Enron: The plain person's guide
independent co.uk
27 January 2002
How did Enron start?
Created in 1985 by the merger of
two gas pipeline firms, Houston
Natural Gas and Internorth of
Nebraska. Within 15 years it was
the world's seventh largest
company, worth $39bn (£28bn)
and operating in 40 countries
including the UK.
How did it get so big?
Operating from Houston, Texas, it rapidly bought up other
power firms and moved into energy trading, risk management
for logging and metal firms, and telecoms. It bought Wessex
Water in Britain for £1.4bn. It was responsible for a quarter of all energy traded in Europe and the US.
When did it all go wrong?
Its troubles started in August when chief executive Jeffrey
Skilling unexpectedly quit after six months in the job.
In October, Enron posted losses of $638m, triggering a share
price collapse. Within weeks $15bn, or 60 per cent, was
wiped off the company's share value. At one point it lost 44
per cent of its share price in two days. The US financial
watchdog, the Security and Exchange Commission, began an
investigation.
Why could it not borrow?
In November, Enron admitted it had previously inflated profits
by $586m, by hiding debt. The share price collapse led to the
company's credit rating being slashed, leaving it unable to
borrow its way out of trouble.
How bad is the debt?
Enron's European arm called in the receivers in November. In
December, Enron itself filed for bankruptcy with the burden of
$13bn of debt. It was the biggest corporate collapse in history.
Enron owed £670m to British banks.
What did the directors do?
Investigations have since revealed that key Enron executives
sold thousands of shares in the weeks before the firm's
collapse.
What about the auditors?
Arthur Andersen, one of the world's leading accountancy
firms, is accused of shredding key documents and of failing to reveal Enron's debts.
How was the debt hidden?
By the creation of off balance sheet business partners, mainly based offshore. These companies purchased Enron stock at inflated prices. The debts were not published in annual financial reports.
What's the political angle?
Enron made donations to 188 US congressmen and 71
senators; to the Texan state legislature and even to the British Labour Party. Enron's chairman, Kenneth Lay, is a friend of President Bush
What about the staff?
Enron's 21,000 staff, encouraged to invest their pensions in
the company's shares, stand to lose £700m in retirement
savings.
What now?
Billion dollar lawsuits from investors as well as former staff, plus some investigations by Congress.
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