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

Late in the afternoon of July 31, 2000, a who's who of Republicans--Texans as well as national party officials--jammed into elevators of a downtown Philadelphia office building, a few blocks from the GOP National Convention. When the doors slid open on the 50th floor, they spilled into the Top of the Tower banquet room for piles of pasta and prime beef, free-flowing liquor and the heady aroma of curried favor.

These guests of the Enron Corp. gazed from the peak of the pink granite shaft on Arch Street onto a view that stretched into three states. In this moment, with Enron favorite son George W. Bush prepared to accept his party's presidential nomination, the party crowd must have felt they could see all the way to the White House.

Enron's shares were selling for $90 on the New York Stock Exchange that summer. Hard-driving traders at the company's electronic power emporium, Enron Online, were getting $275 per megawatt-hour in California's deregulated energy market.

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.
Another recipient of Enron's largesse was Houston Democratic Congressman and senatorial candidate Ken Bentsen.
Deron Neblett
Another recipient of Enron's largesse was Houston Democratic Congressman and senatorial candidate Ken Bentsen.
Enron lobbyist George Strong says Enron was very astute in its contributions to politicians.
Deron Neblett
Enron lobbyist George Strong says Enron was very astute in its contributions to politicians.
Enron political fund-raiser Sue Walden says Lay was besieged by senators and congressmen seeking contributions.
Deron Neblett
Enron political fund-raiser Sue Walden says Lay was besieged by senators and congressmen seeking contributions.

The company was already the largest marketer of natural gas and electricity in the world. With the prospect of a friend in the White House, maybe even a Republican-led Congress, the future seemed to hold no limits. Politicos paid tribute with their presence to a company that had morphed itself, in only a decade, from a stodgy gas pipeline company to a self-hyped capitalist dream machine under the driving force of founder Kenneth Lay.

Lay, as a lobbyist himself in the '70s, had learned early that free enterprise works best when political wheels are greased with cash. By the mid-'90s, Enron had worked Congress and legislators in all 50 states for deregulation of everything from electricity to obscure commodities that no one had thought to buy or sell before. The company was hailed as a pioneer, its top executives worshiped as geniuses, and Wall Street pegged its worth at $70 billion.

Bush may have called him Kenny Boy, but in Houston, Ken Lay was the man. Bonus week sent traders scurrying to Porsche dealers, renting private jets and crowding into the city's best restaurants.

The millions in campaign contributions, the lobbyists lured off government payrolls, the corporate jet he put at the disposal of elected officials, all seemed like acts of charity in his continuing crusade for less government oversight into Enron's affairs.

And two of his biggest allies had taken Enron toward that goal. Senator Phil Gramm had led the move to free the company from federal restraints in the exotic commodity derivatives markets and to exempt it from key financial reporting requirements. Wife Wendy Gramm had done her part years earlier, as a commodities commission chair who was now an Enron director.

Enron lobbyist George Strong was working the door of the Enron festivities that afternoon in Philadelphia. Strong, whose political work typically favors Democrats, recalls the rousing reception that greeted the Gramms as they stepped from the elevator at the Top of the Tower.

"When they came in," Strong remembers, "I thought, 'Wow, this is really great.'"


A company once grew up around an idea that made all the sense in the world: Buy a commodity that somebody wanted to sell, and then sell it for a profit to someone who wanted to buy it. The idea was so appealing that, after hearing that the chief executive was a genius, people flocked to it.

No one knew the details about who was buying and selling or how much profit was made. Occasionally some wary individual would ask, but the company would always explain that secrecy was key, since its competitors would undoubtedly steal the idea. Meanwhile, investors were mailed statements every so often, informing them that their cash contributions had increased in value.

That attracted more investors, and the company hired people to handle all the buying and selling. It paid them commissions on the profits they turned, and the employees agreed to reinvest a portion of their earnings to help the business grow.

Then, at the height of the company's success, someone took a closer look and realized the company's liabilities far exceeded its assets. Investors began to suspect the statements they received in the mail were bogus. Pretty soon there was no more buying and selling and no more investors.

In the simplest terms, that is the rise and fall of the great Enron Corp. It is also the story of the Old Colony Foreign Exchange, started in Boston just after World War I by a former produce vendor named Charles Ponzi.

