Enron

Enron is the name of the company that caused a major corporate accounting scandal and related financial irregularities in 2001 that disrupted financial markets. In 1985, Houston Natural Gas merged with InterNorth, a natural gas company based in Omaha, Nebraska. The new company was renamed Enron, and in 1986, Kenneth Lay becomes chief executive. At the same time, Lay found another avenue for greater wealth: deregulation of the natural gas industry. He used his connections and had Enron make political donations in order to influence Congress to make natural gas an unregulated, tradable commodity. In 1989, as the natural gas was deregulated, Lay created the Gas Bank. This initiative was to form a bridge between producer and consumer, ensuring consumers long-term supplies at set rates while stockpiling reserves of natural gas bought from producers.

In 1990, Lay hired former business consultant Jeffrey Skilling to look after the companies' energy trading operation. Andrew Fastow, who later became the mentor of the firm's dubious accounting practices, was one of the first hires. The same year, Lay was given $1.5 million in cash compensation, along with millions of shares of Enron stock. Enron's chief financial officer (CFO), Andrew Fastow, found a new use for the Gas Bank: he created Cactus, the first of what would eventually amount to 3,500 dummy companies created by Enron. Enron would make phony deals with the Gas Bank and assume, as supposedly separate and independent companies, any debts the Gas Bank incurred. By keeping Cactus off the books, Enron's actual indebtedness would be hidden. Thanks to Cactus and other dummy companies created by Fastow, none of Enron's earning's reports would be accurate, but to unsuspecting observers Enron seemed to do very well.

Enron's corporate culture changed radically during the mid–1990s. Bonuses and salaries became dependent on the closing of deals, and employees starting battling each other for the rights of each deal made. In May 1995, James Alexander, an executive in Enron's Global Power & Pipelines division, warned Lay of suspicious accounting of the division's finances. Lay did not act on the warning. In 1997, Skilling was promoted to president and chief operating officer. Fastow created a series of companies—codenamed Chewco and Jedi—designed to keep debt away from Enron's books while inflating the firm's profits. That year, Fortune magazine named Enron the most innovative company in the United States. In 1999, Fastow set up the first of the secret partnerships, which generated huge bonuses for him and his associates, while hiding Enron's many poorly performing assets and investments. At the same time, Enron launched its broadband services unit and Enron Online, the company's website for trading commodities, which soon became the largest business site in the world. About 90 percent of its income would eventually come from trades over Enron Online.

By August 2000, Enron shares reached a peak of $90. That year, California learned what Enron had wanted from a deregulated marketplace. For years afterward, Enron employees would insist that the catastrophe was California's fault and that Enron had done nothing wrong. Government investigators discovered that Enron's dummy companies had [Page 577]traded natural gas and electricity among themselves, with each trade increasing in price, until the commodities were sold to California for several times their actual market value.

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