On This Day in 2001, Enron, once considered America’s most innovative company collapsed, writes Eliot Wilson
It’s hard to remember an economic boom now, but the last decade of the 20th century was exactly that for the United States. Annual growth was 3.5 per cent, the jobless total fell until there was nigh on full employment and in 1998 the federal government recorded a surplus for the first time in almost 30 years.
There was not only prosperity but the fizz and crackle of innovation. The creation of the World Wide Web in 1990 sparked a boom in technology firms like Netscape, Yahoo and Google, and existing companies diversified. Anyone, it seemed, could do anything, and the profits rolled in.
Enron had been formed in 1985 from the merger of Houston Natural Gas and InterNorth. Its presiding genius was Houston’s Chairman and CEO, Dr Kenneth Lay, an economist from Missouri who had worked in the oil industry and the federal government before finding success in natural gas. Aged 43 when he took the helm at Enron, he oversaw the relocation of the company’s headquarters to his home town of Houston and set out to create America’s premier natural gas pipeline.
Lay faced a major setback in 1987 when Enron Oil, the petroleum marketing operation, reported losses of $85m and its President and Treasurer pleaded guilty to fraud and filing false tax returns. The real scale of the loss was later revealed as $142-190m – that disparity would become a hallmark.
Enron needed to jump-start its recovery. In late 1988, the company convened a strategy meeting to look at options for the future. Vice-Chairman Rich Kinder, an old college friend of Lay, focused on “draining the swamp”, making sure Enron’s financial underpinnings were sound.
We’re going to get in that fucking swamp and we’re going to kick out all the fucking alligators, one by one, and we’re going to kill them, one by one
“We’re going to get in that fucking swamp,” he declared, “and we’re going to kick out all the fucking alligators, one by one, and we’re going to kill them, one by one.”
There was more creative and messianic thinking that led the meeting to be labelled “Come to Jesus”. Lay had been impressed by the ideas of a 34-year-old McKinsey consultant, Jeffrey Skilling, who would join the company formally two years later. Enron would pursue new and unregulated markets and create a so-called “Gas Bank” as an intermediary between gas producers and buyers. It effectively allowed Enron to hedge and ensure stable prices.
By the 1990s, Enron had new momentum. It began trading futures and options on the New York Mercantile Exchange, turned the Gas Bank into Enron Capital and Trade Resources, created Enron Development Corp. to explore international markets and gradually transformed from an energy producer into something more like an investment firm. Its horizons seemed limitless.
In 1997, FirstPoint Communications, an Enron subsidiary, formed FTV Communications LLC to construct a 1,380-mile fibre-optic link between Portland and Las Vegas. Enron wanted to sell bandwidth to a burgeoning market of internet service providers in the same way it sold other commodities, and on top of the fibre-optic “backbone” it built a huge data centre in Las Vegas with highly reliable connectivity. This was what The Wall Street Daily would later call “Enron’s plan to essentially own the internet”.
The business world looked at Enron with awe. Fortune named it “America’s most innovative company” six years in succession, from 1996 to 2001; when Lay and Skilling, now President and COO, unveiled their fibre-optic project in January 2000, the company’s share value soared and its executives made a fortune. It employed 20,000 people and claimed revenue of $100bn in 2000. Then it all began to unwind.
By the second quarter of 2001, Enron Broadband Services was losing money and a mooted merger with Blockbuster to stream films on demand was called off. Share prices fell and the dot-com bubble was beginning to deflate. But waning profitability hid a darker secret: thanks to accounting loopholes, special purpose entities and lax financial reporting, Enron had concealed billions of dollars of debt. Credit rating agencies downgraded it to junk status and the share price collapsed: in August it had stood at $90.75; 100 days later it was $0.26.
On this day in 2001, 2 December, Enron filed for Chapter 11 bankruptcy. It claimed assets of $65.5bn; but it disclosed debts of $31.2bn, and with other hidden liabilities the total was around $58bn. Either way, it was the biggest bankruptcy in US history. Lay, Skilling and more than 20 other executives were indicted for a range of offences; Skilling was sentenced to 24 years in prison, but Lay died of a heart attack before his sentencing.
For a while Enron’s leadership really had seemed to be the “smartest guys in the room”, as Bethany McLean and Peter Elkind’s 2003 book on the scandal was entitled. The company had been daring and innovative, agile enough to adapt to the unknowns of the 1990s. But the whole enterprise had been a confidence trick, its foundations only deceit and legerdemain. Its envious rivals had forgotten a fundamental truth of business and of life: if it looks too good to be true, it probably is.
Eliot Wilson is a writer and historian; senior fellow for national security, Coalition for Global Prosperity; contributing editor, Defence on the Brink