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Enron Corporation was an American energy company based

in Houston, Texas. Before its bankruptcy in late 2001, Enron

employed approximately 22,000 and was one of the world's







communications companies, with claimed revenues of nearly

$101 billion in 2000. Fortune named Enron "America's Most
Innovative Company" for six consecutive years.

Enron was originally involved in transmitting and

distributing electricity and natural gas throughout the
United States.

The company developed, built, and operated power

plants and pipelines while dealing with rules of law and
other infrastructures worldwide.

In just 15 years, Enron grew into one of America's

largest companies, but its success was based on
artificially inflated profits, dubious accounting practices,
and some say fraud.

Enron Wholesale Services

Enron Energy Services

Enron's Global Assets

Enron Wholesale Services- encompasses Enron's global

wholesale businesses, and is divided into four business

Enron Americas

Enron Europe

Enron Global Markets

Enron Net Works

Enron Energy Services

The retail arm of Enron, offers companies
away to develop and execute their energy

Created as a retail broker of energy services

Bought energy from utilities; sold to customers
Created market in retail energy contracts

Sold energy contracts; hedged in energy

Eventually made big bets on direction of energy
prices, and lost

Enron Transportation Services

oversees Enron's regulated, interstate
gas pipelines

Enron had assets spread across :

Central America and the Caribbean
South America
Asia Pacific

Enron traded in more than 30 different products, including

the following:

Products traded on EnronOnline

Petrochemical, Plastics,Power, Pulp & Paper, Steel, Weather
Risk Management

Oil & LNG Transportation


Principal Investments

Risk Management for Commodities

Shipping / Freight

Streaming Media

Water & Wastewater

Energy and commodities services

Capital and risk management services

Commercial and industrial outsourcing services

Project development and management services

Energy transportation and upstream services

Enron knew they were crooks. But

they were profitable crooks.

What happened?

Why did it happen?

What were the results?

Personalities behind the Enron scandal

Prelude to scandal

Ken Lay, Chairman and CEO

Big picture; optimistic; tended to avoid controversy
Ken gravitates toward good news

Jeffrey Skilling, President

Proponent of big ideas; less interested in details
Skilling is a designer of ditches, not a digger of ditches.

Andrew Fastow, CFO

Ambitious; unwilling to let the rules get in the way
I dont know that he ever had a moral compass

.Enron Oil
(Valhalla, NY)

Enron Corp
(Houston, TX)

Enron Oil chiefs involved in irregularities

Lay imposed weak sanctions; allowed execs to continue
Enron Oil faced devastating exposure
Division head, CFO had siphoned off money; both fired
Lay surprised both by losses and impropriety

Subjective assessment of future gains
Little incentive for follow-through
Pressure to accelerate deal flow

Key Issues:
a) How do we know future costs? (Hint: not very well)
b) What if profits dont pan out? (Contracts should be written
down, but)
c) How will Wall Street react if deals dont keep getting bigger?

Because Enron believed it was leading a

revolution, it pushed the rules.


attempted to crush not just outsiders but each

other. Competition was fierce among Enron
traders, to the extent that they were afraid to
go to the bathroom and leave their computer
screen unattended and available for perusal
by other traders.

Enron morphed from a sleepy gas pipeline into a rogue trading


Enron officers used their political clout affect policy, e.g.,

electricity deregulation;

-pressure on Indian officials to push development of expensive

power plant

Enron traders caused Californias energy crisis

Enrons profits were the product of accounting fraud

Enron used SPEs to hide billions of dollars of debt

Skilling left before the collapse because he knew something

Top management, auditors, and banks were all part of the


The Board and regulators were asleep at the wheel

Lay sold his shares while touting the company to employees

and investors

Executives were dumping their shares while employees, not

allowed to sell from their 401(k)s, saw their retirements wiped out

The Enron collapse was the (inevitable?) result of management


Individual and collective greedcompany, its employees,

analysts, auditors, bankers, rating agencies and investors
didnt want to believe the company looked too good to be

Atmosphere of market euphoria and corporate arrogance

High risk deals that went sour

Deceptive reporting practiceslack of transparency in

reporting financial affairs

Unduly aggressive earnings targets and management

bonuses based on meeting targets

Excessive interest in maintaining stock prices

Was paid $52 million in 2000, the majority for non-audit

related consulting services.

Failed to spot many of Enrons losses

Should have assessed Enron managements internal controls

on derivatives tradingexpressed approval of internal controls
during 1998 through 2000

Kept a whole floor of auditors assigned at Enron year around

Enron was Andersens second largest client

Provided both external and internal audits

CFOs and controllers were former Andersen executives

Accused of document destructionwas criminally indicted

Went out of business

Enron paid several hundred million in fees, including fees for

derivatives transactions

None of these firms alerted investors about derivatives problems

at Enron.

