Enron's End Run

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.

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.

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Tim Fleck
Brian Wallstin