THE SPECTACULAR FALL OF THE HOUSE OF ENRON would have been a huge news story were it not for the terror war. Just a few months ago, Enron Corp. ranked number seven on the Fortune 500. But in little more than 15 months, it managed to lose over 99 percent of its equity. As the nation's biggest electricity marketer in the late 1990s, the company led the way for the energy industry--taking advantage of deregulated markets, boldly forging ahead into new ventures around the globe, and impressing uncounted business commentators with its "innovation" and "brand-new thinking." Enron's vaunted CEO, Kenneth L. Lay, emerged as one of the principal backers of, and advisers to, George W. Bush.
"Enron was the next big thing," says V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies. "Like the dot-coms, it lived and died on that." But unlike dot-com companies that rose up and flamed out with little fanfare, Enron cut an enormous swath through the real economy. At its peak, this was a $70-billion company that helped to bring gas and electricity to people around the world. After it filed for bankruptcy on December 2, more than 4,000 employees in Houston were out of a job. At least $30 billion in company debt now must be dealt with, according to bankruptcy filings.
This is a stunning reversal for an energy company that began in 1985 with the merger of two pipeline concerns. Those were the days when deregulation in the financial industries was beginning to lead to dizzying failures--such as the collapse of junk-bond impresario Michael Milken's investment banking firm, Drexel Burnham Lambert. But the gradual deregulation of the natural-gas industry was just under way. Under Lay's leadership, Enron became a leading natural-gas company. It pushed aggressively for deregulation--first of natural gas and then, in the 1990s, of the electricity industry.
By 1997, Lay and his new partner, Jeffrey K. Skilling, who had been a management consultant at McKinsey and Company, decided to transform Enron into a new kind of powerhouse--one that would take full advantage of the free-wheeling opportunities in energy. Skilling decided that the heart of the business would not be in assets--power plants and pipelines--but in trading long-term energy contracts. In other words, the game was to match up sellers that had excess power with buyers that needed power. This was a radical innovation in the energy industry.
As Skilling and Lay got more creative, Enron's involvement in relatively straightforward long-term contracts evolved into new arrangements involving complex and exotic financial deals. Lay claimed throughout that it was all a matter of creating efficient markets. "Technology is changing," he noted repeatedly, "and there's a lot more value in flexibility and optionality. Just about in every industry, you can make them a lot more efficient when you have more optionality."
What exactly this gauzy talk about "optionality" meant wasn't all that clear to many listeners or, as it turned out, to Lay himself. But like Milken in the 1980s, Lay seemed to be a man very much of the moment, in possession of special knowledge not available to mortals.
ONE OF SKILLING'S BELIEFS WAS THAT ENRON COULD win big by branching out into the commodities business. In the hope that the company could create an international, privatized water market, just as it helped spur a global movement to privatize energy, Enron's leaders in 1998 set up a subsidiary called Azurix. It started off with a major water concession in England but soon ran afoul of British regulators who cut the firm's rates--a sign that without deregulated markets, Enron's style was significantly cramped. Azurix's expansion into Brazil also worked out badly due to local politics. Enron hid the mounting debts in an off-the-balance-sheet partnership. That turned out to be a technique that was all too common and that led to the kind of debt load that became unsustainable when investors lost confidence in Enron's numbers. …