In October, 2001, 16 of 17 security analysts covering Enron still

rated it a strong buy or buy.

Example: One investment advisor purchased 7,583,900 shares of

Enron for a state retirement fund, much of it in September and
October, 2001

Enrons outside law firm was paid

substantial fees and had previously
employed Enrons general counsel

Failed to correct or disclose problems

related to derivatives and special purpose

Helped draft the legal documentation for

the SPEs

Enrons creation of over 3000 (!) partnerships

started about 1993 when it teamed with Calpers
(Calif. Public Retirement System) to create JEDI
(Joint Energy Development Investments) fund.

Why partnerships? As long as Enron could find

another partner to take at least a 3% stake, Enron
was not required to report the partnerships
financial condition in its own financial statements.

Enron used partnerships to hide bad bets it

made on speculative assets by selling these
to the partnerships in return for IOUs backed by
Enron stock as collateral! (over $1 billion by 2002)

In November 1997, Calpers wanted to cash out

of JEDI.

To keep JEDI afloat, Enron needed a new 3%


It created another partnership Chewco (named

for the Star Wars character Chewbacca) to
out Calpers stake in JEDI.

Chewco needs $383 million to give Calpers

It gets..
$240 mil loan from Barclays bank
(guaranteed by Enron)
$132 mil credit from JEDI (whose only asset is
Enron stock)

Chewco still must get 3% from some outside

source to avoid inclusion in Enrons books
filing, 1997).

Chewco Capital Structure: Outside 3%

$115,000 from M. Kopper (worked at the

time for Enron)

$11.4 mil loans from Big River and Little

River (two new companies formed expressly
by Enron
for this purpose who get a loan
from Barclays Bank)

Barclays Bank begins to doubt the strength

of the new companies Big River and Little River.

It requires a cash reserve to be deposited

security) for the $11.4 million dollar

This cash reserve is paid by JEDI, whose net

worth by this time consists solely of Enron
stock, putting Enron in the at-risk position for
this amount.

On July 13, 2001, Skilling resigned as CEO. He claimed it

was for personal reasons. The real reason was that Enron
was heading for trouble, and he didnt want to face the
music. There were at least five reasons that could
foreseeably lead to disaster:

(i) The firms stock was down about 40% for the year. If it
kept falling, several of Fastows SPEs those primarily
financed with Enron stock would be under water.

(ii) India had stopped making payments for electricity

generated by the Dabhol plant. Enron had shuttered the
plant in May and, despite the Bush administration
pressuring India on Enrons behalf, was facing the prospect
of writing off its entire $900 million investment.

(iii) The company had recently spent $326 million to buy

back shares of the failed Azurix water company.

(iv) Severe shortages of electricity in California had led to

rolling blackouts and accusations that Enron had
manipulated prices.

(v) The venture in bandwidth trading failed lamentably, and

ventures in metals and pulp trading wereracking up losses.

The company was in a cash crunch and was trying to sell

assets to raise cash. Skilling could see the writing on the
wall, but so could most of Enrons senior management.
Many had been liquidating their holdings in Enron stock for

Many people suffered from Enrons failure, but

employees were hit especially hard. Thousands were
laid off with just $4,500 in severance pay.

Enron had encouraged employees to invest their

pension assets in the companys stock. Employees
who had foolishly done so lost pension savings as
well as their jobs.

In June 2002, Arthur Andersen was convicted of

obstruction of justice for its destruction of Enron
documents. Andersen, which was once the largest
accounting firm in the U.S., was barred from auditing

The government nearly had a scandal on its hands, as

many politicians had Enron as a major contributor to their

The energy industry went through a crisis, since other

companies in the industry were Enron copycats and had
very similar deals and trading positions in place when
Enron went down. And investors took a big hit.

Finally, even with its downfall, some good has come

regulators are seeking to improve standards and practices
in accounting, corporate governance, risk control, and
pension fund administration, to ensure that another Enron
does not emerge.

Enron was a massive failure, partly because of its

size, partly because of its complexity, partly because
the controls to protect the integrity of capital markets
failed, and especially because of the massive greed
and collusion of key participants. Management failed,
auditors failed, analysts failed, creditors/bankers
failed, and regulators failed. The intersection of
multiple failures sent a signal of structural problems.
Suddenly, the consequence of deceptive financial data
resulting from structural failure in the capital markets
was not merely a hypothetical possibility. The speed
with which the system responded indicates the
importance of fairly presented financial information.