Twenty years after epic bankruptcy, Enron leaves a complex legacy

ByDonald L. Leech

Dec 2, 2021

A logo shines in front of the new headquarters of Houston-based energy trading company Enron on November 29, 2001 in Houston, Texas.

James Nielsen | Getty Images

The Enron bankruptcy on December 2, 2001 spawned an epic scandal, nearly two dozen criminal convictions and sweeping government reforms. Enron has become an enduring symbol of corporate fraud.

But 20 years later, several pundits, former company insiders and others say Enron’s legacy deserves another look. They say the company that has been repeatedly hailed as America’s “Most Innovative” was truly a trailblazer in businesses we take for granted today, from energy trading to video streaming.

Among those defending Enron’s legacy are the daughter and son of the company’s founder and former chairman, Kenneth Lay. A federal jury convicted Lay in 2006 on 10 counts, but because he died of a heart attack six weeks later – before he could appeal – his convictions were overturned.

“Prior to 2000, Enron was one of the world’s largest renewable energy developers and operators (primarily solar and wind), the first major US energy company to approve the cap and trade of CO2 credits, had targeted historically black college recruiting programs, actively promoted women and minorities to leadership and board positions, and committed over $ 28 million in equity investments in underserved communities and entrepreneurs, ” Elizabeth Lay, a lawyer who worked on her father’s defense team, and Mark Lay, a former vice president of Enron, said in a statement provided exclusively to CNBC.

“The model was simple, hire the smartest people you can find, give them capital, and run the back office for them so they can create new markets,” Lays said.

Stephen Webster, a former executive in Enron’s international division in Alabama bankruptcy laws, described a high pressure, sink or swim culture.

“I would tell you it was probably one of the best jobs I have ever had,” he said. But looking back, Webster said he doesn’t regret the stress. “We were rushing into new markets. We were doing new things. ”

Ravi Kathuria, former director of strategy at Enron’s retail energy unit, Enron Energy Services, described a culture where employees were given remarkable autonomy – a culture where bosses never called to ask for what the workers were doing or how they were doing. Staff members had to make the most of freedom.

“Enron fostered innovation and fostered an environment in which everyone within the company acted almost like an entrepreneur, your own internal entrepreneur, and you were in charge of your destiny,” he said. .

On the razor wire

Even some of Enron’s harshest critics concede the company was a trailblazer.

“Has Enron revolutionized the natural gas and electricity business? Without a doubt, ”said Ed Hirs, an energy researcher at the University of Houston, who has served as a consultant for the Department of Justice’s Enron task force. Hirs helped prosecutors prepare their cases against the Enron executives. “They were pioneers, and they brought efficiency and transparency to the markets of these economies. It was really fantastic.”

In the 1990s, Enron transformed from a hefty gas pipeline company into a corporate dynamo with an innovation known as Gas Bank, developed by McKinsey consultant Jeffrey Skilling. He would become the CEO of Enron, and he would later serve the longest prison sentence – 12 years – of any Enron executive. But the the charges against Skilling – including fraud, conspiracy and insider trading – had little to do with Enron’s business model, which remains in use across the industry today. Skilling declined to comment.

If they hadn’t covered up the fact that they really weren’t making any money, they would still be there.

Ed hirs

Former Consultant, Enron Working Group, Department of Justice

Capitalizing on the deregulation of the natural gas industry, Enron has established itself as a middleman between pipeline operators and customers such as utilities, taking its own part of the process. He also adapted the concept to electricity.

In 2000, Enron’s last full year as a public company, the division that included business operations accounted for over 90% of the company’s $ 100 billion in revenue. The company’s internet commerce platform, known as EnronOnline, said it processed more than $ 336 billion in transactions that year, making it the world’s largest e-commerce marketplace at the time.

While Enron’s business operations had little to do with the company’s accounting scandal, the unit’s successes created incentives for tricky bookkeeping in the bargaining unit and elsewhere in the company, said Hirs.

“By bringing transparency and liquidity to the market, margins – the spreads between supply and demand – have narrowed,” Hirs said. “And so, it’s very, very difficult for them to keep reporting increasing income and profits.”

But, Hirs said, the business model itself was solid in the long run.

“If they hadn’t covered up the fact that they really weren’t making any money, they would still be there,” he said.

And in a sense, they are. Enron alumni are scattered throughout the industry at companies that buy and sell natural gas using the same principles as the Skilling Gas Bank.

Market maker

Enron would try to replicate the success it has had with natural gas in other markets, with mixed results. He became a leader in the electricity business, although three Enron traders pleaded guilty to manipulate the California market during an electricity crisis in 2000. Yet the company itself was strong. And some, including the Federal Energy Regulatory Commission, have argued that much of the blame lies with California for developing a system that can be played in the first place.

“Significant supply shortages and an irreparably flawed market design were the root causes of the California market collapse,” FERC staff wrote in a 2003 report. autopsy.

Kenneth Lay speaks during an interview in his office at the company headquarters February 5, 1996 in Houston, Texas.

Paul S. Howell | Hulton Archives | Getty Images

Enron’s attempt to wield its magic in the burgeoning broadband market in the ’90s was perhaps the most problematic, even though it has helped shape the way we communicate and consume content to this day.

The idea was to buy and sell Internet bandwidth the same way the company markets natural gas. And to help meet demand, Enron Broadband is said to offer services such as Internet video conferencing – an early version of cloud computing – and even on-demand movie streaming as part of a joint venture with the channel. Blockbuster Video Rental. These innovations took place decades before Zoom and Netflix became household names.

“We said there would be a new medium,” said F. Scott Yeager, former director of Enron Broadband who has worked on new technologies. “The new medium would be the combination of flow, interactivity and dynamic content based on databases which are unique user experiences.”

Ahead of the game

But with the dot-com bubble collapsing, Blockbuster’s inability to license major content from Hollywood studios, and a huge glut of bandwidth, the broadband division has never lived up to its lofty goals. ‘Enron. Allegations that the company tried to hide this from investors became at the heart of the lawsuits – and guilty pleas – of several Enron Broadband executives, as well as part of the case of Skilling, the former CEO. .

I’m not saying they didn’t have great ideas or did nothing, but they tried to monetize things before they were really ready.

Leslie R. Caldwell

Former Director, Enron Working Group

Yeager has been accused of inflating the value of Enron’s shares by promoting technology that prosecutors said was not working. But a jury acquitted him of conspiracy, securities fraud and wire fraud, while being deadlocked on some 20 counts of insider trading and 99 counts of money laundering. When the government sought to retry him on these charges, Yeager took his case all the way to the Supreme Court and won.

“Our network was real, yes everything we did was real. And the infrastructure was real,” Yeager said.

But 20 years later, prosecutors who worked on the investigation still say broadband was typical of a trend at Enron to be just a little too ahead of its time, and fail to level with investors. when the bets have failed.

“Broadband might have been a great and brilliant idea, but it wasn’t ready for prime time. And in the meantime, they still tried to capitalize on it,” Leslie Caldwell said, the first director of the Department of Justice’s Enron Task. Obligate. Caldwell would go on to head the department’s criminal division during the Obama administration. Today, she is a partner at Latham & Watkins in San Francisco.

“I’m not saying they didn’t have great ideas or did nothing, but they tried to monetize things before they were really ready,” she said.