop repeating his favorite mantra as the solution to all the world's problems. There are rolling blackouts in the Midwest? Deregulate. Some energy companies look like they're price gouging? Deregulate more. And if salad dressing had dripped onto my tie?... You get the picture.

With Lay and Skilling in charge, Enron's revenues and profits climbed sharply. People from all over the country clamored to join Enron and its crusade. TV monitors in the Enron Building in downtown Houston displayed the stock price. Employees could get pumped up by inspirational elevator messages on the way to work. In the best dot-com tradition, employees were treated to subsidized Starbucks, an on-site gym and lavish company outings. Enron wasn't just a business, it was a lifestyle that rewarded foam-mouthed aggression. "There's nothing wrong with ambition, but there was simply a warped culture at the top," says John Allario, 38, who worked six years in Enron's business-development department before losing his job in the collapse. "They wanted to climb to the top of the mountain and pound their chest and crush anyone or anything that got in the way."

The most important measure of Enron's growth was its rising stock price. It was the oil that made the Enron machine run smoothly. After faltering in 1997, Enron shares went on a run in late 1998, doubling, then doubling again. Enron stock options were making employees rich and helped the company attract the best and brightest. Not wanting to miss out on a sure thing, Enronites stuffed company shares into their 401(k) plans. The company required most employees to have a chunk of their 401(k)s in Enron stock--but many employees had far more stock than Enron required, and far less in diversified investments, such as mutual funds.

But what made Enron successful--innovation and daring--got the company into trouble when it decided in its arrogance that it could "financialize" almost anything. Rather than sticking to natural gas and electricity, which it understood, Enron in the mid- and late-'90s branched into whatever struck its fancy: water, coal, fiber-optic capacity, weather derivatives (whatever those are) and newsprint. It bought and sold properties, and traded up a storm. But many of its businesses tied up lots of capital while earning very little or running in the red. In the late 1990s, by my count, Enron lost about $2 billion on telecom capacity, $2 billion in water investments, $2 billion in a Brazilian utility and $1 billion on a controversial electricity plant in India. Enron's debt was soaring. If these harsh truths became obvious to outsiders, Enron's stock price would get clobbered--and a rising stock price was the company's be-all and end-all. Worse, what few people knew was that Enron had engaged in billions of dollars of off-balance-sheet deals that would come back to haunt the company if its stock price fell.