Ponzi's idea was to speculate in International Postal Coupons. For instance, a coupon bought in Spain for a penny could be exchanged in the United States for 6 cents. The problem was that the expenses of trading those coupons in world markets ate up Ponzi's profit. But rather than admit to a bad idea, Ponzi kept his scheme alive by using new investors' cash to pay dividends to earlier backers.

The truth emerged when it was discovered that Ponzi was part owner of Hanover Trust, which wrote the dividend checks. Auditors found the only thing keeping Old Colony solvent was the continued issuance of worthless stock.

Comparisons between Enron and the Old Colony Foreign Exchange are, of course, imperfect.

Like Ponzi, Enron wouldn't own up to its failure. When the company's top executives discovered they couldn't trade water or high-speed Internet access like oil and gas, they formed partnerships to keep losses off the balance sheets. Failed businesses were shifted onto the partnerships' accounts, which triggered loans that Enron booked as earnings. The loans were funded by Enron's investors--such as J. P. Morgan--and backed by assets, which included a water plant and a broadband unit, that Enron had moved into the partnerships. Enron then recorded the loans as earnings on these assets. The actual value of those assets, however, was considerably less than the earnings put on the books, which is why Enron had to restate its earnings when the partnership schemes were uncovered.

This, however, isn't called a Ponzi scheme. It's derivative financing, or more precisely, a debt-equity swap that allowed Enron to borrow from itself to cover losses and keep shares trading at a premium. Meanwhile, executives told investors the sun would rise twice tomorrow.

When Enron filed for bankruptcy on December 2, shareholders finally learned the company had created more than 870 off-balance-sheet subsidiaries.

From the formation of the first of those partnerships in 1997, 29 Enron executives and board members sold $1.1 billion in company stock. In the wake of the company's collapse, shareholders--untold numbers of retirees and pension fund investors, including Enron's own employees--are down $70 billion.

It may turn out to be a coincidence that the brass began cashing out at precisely the time Enron's insider trading of derivatives--unregulated futures contracts, or "structured financing," as the company called it--started to spin out of control.

But long before that, back in the beginning, there was just the Enron idea that made perfect sense. Trying to become the premier trader in new commodities--broadband, water, power production, pipeline capacity and more--would take more than a mastery of this new marketplace.

Commodity and derivative dealings had been restricted by government, and for good reason. Enron, to realize its dreams, would have to first master the finer art of political influence in the highest places. When that time came, Enron chief Ken Lay was more than ready.


Lay had been developing political friendships since the 1970s, when he was a minor Washington lobbyist for a Florida gas company. By the time he ascended to the helm at Enron in 1985, Lay had become a friend to Vice President George H.W. Bush and an energy adviser to the Reagan White House.

In 1985, around the time Houston Natural Gas and Internorth were merging into Enron, the Reagan-Bush administration deregulated the natural-gas industry by ordering pipeline companies to sell excess capacity to whomever wanted it.

When then-Texas Governor George W. Bush "restructured" the state's power markets in 1999, he was following a trend Lay had inspired in Washington and relentlessly pursued to a successful end in two dozen states.

Lay and his contributions had cultivated many political connections, but his wisest investment was in the political future of Texas Senator Phil Gramm and his wife, Dr. Wendy Lee Gramm.

Common ground was plentiful. All three emerged from modest backgrounds and went on to earn doctorates in economics. Their professional interests meshed with their philosophical sharing of a passionate distaste for government interference of any type with commercial enterprise.

The Gramms have never been known to coexist with a government regulation if they could choke the life out of it instead.

Some of the regulations they despised the most dealt with commodity markets, which traditionally had been regulated by the government. Such exchanges post prices, maintain bid-driven markets and enforce credit standards to protect the players. The Commodity Futures Trading Commission regulates these exchanges.

The commission has less authority in dealing with over-the-counter commodity trading. Those buyers and sellers negotiate derivative contracts with banks, securities firms and broker-dealers. The terms and prices don't have to be reported to the exchanges.

Derivatives were once known as leverage contracts, which had been the tools of trade for notorious foreign-exchange scams known as bucket shops. (A bucket shop is a type of phony derivatives trading operation that runs off with the investor's initial payment on the commodity; foreign-exchange rate swings were often the commodity supposedly being traded.) Randall Dodd, director of the Derivatives Strategy Institute in Washington, D.C., explains that exchanges regulated by the government, such as the New York Mercantile Exchange, have avoided major collapses through oversight.

