Posted on 20/12/2001
Enron
Down - Whose Hurting
By Pratap Chatterjee, photo shows Kenneth Lay
On December 4, 2001, Enron filed for bankruptcy. Not long ago
Enron was the
largest energy trader in the world, the largest natural gas
pipeline owner
in the country and a pioneering force behind energy deregulation.
The move
resulted in 4,500 layoffs, or 60% of Enron's workforce at its
headquarters
in downtown Houston.
Employees and investors were stunned. How could one of the most
wealthy and
powerful corporations in the world go bust over night? Wall
Street
shuddered; could this be the first in a series of corporate
disasters that
marked the now official US recession? In Houston, security guards
patrolled
the Enron buildings, watching employees as if they were potential
thieves
as they emptied their desks. Workers flooded into the streets
in front,
many crying and hugging one another as police on horseback shouted
at them
to disperse. "My group was told nothing yesterday, other than
to gather
personal belongings and leave" former Enron employee Kathleen
Salerno wrote
in a letter to the Houston Chronicle. "On November 30, we were
given the
right to move Enron's matching funds for our retirement savings
plans from
Enron stock to another fund. My personal account amounted to
$46.01.
Another friend, with almost twenty years service had $102. This
is absurd,
sad, and I think, criminal."
A Vietnamese-American worker compared the Enron's demise to
the fall of
Saigon in 1975. "I watched the fear in the eyes of the South
Vietnamese
soldiers as they retreated and disposed of their weapons. I
watched
families and friends hugging each other for comfort as they
waited in fear
for the uncertainties which were about to fall on them. Last
Monday those
memories came flooding back. I saw chaos and confusion. I saw
co-workers
and friends hugging one another for comfort." It was a far cry
from
previous years when Enron high flyers bought silver Porsches-the
most
favored status symbol at the company · to celebrate annual bonuses
as high
as $1 million. The company's stock soared to $90 a share at
its peak last
August, making it the seventh largest business in the United
States. For
five years in a row Enron was named "The Most Innovative Company
in
America" by readers of Fortune magazine.
Enron's Empire
Enron was founded in 1985 by Kenneth Lay, a former employee
of the now
defunct Federal Power Commission and an erstwhile economist
at the Pentagon
during the Vietnam War. The company was created when Lay merged
Houston
Natural Gas with InterNorth, a natural gas company based in
Nebraska. Over
the years Lay invested millions of dollars in lobbying federal
officials
and financing their political campaigns to get them to privatize
and
deregulate the energy industry. In 1989 Enron began trading
natural gas
commodities to help utility customers shield themselves from
risk by
locking up the long-term prices that they wanted ahead of time.
Enron
bought the gas supplies from producers, arranged for delivery
and took a
cut of every deal. In time, the company became the largest natural
gas
merchant in North America and the United Kingdom. This success
in the
natural gas industry soon made Enron believe it could apply
these tactics
of deregulation and political influence to a dizzying array
of businesses
from internet broadband to water, coal and steel. The Economist
magazine
described Enron as an "evangelical cult," with Ken Lay its "messiah."
This expansion was overseen by Jeffrey Skilling, a former energy
consultant
at McKinsey & Company, who joined Enron in 1990. Skilling
transformed the
company into the biggest and most aggressive of the new breed
of
unregulated energy traders that bought and sold billions of
dollars of
electricity and other commodities daily. But instead of bringing
prices
down for buyers, these transactions had the effect of driving
up prices to
hundreds of times of production costs, pushing states like California
into
major debt. "We are on the side of angels," Skilling, who was
appointed
chief executive officer of Enron early this year, told a television
crew.
He dismissed those who saw the company as a profiteer in California's
energy crisis. "People want to have open, competitive markets.
They want
fair competition. It's the American way."
The Emperor Has No Clothes
Then, in mid-August Skilling was forced out of his job, cashing
in his
shares and options, pocketing some $62 million, while Lay cashed
in stock
worth $150 million. Two months later the company disclosed it
had some
internal financial problems and Enron's share price started
to spiral
downward even faster than it had risen.
Carl Wood, a member of California's energy commission, wryly
remarked that
Enron had turned out to be "all hat and no cattle - that's their
Texas
expression." Employees were far more bitter. A former Enron
employee wrote
in the Houston Chronicle that Skilling once said, "'Enron's
strategy is
simply to take the money outside the building and move it inside
the
building.' The smartest thing Skilling ever did: leave the building,
and
take the money with him." Others, like George Strong, a lobbyist
who worked
for Enron for 25 years, say that Skilling brought arrogance
and greed to
the company. "We were looking to do a deal to supply energy
to HISD
(Houston's public school district), and I explained to them
that it would
take a year to educate the school district and make it comfortable
with
changing the way it got its power," says Strong. "The guy I
was working
with-he was a director in his late 30s-started yelling, 'I don't
have a
year! My bonus is based on what I do this quarter. If I can't
get it done
in three months, I don't have time for it.'" Yet even though
the boom in
new markets and transactions inflated Enron's revenue and made
for fat
bonus checks, the company was still paying out more than it
was bringing
in. So Enron's accountants used complex bookkeeping tricks to
shift
billions of dollars in debt off its balance sheet and into an
array of
partnerships set up by Andrew Fastow, the company's chief financial
officer.
