The Fall of Enron

Enron began as a pipeline company in Houston in 1985. It profited by promising to deliver so many cubic feet to a particular utility or business on a particular day at a market price. That change with the deregulation of electrical power markets, a change due in part to lobbying from senior Enron officials. Under the direction of former Chairman Kenneth L. Lay, Enron expanded into an energy broker, trading electricity and other commodities. The Business of Enron

Enron became a giant middleman that worked like a hybrid of traditional exchanges. But instead of simply bringing buyers and sellers together, Enron entered the contract with the seller and signed a contract with the buyer, making money on the difference between the selling price and the buying price. Enron kept its books closed, making it the only party that knew both prices. Over time, Enron began to design increasingly varied and complex contracts.

Customers could insure themselves against all sorts of eventualities such as a rise or fall in interest rates, a change in the weather, or a customer’s inability to pay. By the end, the volume of contracts to actually deliver commodities, and Enron was employing a small army of PhDs in mathematics, physics and economics to help manage its risk. The Failure of Enron As its services became more complex and its stock soared, Enron created a constellation of partnerships that allowed manages to shift debt off the books.

Some partnerships’ losses would have to be paid for out of Enron stock or cash in 2003, bringing the debts back home. There are indications that Enron executives and its accounting firm, Arthur Andersen, had warnings of problems nearly a year ago. According to an email sent February 6, 2001, Andersen considered dropping Enron as a client. In August, Enron Vice President Sherron Watkins wrote an anonymous memo to former Chairman Kenneth Lay, detailing reasons she thought Enron “might implode in a wave of accounting scandals. On October 16, Enron announced a $638 million loss for the third quarter, and Wall Street reduced the value of stockholders’ equity by $1. 2 billion. Enron announced November 8, that it had overstated earnings over the past four years by $586 million and that it was responsible for up to $3 billion in obligations to various partnerships. A $23 billion merger from rival Dynegy was dropped November 28 after lenders downgraded Enron’s debt to junk bond status. Who’s to Blame?

Kenneth Lay, (former Enron Chairman and CEO) and Enron poured millions of dollars into both political parties, cultivating access and using the entree to lobby Congress, the White House and regulatory agencies for action that critical to the energy company’s spectacular growth. Greg Whalley, (former Enron President and Chief Operation Officer) had six to eight conversations last fall with the Treasury’s Department Peter Fisher, including one in which he asked Fisher to call Enron’s lenders as they decided whether to extend credit to the company.

Andrew Fastow, (former Enron Chief Financial Officer) was removed as Enron’s CFO on October 24, 2001 as the SEC began a probe into conflicts of interest in two partnerships he created and managed. Those partnerships earned him around $30 million in management fees from the deals in addition to his Enron salary. Jeffrey Skilling, (former Enron Chief Executive Officer) was criticized by Senior Enron executive about possible conflicts of interest in two partnerships he created with former Chief Financial Officer Andrew Fastow.

Jeffrey McMahon, then Enron’s treasurer, was highly vexed about the conflicts, “complained mightily” and suggested a list of remedies. Skilling served as the CEO of Enron for six months in 2001 for resigning for personal reasons. J. Clifford Baxter, (former Enron Vice Chairman) was one of 29 former and current Enron executives and board members names as defendants in federal lawsuit, after he sold over 500,000 shares of Enron for $35. 2 million before Enron’s collapse.

Sherron Watkins, (former Enron Vice President for Corporate Development) considered the internal whistleblower who in August of 2001, more than two months before Enron disclosed it had overstated its profits and understated its debts, warned Kenneth L. Lay that the company might “implode in a wave of accounting scandals. ” Shortly after Enron chief Executive Officer Jeffrey Skilling suddenly resigned. Watkins described “a veil of secrecy” around partnerships involving the energy-trading company’s former chief financial officer, Andrew Fastow.


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