"They trade these same derivatives contracts on the NYMEX," Dodd says. "Those markets work fine because everyone is holding capital, there is government surveillance, there are reporting standards--all these safety provisions that prevent it from failing."

Congressional action in 1978 locked the over-the-counter market down to three companies limited to the unregulated speculation in precious-metal futures.

The Gramms and other deregulation supporters argue that over-the-counter derivatives constitute capitalism at its purest. In fact, in the traditional open-cry pits found at the Chicago Board of Trade and NYMEX, Enron wouldn't have found a market for hangar slots. But off-exchange, the theory goes, if someone can turn something into a commodity, the buyers and sellers will appear.

OTC derivatives also allow institutions like insurance companies and pension funds, as well as wealthy, sophisticated individual investors, to assume more risk. They can invest in newly created markets or play more aggressively in familiar ones.

Enron's transformation from a pipeline company began in 1989, when it and other companies began lobbying to open up the over-the-counter derivatives market. Lay's strongest ally was in a prime position to help: Then-President George H.W. Bush had just appointed Wendy Gramm to chair the Commodity Futures Trading Commission. She quickly issued a lengthy report that argued to reduce CFTC oversight of certain commodity trading.

Two years later, Gramm led the push to open the door for Enron even wider by heading the effort to exempt over-the-counter derivatives from commission control. That allowed Enron to break free of the spot market for natural gas. Spot market contracts are standard contracts dealing with the price of the commodity that day--natural gas, for example--and are used to buy commodities that are required every day, such as a power plant's need for natural gas. Over-the-counter derivatives contracts are futures contracts like those traded on regulated exchanges. The rule change Gramm pushed through allowed Enron to enter the over-the-counter market for natural gas, where the company negotiated private, customized contracts with customers who wanted to protect themselves from increases in the price of natural gas.

Wendy Gramm had previously announced she would be leaving the commission. A week after delivering the rule change for congressional approval, she departed.

Five weeks later, Gramm had a new position: Lay appointed her to Enron's board of directors. The position paid about $30,000 a year, plus stock options. One CFTC member called the timing "horrible." Lay told The Washington Post that it was "convoluted" to suggest Gramm was brought on board for any reason other than her brilliance.

"Her knowledge of the derivatives market is a big plus for Enron," Lay said. "There aren't that many people who really understand that business."

The corporation itself, however, would soon be wondering how well it understood business in the vastly broadened markets delivered through deregulation.


Enron's extended leg room in the over-the-counter market brought it trouble almost immediately. In 1993, TGT, an Enron subsidiary in Great Britain, entered into a "take or pay" contract with companies pumping natural gas from the J-Block field in the North Sea. A take-or-pay contract is a form of derivative for the actual delivery of the commodity. Enron was trying to lock down a long-term price for gas from the J-Block field, even though the pipeline hadn't been completed yet, and agreed to take 260 million cubic feet of gas per day for 10 years to supply one of its own power plants and to sell to others.

But when the contract matured and Enron had to take delivery, demand for natural gas was down and the price had dropped by half--less than what Enron had agreed to pay in its contract. In the derivatives game, that's called tough luck--Enron should have bet the other way on the future price of gas. The company tried to litigate its way out of the mess, but a British court ruled that the meaning of "take or pay" was pretty clear.

The failed deal cost Enron $537 million in 1997. Bob Young, a derivatives consultant with New York-based ERisk, says the massive loss should have raised concerns inside the company.

Young believes that trading in the "short end," meaning locking in prices for three to five years, is a safe bet because everyone has the same idea about what the commodity will cost in that time frame. But he explains that there are no markets for pegging prices in the more distant future, such as 15 years out.

"No one knows what the price is going to be," he says, "so you have to base it on expectations, which can change."

In retrospect, the J-Block debacle appears to be just one of many problems Enron faced in 1997. After all, that's when it formed the first of its subsidiaries to shield transactions from the balance sheet. One of the more famous was called LJM, for the initials of CFO Andrew Fastow's three children.

The J-Block contract suggested to Young that Enron wasn't managing its trading books closely enough. Traders are supposed to adjust the value daily on long-term contracts, a practice called mark-to-market accounting. A responsible trader will watch for price decreases that reduce the long-term value of contracts. If that happens, the trader will try to hedge the lost value by making another trade that promises a better outcome.

