Enron's End Run

To make a mess as big as the Enron debacle, you need some friends in high places--Texas Senator Phil Gramm and his wife, for instance

Gramm argued that risk to individual investors was small. It is up to institutional investors, such as banks, to make sure their money is safe, he explained. "People who lend money ought to know who they're lending money to," he said at the time.

Fueled by objections from the securities industry to the continuing debate, Gramm led an effort to impose a moratorium on new derivatives regulations. That ended in May 2000 when the senator agreed to co-sponsor the Commodity Futures Modernization Act.

Gramm signed on to the bill after the original sponsor, Senator Richard Lugar of Indiana, agreed to amend it to exclude sweeping deregulation of the over-the-counter derivatives market. The bill also exempted companies that trade derivatives electronically, such as Enron Online, from disclosing details of trades. It became known as the Enron Exemption.

Senator Phil Gramm and Wendy Gramm, an Enron director, did their part to free Enron from federal restraints in the exotic derivatives markets.
Senator Phil Gramm and Wendy Gramm, an Enron director, did their part to free Enron from federal restraints in the exotic derivatives markets.
Ken Lay made some unlikely friends in Washington, such as ultraliberal Congress member Sheila Jackson Lee of Houston.
John Childs
Ken Lay made some unlikely friends in Washington, such as ultraliberal Congress member Sheila Jackson Lee of Houston.

In December 2000, five months after Phil and Wendy Gramm made their triumphant entry into Enron's reception in Philadelphia, then-President Bill Clinton signed the measure into law.

Some of the derivative-trading ranks hardly celebrated the supposed victory. The nation's established commodity exchanges tried unsuccessfully for a provision that would allow them to compete with Enron in limited over-the-counter commodity markets.

"To be perfectly frank, in my opinion, Enron's behavior in this instance was completely shameless," says Neal Wolkoff, executive vice president of the New York Mercantile Exchange. "It was just obnoxious. Every time I called a congressional aide or one of the committees to offer some input, they said the same thing: 'I'll have to run it past Enron and Goldman Sachs first.' We were trying to be heard and were just getting blown away.

"Enron came across as these flaming capitalists, but they wanted a monopoly," Wolkoff recalls. "They said, 'Keep the government out of my face and my number-one competitor at a disadvantage. Then we'll be a competitive company.'"

Enron had, indeed, been very successful in keeping government out of its affairs, beginning with natural-gas deregulation in 1985. But whatever opportunities the company once saw in an open marketplace were squandered during its transformation from a real business into "an old-time Wild West casino gone crazy," says Michael Greenberger, the former futures commission division chief.

But rather than walk away from the table, Enron upped the stakes. The over-the-counter futures franchise it won from Congress gave traders the power to place even more bets on a house account that had already been drained.

Publicly, though, Enron had plenty of bluff left in it. With its shares trading at a respectable $84 last year, newly named CEO Jeff Skilling nonetheless chided a group of analysts, saying shares should have been selling for $126.

Pressures increased for the company to explain indecipherable accounting that had kept massive debts off the balance sheets. "We don't want anyone to know what's on those books," CFO Andy Fastow said at one point. "We don't want to tell anyone where we're making money."

Or where they were losing it. In late March, a deal to distribute Blockbuster videos over the Internet via Enron Broadband collapsed. Then the company revealed it was owed $570 million by the bankrupt California utility company Pacific Gas & Electric. Worse, analysts started questioning the company's ethics after Fastow's financial stake in Enron's off-balance sheet partnerships was revealed.

In mid-August, Skilling stepped down as CEO after just seven months. Shares had sagged to $43. Lay returned as interim CEO and, in a series of meetings and e-mail messages, urged employees to continue "talking up" Enron. Lay himself, on the other hand, was bailing out, eventually cashing in more than $600 million worth of shares. Meanwhile, employees were locked out of liquidating pension shares as the price plummeted even faster.

When the SEC began investigating the company in October, Enron shifted more than $1 billion in losses back to its balance sheet, then admitted another $1.2 billion write-down was on the way.

Enron's trading operation stalled under the revelations. Suddenly there was no more buying and selling.

The biggest corporate collapse in history reached its stunning nadir with the December 2 bankruptcy filing. More than 4,500 people were laid off.

It could take years of forensic accounting to pin down how $70 billion disappeared. But this much is already known: Enron was an energy company like the Money Store is a U.S. mint. The company might have owned 37,000 miles of pipelines, but it had leveraged its value making markets where none existed.

Which, of course, isn't a crime. But it isn't a very good idea, either.

The formal exercise in assessing blame is under way in a dozen governmental venues. On January 24, members of the House Governmental Affairs Committee grilled executives from Arthur Andersen, Enron's accountants, over the shredding of Enron audit records and conflicts of interest as both company consultants and auditors. Andersen pointed fingers at Enron for misleading auditors, and at the legal giant Vinson & Elkins for endorsing suspect bookkeeping practices and helping to create the troublesome partnerships.

Lay himself was scheduled to testify February 4 before a Senate panel. His likely defense--and that of other executives--is that he wasn't involved in the decisions that came to devastate the Enron empire. The appearance of his mournful wife, Linda, on national television indicates the spin control has begun on what has already spun so out of control.

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