Enron Corporation

When Enron Corporation filed for bankruptcy under Chapter 11 protection on December 2, 2001, it was valued at over $60 billion, thus achieving the notoriety of being the largest U.S. corporate failure at that time. The exemplar of American commercial enterprise became a byword for corporate malfeasance.

Enron was brought into being by Chief Executive Officer Kenneth Lay in 1985 from an amalgamation of Houston Natural Gas (HNG), of which he was previously CEO, and InterNorth of Nebraska. The new corporation's business was centered on some 37,000 miles of natural gas pipelines and supply contracts. Until the late 1980s, gas pipeline operators were required to be buyers and resellers of natural gas as well as transporters of the product. Deregulation motivated Enron to remove the constraints of entering into purchase contracts and reduce their involvement to transportation and tolling. In 1988, a meeting of top executives was told by Lay and his vice chairman Richard Kinder that far from harming their business, deregulation should provide the impetus for reengineering their business.

By 1990, a review of their corporate business strategy led to a reprofiling of the corporation. Some non-core businesses were sold off and the business was relabeled as an energy provider. In reality, this was a move from their previous conservative strategy of developing trading opportunities from a capital asset base to becoming an energy trading entity with capital assets.

This business transformation was led by Jeffrey Skilling, who joined Enron in 1990 from the consultancy business of McKinsey and Co., where he had been senior partner of their energy business. He came with his strategy to turn Enron into an “asset-light” [Page 598]organization, fueling expansion through financial trading. From using their “Gas Bank” to fulfill contractual obligations, their trading from 1992 might be better considered as derivative trading, since Enron was more involved in creating energy and financial markets than selling either products or services.

Enron, based in this complex in Houston, Texas, was the largest U.S. corporate failure ever when it went bankrupt in late 2001.

From its foundation, Enron was saddled with substantial debt inherited from HNG and InterNorth. This was increased in 1988 to buy out some 16 percent of the shareholding held by Irwin Jacobs, a major investor in InterNorth, and later investors, who had threatened to mount a takeover bid for the young Enron. This raised their debt-to-capital ratio to some 75 percent, making the corporation a poor investment risk. Through refinancing, this ratio was reduced, but keeping debt and losses off their consolidated balance sheet eventually led to Enron's collapse. This was not helped by some of Enron's less successful ventures, such as Azurix (water/utilities) and Elektro Eletricid-ade e Servicios (Brazilian electricity utility).

Enron also invested in the internet, buying into RhythmsNetConnections, an independent internet service provider (ISP). While developing a means of hedging following their initial public offering (IPO), Andrew Fastow, who was promoted to chief financial officer (CFO) in 1998, set up the first LJM entity. This was an investment vehicle formed by his family (their initials) that became an integral part of Enron's SPEs (special purpose entities). Earlier SPEs, such as the Cactus Fund, were legitimately used to create trading liquidity in gas markets. The later SPEs, such as the Raptors and Talon partnerships, became vehicles for “off balance sheet” accounting, avoiding the consolidation of debt, risk, and losses.

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