The flaw in such accounting of unregulated derivatives was the potential for a harried or unscrupulous trader to inflate long-term contract values, knowing no one outside the company would have access to the information. Traders for any company might decide to impress their bosses or increase their bonuses by setting unrealistic future prices, then simply ignoring any subsequent changes in the commodity's price.

"It's a real conflict of interest," Young says. "A trader can set the market almost however he wants, then manipulate the market value to his own benefit. He just tells his boss the trade has been booked and he wants to be paid for that value now."

Whatever problems were escalating within the walls of Enron's far-flung enterprises, the exterior looked sleeker than ever. The corporation concentrated more and more resources into the heady stuff of derivatives trading. It invested in broadband, coal, water, pulp, paper and more. World market analysts were wowed by the new and novel initiatives into expanding economic markets.

Executive Jeff Skilling showed the brash style with personalized license plates--WLEC--for "world's largest energy company."

As that target came within Enron's sights, there were a few pesky chores to be taken care of first. Creative bookkeeping had spawned more and more sleight-of-hand subsidiaries to mask accurate numbers from corporate balance sheets. And government was trying to get in the way again, this time with the audacity of proposals to require proper accounting and oversight to the wide-open field of derivatives.

Lay would soon be returning to the front to break more regulatory leashes. This time, he was better armed than ever with political largesse.


The Enron chairman had invested his massive campaign contributions wisely. While he'd made it clear that one of his goals was a GOP majority in Congress, he would put his money on Democrats when there were no viable alternatives.

Lay is conservative, but "he is not some right-wing nut," says Enron fund-raiser Sue Walden, a loyalist who stays in regular contact with Lay. "He is pragmatic in 'What do I need to do on the PR end to achieve my goals?'"

"Lay concluded early on, as any smart lobbyist does, that it doesn't do any good to support somebody that might be right ideologically but can't get elected," says former Enron lobbyist and consultant George Strong, who has known Lay for a quarter-century. "With very few exceptions, you'll find that Enron was pretty astute on making decisions on who to give money to."

As unlikely as some of those decisions seemed at the time, they paid off. Sheila Jackson Lee, arguably the most liberal member of Congress and inarguably the most vocal, became a Ken Lay "project" in her upstart 1994 race for the 18th District in Houston. As her fund-raising chairman, Lay rallied the Houston business community to join her against their common foe, incumbent Craig Washington.

"We all had to give $250 to get rid of Craig," says a Lay associate. "But she was a pain in the ass to him." The source says that after her election, Jackson Lee would call Lay "two or three times a day trying to get us to hire her cronies for big money."

Freshman Houston Congressman Ken Bentsen also knew the influence wielded by Lay and Enron. The Democrat got jolted in November 1996 when Lay unexpectedly jumped ship to endorse his Republican opponent, Dolly Madison McKenna, for the 25th Congressional District. "He was probably the senior corporate citizen in Houston," says the congressman. "And they were the go-to people. He was the go-to guy."

The Enron chairman explained to reporters at the time that he simply had allegiance to McKenna, an old family friend. That was coupled with his fears that Bentsen's substantial labor backing would inevitably drive him to the left.

After Bentsen beat McKenna, Bentsen waited for Lay to apologize for the flip-flop. He thought it was coming several months later when an Enron staffer called and asked if Lay could meet with him.

"Being the nice gentleman I am, I say, 'Sure. Come on over,'" Bentsen says with a chuckle. "So he comes in and sits down. I keep waiting for him to say, 'Oh, we had a disagreement, but you won, and we want to try and work with you.'"

According to Bentsen, Lay talked about the need for energy deregulation but never mentioned the election, as if it were some faux pas between friends unworthy of comment. In 1997, Bentsen received contributions of $1,000 each from Lay and his wife, and $500 from the Enron PAC and a Lay-hosted fund-raiser. All in all, it was an implicit apology that probably spoke more eloquently than anything Lay might have said face to face.

Enron and its leader went on to give a total of $45,000 to Bentsen in the '90s, the highest amount it contributed directly to any member of the House of Representatives.

Lay and Enron, in fact, became synonymous with political contributions and candidates, mostly Republican, who regularly made pilgrimages to Houston to fill up their campaign tanks.

