What Happened to Enron?

Enron appears to have played fast and loose with the accepted rules of accounting and revealing of business dealings to the stockholders of the company. They misrepresented their dealings every step of the road on the way to ruin.

The fall of Enron began at the end of 2000. Memos were circulated at Enron between the upper level management that Enron might be on the verge of a wave of accounting scandals. Investigating reporters were beginning to question Enron’s moneymaking techniques. The CEO announced to Enron employees in 2001, that he expected the price of the stock to go up as he was selling off his holdings in the company. By the end of 2001, the end was just beginning for Enron. Enron announced in October 2001 that it had a loss of $638 million, due in part to the failure of its Internet Services division.

Just a few days after this announcement the Securities and Exchange Commission (SEC) announced that they were investigating Enron. By the first week of November, Enron admitted that its earnings for the last four years had been overstated. The earnings had been overstated by as much as $586 million. It was now due to repay six billion in loans by the next year.

The result of these announcements was a drastic drop in the price of Enron stock. The drop brought into effect some of the agreements that Enron had made with its investors, requiring them to repay their money immediately. Their inability to repay the loans left Enron no option but to declare Chapter 11 bankruptcy.

Enron Employees and Stockholders

Thousands of employees and hundreds of investors were left in the wake of this huge meltdown. These employees and investors were out of jobs and their investment capital.

With $6 billion in bad debts, the investors would be lucky to receive a penny on every dollar they had invested during the bankruptcy hearing.

By employing a veil of secrecy in its dealings with investors and stockholders, Enron was able to stretch its tentacles of acquisition into places that put the largest banking firms of Wall Street in the difficult position of not being able to recover from Enron’s default on its loans.

Started as an Energy Company

Enron began business in 1985, as a traditional energy company buying and selling gas to suppliers in local markets. Then, legislation passed in Congress in 1996 that released the controls on energy prices. This allowed Enron to change its way of doing business and instead of being an energy supplier, they were able to trade energy contracts.

With the growth of revenues from their new trading activities, their stock prices rose. This success thus allowed them to expand their business into other areas, such as Internet services. With this expansion, the contracts became more complicated.

Shady Business Dealings

In order to continue this growth curve, Enron initiated loans from banks to continue acquiring new projects. Because this new debt would reflect poorly on its financial reports, Enron began forming new partnerships with new companies that would allow them to keep the debt off their books and therefore keep them from having to reveal where the money went and came from.

One example of this technique involved a partnership with a company called Chewco. The partnership with this new company allowed Enron to keep $600 million of debt off their books and therefore there was no disclosure to the government or to Enron stockholders. This is a large part in explaining what finally led Enron to its bankruptcy.

Enron and the Financial Crisis

Enron even played a small part in the economic crisis that hit the U.S. in 2008 and 2009. Problems leading to that crisis can be attributed to the behavior of Enron and those that were supposed to be the watchdogs of the loans and investments.

Had anyone been able to ask the right questions or gotten to examine all the books a realistic picture of the situation might have been obtained. With the foreknowledge of the impending doom, there may have been a way to reign in the domino effect that hit the financial markets when Enron finally went bust.