ENRON the corporate dumpster fire

By: Reed Morris

Image taken from: https://useast2-www.securly.com/broker?reason=safesearch&categoryid=2148532229&policyid =0&i2n=1935897921&url=
ZW4ud2lraXBlZGlhLm9yZy93aWtp
L0Vucm9u&ssl=true&pac=true&ra nd=1117590440

The Beginning

Enron began in 1985 after the merger of two energy companies, Houston Natural Gas Co. (HNG) and an Omaha based company called InterNorth Inc. After the merger, a man by the name of Kenneth Lay, who was the CEO of HNG before the merger, became the new CEO of Enron. One of Lay’s first moves as CEO was to shift and rebrand Enron into an energy supplier and trader. With recent loosening on the energy market, companies were now allowed to place bets on future energy prices. Lay wanted Enron to take advantage.

In 1990, Lay created Enron Finance Corp, and chose a man named Jeffrey Skilling (he’ll be important later) to be the head of this new corporation. In regards to his joining Enron, Skilling’s timing was perfect. Energy in the 90’s was very loosely regulated and Enron was set to flourish in this environment.

Skilling’s first major contribution to the company was figureheading the company’s shift from a traditional ‘historical cost’ accounting method, to a new ‘Market to Market’ (MTM) accounting system, which allowed the company to receive official approval of the United States Securities and Exchange Commission in 1992. MTM: “Mark-to-market or fair value accounting refers to accounting for the ‘fair value’ of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed ‘fair’ value.” It is widely accepted that Enron’s adoption of the MTM style was the official beginning of the end of Enron. This style of accounting allowed Enron to log estimated profits as real, current, profits.

The height

At Enron’s height, the company had a market valuation of sixty billion dollars. As Enron was at its height during the ‘dot-com bubble’, interest in the internet was immense, so they created a website called EnronOnline (EOL). The website focused on commodities. With every transaction that took place through EOL, Enron was the counter partner, either the seller or buyer. One of the biggest reasons this website was a success was that Enron had direct insight into the value and activities of the energy market, as well as many other global markets. This allowed them to manipulate and contort these markets to make an unimaginably absurd amount of money.

The first signs of distress

Yea, that was a lie. Investors were told that they were making money, and were told that it was a success when in reality it was ripping apart at the seams. The first and most noticeable instance of this was when Enron partnered with Blockbuster to create a new video on demand (VOD) platform and enter the VOD market. At the time, the VOD market seemed like a really good pick, so Enron pulled out their MTM tricks, and started logging expected future earnings as their current, real earnings.

By early to mid 2000 rolled around, EOL was executing somewhere upwards of $350 billion in trades. This is when the dot-com bubble started to burst. Enron had decided to build a system of high-speed broadband telecom networks, which soaked up hundreds of millions of dollars. The downside of this was that due to the bursting of the dot-com bubble, they began seeing little to no returns on their hundred million dollar investments.

When the recession of 2000 hit, Enron was extremely saturated throughout many different markets, and was an extremely large part of the US stock market as a whole. They took immense financial hits, and were hanging on by the skin of their teeth. Overzealous Enron found itself on the heavy losing end of their vanishing market capital.

In a highly competitive and quickly growing energy market, Enron could no longer hold itself up. This was the beginning of the end.

The fall

In October of 2000, Enron found itself in a precarious position. It had money and assets tied up all around the world, and it started to crumble under its own massive corporate weight.

Remember Skilling? He decided that the best course of action for the company was to keep lying, and lie even more than before. Skilling used his admittedly impressive accounting skills to hide the financial losses of the Enron trading business, as well as every other operation the company was spending money on, thanks to MTM accounting. These tricks can be beneficial for trading certain securities, but when an actual business is being dealt with, it can have extremely disastrous effects.

An example of the way Enron was manipulating their numbers is this: Imagine they built a power plant for x million dollars. They would report the actual cost to produce the plant, but they would also immediately report the expected profit from this plant even if no one has made a single cent off of it. Then, if the power plant really didn’t make any money in the long term, the losses would be scrubbed from Enron’s books and the losses would be sloughed off on off-the-book shell companies, where these losses would go unreported and unnoticed.

This degenerate cycle required someone who could handle the heat and the lies surrounding it. In 1998, a man named Andrew Fastow, a rising star within Enron, was appointed as the company’s new CFO and he was now in charge of keeping up the facade of success Enron was trying so desperately to preserve.

Even though Fastow had put years of work into keeping Enron’s accounting frauds and financial failures hidden, details regarding the companies financiers started to leak out into the public eye.

Seemingly overnight, the company’s share price dropped around 90% from close to $96 dollars a share, down to a measly $12 per share. This was the final collapse of Enron. The company liquidated the assets it had left and filed for bankruptcy. Enron was no more.

Image taken from:
http://www.crawfordsworld.com
/rob/ape/APEFilms/APEEnron/
APEEnronSentences.htm

The aftermath

There is too much to cover in the aftermath of the Enron disaster. There were immense changes in legislation regarding large corporations and accounting methods, there was also a huge shift in the energy sector as a whole. Enron’s effect on the United States is significant and lasting.

The men involved with the lies and deceit at Enron also faced extreme legal trouble. Jeffrey Skilling (former CEO) ended up being sentenced to 24 years in prison because of his involvement in Enron’s collapse. Skilling was released from federal custody in early 2019. Similarly, the mastermind behind the concealment of billions in losses, Andrew Fastow was charged with securities and wire fraud, and was sentenced to 6 years in prison.

Final thoughts

As one of the biggest corporate scandals in US history, there is a lot to be learned from. While thousands of jobs were lost, and millions of dollars vanquished into thin air, the Enron disaster brought about a lot of positive change that has a lasting impact on the economy today.

The story of Enron is much too complicated and deep to fully explain in a short article, but if you have any interest in learning more about this historical dumpster fire of a company, there is a movie that goes into much more depth and detail about the events called ‘Enron: the smartest guys in the room’

One thing that can be learned from Enron is that massive corporations aren’t always clean, and need to be kept in check. In a world with companies that are valued at more than a trillion dollars, there has never been a more important time to keep vigilant, and make sure massive companies don’t have too much power, market share, or influence over our ever changing world.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s