Sue Walden remembers all the calls from officeholders requesting that Lay host Houston fund-raisers. "A lot of elected officials on the federal end think Houston is a cash cow because we have the oil and gas industry here and they want a way in. Especially those on oil and gas, natural resources, deregulation, those sorts of committees, would come to Enron and ask Ken to host an event.

"Ken would do it," Walden explains. "It's hard to say no to a sitting senator or congressman."

Eventually the feeding frenzy became too intense. Walden says she had to try to shield the chairman from the ceaseless demands. "I'd say, 'Ken is just overused on this right now; let's give him a break. Find someone else, and I'll get Enron to help.' We'd go that route. I'd try to protect Ken a little bit, because you can't go to the well too many times."

Lay's much-touted role as one of the $100,000 pioneers for Bush's presidential campaign is not quite what it seems, says the fund-raiser. When the deadline came for contributions, the chairman was still a bit short.

"He hadn't made it yet, so I transferred $30,000 or $40,000 from my [fund-raising] account codes to him so he could get pioneer status on this big event day," Walden says. Fund-raiser Heidi Kirkpatrick worked with Walden, concentrating more on Democrats.

"It's like you visit Houston, and you visit Ken Lay," says Kirkpatrick. "He was pretty much the top target for fund raising on both sides of the aisle."

While Bentsen may have been a big individual recipient, Enron's real go-to guy in the House was Sugar Land Republican Tom DeLay. According to an Enron source, DeLay was particularly aligned with the new Enron order under Jeff Skilling.

"Skilling and DeLay think the same on 'dereg': They are free enterprise, open markets, they believe it," says the source. "There's just a natural bond, plus DeLay is majority whip."

But the fight against reporting requirements would require a well-connected Senate commander, Phil Gramm of Texas.


Senator Gramm first attacked the Financial Accounting Standards Board, which had recommended that derivatives be included on companies' balance sheets. At a Senate banking committee hearing in 1997, Gramm challenged FASB Chairman Ed Jenkins to reach a "broader consensus" from the business community. Jenkins replied that the standards board held 123 public meetings before concluding that reporting practices for derivatives were inconsistent, allowing different companies to report the same transactions differently.

"I don't question that you've had extensive hearings," Gramm snapped. He recited a list of opponents to the FASB standard, which included Chase Manhattan Bank and Citicorp. "Are these people against the public's right to know?...If we are going to maintain generally accepted accounting principles, part of your job, it seems to me, is getting general acceptance."

"The focus of the FASB is on consumers," Jenkins argued, "users of financial information such as investors, creditors and others." He explained that corporate reports need to give accurate finances and "not influence behavior in any particular direction."

Soon after, Wendy Gramm told the House banking committee that derivative markets would suffer from "unnecessary or overly burdensome regulatory costs." Gramm, a professor at George Mason University's James Buchanan Center for Political Economy, described her views as "comments that reflect the public interest rather than any special interest."

What she didn't put on record, however, was any mention of her job as paid director for a company that planned to become the world's largest corporation by dealing over-the-counter derivatives. Gramm is currently on the board of two other firms that put investor funds to work in the derivatives market: Invesco Funds and Longitude, a company that develops software to help dealers keep track of prices and trading positions.

In 1998, anti-regulation forces advanced with the GOP's new majority in both the House and Senate. Phil Gramm was elevated to chairman of the Senate banking committee, which oversees legislation on any financial regulations.

Merton Miller, an economics professor and 1990 Nobel Prize-winner, told a roundtable discussion in spring 1999 that the Texas senator would be influential with the Securities and Exchange Commission in weakening financial derivative controls.

To unanimous agreement, Miller said that the way to weaken such regulations was "not by rational arguments, of which we have immense numbers. But by a fellow named Phil Gramm..." To persuade the SEC "to take this medicine," he said, "you've got to be able to get to the supervisor of [SEC Chairman] Arthur Levitt, who is, in effect, Phil Gramm, and I think you can fully expect him to listen."

As the general, Gramm raked in enormous contributions from those who stood to gain the most from derivatives deregulation: Enron and those in the banking and securities industry.

Enron donated more than $100,000 in individual and corporate contributions to Gramm's political campaigns, including $10,000 from Ken and Linda Lay, according to the nonpartisan Center for Responsive Politics. (Lay was also regional chairman of Gramm's failed presidential bid in 1996.) The banking and securities industry provided him with more than $2 million since 1989.

