On this day: Enron files for bankruptcy

On This Day in 2001, Enrononce considered America’s most innovative company, is bankrupt, writes Eliot Wilson

It’s hard to remember today’s economic boom, but the last decades of the 20th century were similar for the United States. Annual growth reached 3.5 percent, unemployment fell to nearly full employment and in 1998 the federal government recorded a surplus for the first time in nearly 30 years.

Not only prosperity but also innovation sizzles and crackles. The creation of the World Wide Web in 1990 sparked an explosion of technology companies such as Netscape, Yahoo and Google, and existing companies diversified. It seemed that anyone could do anything, and the profits were pouring in.

Enron was formed in 1985 from the merger of Houston Natural Gas and InterNorth. Its genius leader was Houston Chairman and CEO, Dr. Kenneth Lay, a Missouri economist who had worked in the oil industry and the federal government before finding success in natural gas. Aged 43 when he took over at Enron, he oversaw the relocation of the company’s headquarters to his hometown of Houston and began building America’s major natural gas pipeline network.

Lay faced a major setback in 1987 when Enron Oil, a petroleum marketing operation, reported losses of $85 million and its President and Treasurer pleaded guilty to fraud and filing false tax returns. The true scale of the loss was later revealed to be $142-190 million – the gap would become characteristic.

Enron needed to begin its recovery. In late 1988, the company held a strategy meeting to consider future options. Vice Chairman Rich Kinder, an old college friend of Lay’s, focused on “draining the swamp,” ensuring Enron’s financial foundation was sound.

We’re going to get into that swamp and we’re going to drive all the alligators out, one by one, and we’re going to kill them, one by one.

“We’re going to get into the damn swamp,” he said, “and we’re going to drive all the alligators out, one by one, and we’re going to kill them, one by one.”

There was more creative and messianic thinking that led to the meeting being labeled “Come to Jesus.” Lay was impressed with the ideas of 34-year-old McKinsey consultant Jeffrey Skilling, who would join the company officially two years later. Enron would pursue new, unregulated markets and create so-called “Gas Banks” as intermediaries between gas producers and buyers. This effectively allowed Enron to hedge and ensure stable prices.

In the 1990s, Enron had new momentum. The company began trading futures and options on the New York Mercantile Exchange, transformed Bank Gas into Enron Capital and Trade Resources, founded Enron Development Corp. to explore international markets and gradually transform from an energy producer to more of an investment company. Its horizons seemed limitless.

In 1997, FirstPoint Communications, a subsidiary of Enron, formed FTV Communications LLC to build a 1,380-mile fiber optic network between Portland and Las Vegas. Enron wanted to sell bandwidth to the burgeoning internet service provider market the same way it sold any other commodity, and on top of its fiber optic “backbone,” Enron built a huge data center in Las Vegas with highly reliable connectivity. This is what Wall Street Daily later calling it “Enron’s plan to own the internet.”

The business world viewed Enron with admiration. Property named it “America’s most innovative company” six years in a row, from 1996 to 2001; when Lay and Skilling, now President and COO, launched their fiber optic project in January 2000, the company’s stock value soared and its executives made a lot of money. The company employed 20,000 people and claimed revenues of $100 billion in 2000. Then things started to die down.

In the second quarter of 2001, Enron Broadband Services was losing money and plans to merge with Blockbuster to stream movies on demand were cancelled. Stock prices fell and the dot-com bubble began to deflate. But declining profitability hid a darker secret: thanks to accounting loopholes, special purpose entities, and weak financial reporting, Enron had hidden billions of dollars in debt. Credit rating agencies downgraded it to junk status and its share price plummeted: in August, it was worth $90.75; 100 days later it was $0.26.

On this day in 2001, December 2, Enron filed for Chapter 11 bankruptcy. It claimed assets of $65.5 billion; but the company disclosed its debt was $31.2 billion, and with other hidden liabilities, the total was about $58 billion. After all, this is the largest bankruptcy in US history. Lay, Skilling and more than 20 other executives were charged with various offenses; Skilling was sentenced to 24 years in prison, but Lay died of a heart attack before being sentenced.

For a time, Enron’s leadership seemed to be “the smartest people in the room,” as the title of Bethany McLean and Peter Elkind’s 2003 book about the scandal. The company was bold and innovative, agile enough to adapt to the unknowns of the 1990s. But the whole effort is just a trick of self-confidence, and its foundation is nothing but deceit and lies. His envious competitors have forgotten a basic truth in business and 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, Defense on the Brink