This had the effect of making it look like the company was doing
far better
than it really was, until mid-October when Enron disclosed that
its
shareholders' equity (a measure of the company's value) had
dropped $1.2
billion in the third quarter. A week later the company fired
Fastow and
appointed a special committee to examine the transactions, led
by William
Powers Jr., the dean of the University of Texas law school.
The Securities
and Exchange Commission also opened a formal investigation into
transactions. Investors started to suspect that Enron was hiding
major
losses and began to dump the company shares when Enron revealed
that it
had $13 billion in debt. Dynegy, a smaller cross-town rival
company, agreed
to acquire Enron for $9 billion plus the assumption of the debt,
with
additional financing from Chevron-Texaco, a major Dynegy shareholder.
When Enron disclosed even more debts, the energy traders started
to panic
and follow the investors by refusing to do business with the
company. In
late November Dynegy pulled out of the deal forcing Enron into
bankruptcy.
The company listed assets of $49.8 billion and debts of $31.2
billion,
although this total did not include all the company's debts.
In early
December Enron's share price plunged to 36 cents from the high
of $90 just
over a year before, making the company a victim of the very
market forces
that it exploited to become rich in the first place.
In mid-December, a creditors committee, composed of some of
the major banks
that Enron owed money to, was to be set up to decide what parts
of the
company should be sold off in order to pay the bills. Meanwhile
employees
who lost their jobs after Enron filed for bankruptcy protection
were told
they would receive no more than $4,500 in severance pay. They
also were
told to petition the bankruptcy court to cash in unused vacation
days.
However shareholders refused to accept that all the money had
simply
evaporated. A lawsuit filed in early December accused 29 Enron
officers and
directors of engaging in "massive insider trading" and making
"false and
misleading" statements about the company's financial performance
while
selling about $1.1 billion worth of stock over the last three
years. Senior
management are not the only people who profited during Enron's
glory days.
Between 1997 and 2000 Enron spent $10.2 million influencing
Washington
politicians.
During the 2000 Presidential campaign the Center for Public
Integrity
identified Enron as the single largest patron of George W. Bush's
political
career. A frequent flier on Enron corporate jets, Bush received
$774,100
from Enron management and the company itself including $312,500
for his
campaigns for governor. In return then governor Bush helped
deregulate
Texas electric markets in 1999, permitted "grandfathered air
polluters" and
passed laws protecting businesses from lawsuits. This close
relationship
continued when Bush took over the White House. Lay reportedly
is the only
executive who got a private audience with Vice President Dick
Cheney, to
discuss the administration's energy policy. Enron was also a
powerful
behind the scenes force shaping US trade policy. As a key member
of the
U.S. Coalition of Service Industries, Enron positioned itself
to play a
major role in WTO negotiations. These negotiations affect a
wide array of
services that impact daily life, from health care and education
to energy
and water. Enron's agenda of deregulation and privatization
clearly meshed
with Washington's position at the recent WTO meeting. Enron
was also on the
Board of the National Trade Council, a prime mover behind granting
the
President fast track authority over all trade negotiations.
Today, as the cash flow dries up so too have Enron's friends
in high
places. Although Bush and his administration have made sympathetic
noises,
so far they have refused to bail out the company. Senior officials
have
said that they are tracking the situation closely, which may
be a euphemism
for waiting to see if Enron turns out to be more of a liability
than an
asset. And despite the fact that Enron's far-flung empire of
international
subsidiaries from Argentina to Turkey are still operating, there
are signs
of financial troubles at some operations most notably in India
as well as
in Brazil. Those operations have been plagued by charges of
human rights
and environmental abuses. In India, the company has been in
a protracted
dispute over unpaid bills and contract terms with the state
utility of
Maharashtra at the $3 billion Dabhol Power venture, India's
largest single
foreign investment. Enron has been offering its 65% stake in
Dahbol for the
knockdown price of $1 billion, but has yet to find any takers.
Banks with $
1.5 billion dollars in loans and loan guarantees outstanding
on Dabhol are
threatening to seize the plant outright.
In addition, Human Rights Watch and Amnesty International have
both
documented human rights abuses committed by local police working
as a
private security force for Enron. Among the violations are numerous
incidents of police on the Enron payroll beating local residents
opposed to
the Dabhol project, including elderly villagers and women. Some
were even
dragged out of their homes, brutally beaten with night sticks
and arrested
for refusing to cooperate with the company. Enron has always
enjoyed being
a case study for business school textbooks, and may continue
to be one for
years to come-for very different reasons. At its zenith Enron
derived 80%
of its revenue from trading, exemplifying to students how market
forces can
be exploited for super-profits. Today, it remains a cautionary
tale for
those who believe in unfettered markets. At the very least,
Enron has
become a victim of the dot com shakeout and the current recession.
The
question that remains to be answered is: Will Lay, who rose
from humble
beginnings, continue to be a powerful Washington insider? If
Bush and other
politicians persist in giving him access to the corridors of
power as they
have in the past, Lay may still be able to mount a comeback.
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