Michael Greenberger, the former chief of the CFTC's trading and marketing division, says the debate over off-exchange derivatives has been smothered by special interests. Even modest attempts to study the issue trigger a rush of lobbyists to Capitol Hill.

"The Enrons of this world, the investment banks, the commercial banks individually and through trade associations, are lobbying the congressional branch and the executive branch and whoever they need to lobby 24 hours a day, seven days a week for this kind of stuff," says Greenberger.

Enron, tasting victory, launched Enron Online. The computerized trading platform would standardize the company's long-term derivatives contracts, to close such deals in seconds rather than the hours formerly needed. That would increase trading volume exponentially.

That online debut was diminished by a November 1999 White House capital management task force report recommending more financial disclosures from hedge funds. The report also recommended proceeding slowly with online markets such as Enron Online. And then-futures trading commission chairman Brooksley Born also echoed those sentiments about derivatives trading.

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.

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.

Because Wendy Gramm is married to the ranking Republican on the Senate banking committee, her public inquisition should highlight the agenda.

High on the list of questions for investigators is why she and other Enron directors agreed to waive an ethics policy so executive Fastow could arrange a stake in the company's silent subsidiaries, and whether or not she knew they were used to inflate earnings. Someone will ask if her fiduciary duty to shareholders may have been compromised by the $915,000 to $1.8 million in salary, fees, stock options and dividends she received since joining Enron's board in 1993. (The figures are from SEC filings reviewed by Tyson Slocum of the D.C. watchdog group Public Citizen.)

Other inquiries may center on whether Gramm's appointment to the Enron board was a payback for being such a strong supporter of energy derivatives and unregulated commodity trading. One question to be posed is how much, if anything, Wendy Gramm shared with her husband about what Enron hoped to gain from Congress. And what she knew as a member of Enron's auditing committee.

The senator told a reporter recently that "most of the time," he and his wife talk about household chores and college football. Gramm has denied that his decision not to seek re-election, made less than a month after Skilling's departure, had anything to do with Enron. Public Citizen's Slocum isn't so sure, saying the timing is more than coincidental.

"Enron would have been a major campaign issue," he says. "The Democrats would have gone ballistic: 'What? Your wife was on the board of directors? She was on the audit committee? Why didn't you protect these workers who were laid off?'

"Any potential for criminal investigations into his wife would have been a major liability and might have become a major scandal," Slocum says.

Enron's massive political donations and friendships--the Center for Responsive Politics says it failed to report $1.6 million in contributions last year--have muted some of the backlash. For example, Congressman and senatorial candidate Bentsen says the relationship of the Gramms to the company may have been an "uncomfortable situation." But he says he has "every confidence" that they followed the rules.

"There's no instance I see where Enron was in a situation with a regulator that was giving them a hard time, or affecting their business such that they were saying back off," he says. Executives "called the White House when they were in trouble, but the White House, to their credit, demurred."

Others say the Enron-fueled deregulation made government derelict in its role as watchdog for the unbridled trading markets.

"The collapse of Enron makes it plain that the key gatekeeper institutions that support our system of market capitalism have failed," Frank Partnoy, a law professor and former Wall Street derivatives trader, told a Senate panel. "The institutions sharing the blame include auditors, law firms, banks, securities analysts, independent directors and credit-rating agencies."

Banks and investment firms like J.P. Morgan, the United Bank of Switzerland and Lehman Brothers, which contributed $2.1 million to Phil Gramm in the last decade, are first in line to divvy up the carcass that was once Enron. Then they'll go back to investing their clients' savings in an unregulated $95 trillion financial market where people bet on the weather and the availability of aircraft hangar spots in London.

"The 'Who Shot John' over the politics of all this, I think, is beside the point," says former white-collar prosecutor Michael Greenberger. "What I think we have to worry about is that because [derivatives] are only brought to people's attention when there is an emergency, nobody knows how many more companies are out there trading these things. Nobody knows whether there are destabilizing trades that are being made that could bring other corporations down, as well."

The latest revelations indicate that Enron's own board may have already known of the questionable financial and accounting practices 18 months ago--at the GOP convention reception where they and the rest of the free-marketeers saluted George W. Bush and the Gramms. Loyalists and their political allies had a damning descent from the luxurious trappings they savored in their time at the Top of the Tower. But their legacy of deregulation means plenty of others are still jostling in line for that dizzying ride to the top.

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