Enron Explained: Lord Wakeham is to step down from the
press complaints commission, becoming the first
ish political victim of the Enron debacle.
Mark Tran explains
Thursday January 31, 2002
Why did Lord Wakeham step down?
The peer announced the temporary move "as a matter of honour"
while his links to Enron were being probed by investigators in
the US. Lord Wakeham said he wanted to protect the PCC from
damaging speculation during the inquiry into the energy giant's
multibillion dollar bankruptcy.
What connections did Lord Wakeham have with Enron?
Lord Wakeham joined Enron as a non-executive director in 1994
after serving as energy minister under Lady Thatcher, when he
approved Enron's first big gas power station in 1989. He also sat
on Enron's audit and compliance committee, which was
supposed to scrutinise the complex transactions between Enron
and its controversial partnerships. He was paid a reported
£80,000 a year from the company. But unlike other top Enron
executives, Lord Wakeham did not sell his shares in time.
What is Enron?
Enron started life as a regional natural gas pipeline company,
the result of a merger between Houston Natural Gas and
InterNorth in 1985. Its chairman, Kenneth Lay, eventually
transformed Enron into the world's largest energy trading
company and America's seventh-biggest corporation. Enron filed
for bankruptcy on December 2 last year in the biggest collapse
in American history.
How did Enron become so successful?
Enron specialised in contracts to deliver natural gas, electric
power and other energy products to industries and utilities at a
future date. It also sold financial instruments designed to protect
customers against sharp swings in energy prices.
Enron was quick to exploit trading opportunities when
deregulation in the late 1980s allowed users to buy gas or
electricity from a number of producers. Soon it became a darling
of Wall Street as analysts heaped praise on the company for its
"innovative" approach in bringing hi-tech and complex finance to
energy trading. Enron also cashed in on dot.com mania with
Enrononline, a web-based trading service.
When did Enron start to unravel?
The rot started in August last year with the abrupt resignation of
the chief executive officer, Jeffrey Skilling, who cited "entirely
personal reasons". At the time, Mr Lay denied that there were
any problems with the company, but Mr Skilling's hasty exit
adversely affected the share price as doubts started creeping in.
What precipitated its collapse?
The situation deteriorated dramatically in October when Enron
had to set aside $35m (£24m) to reflect losses in two complex
partnerships, which were set up in 1999 to move debt off its
balance sheet and hide losses. It was also forced to knock
$1.2bn off shareholder equity at the time, a move that led to a
crisis in investor confidence and a collapse in Enron's share
price.
Why could the collapse become a political headache?
It has emerged that Mr Lay had conversations with Paul O'Neill,
the treasury secretary, and Donald Evans, the commerce
secretary, just weeks before the company filed for bankruptcy.
Mr Lay asked for help to stop a private credit rating agency from
downgrading Enron debt. Administration officials deny any
intervention, but questions persist because of Enron's close
connections with the Bush White House.
How close was Enron to the Bush administration?
Mr Lay is an old Texas friend of the president, and Enron
executives contributed more than $500,000 to Mr Bush's various
campaigns.
More specifically, the White House faces questions about the
six meetings that Mr Cheney or his staff held with Enron
executives last year as the administration was formulating US
energy policy. Mr Cheney has refused to release records on
those meetings, saying they involved matters of policy. But even
congressional republicans are warning that a lack of openness
will only fuel accusations of a cover-up.
Does the administration face legal action?
The general accounting office (GAO), the investigative arm of
Congress, is to sue the White House for refusing to disclose
information on the Cheney meetings with Enron executives. It's
the first time that Congress has taken the White House to court.
The administration claims it is withholding details as a question
of principle as otherwise it would be impossible for the White
House to hold confidential conversations with anybody.
Who is investigating Enron?
The US justice department has launched a criminal investigation
and Mr Bush has ordered sweeping reviews of pension and
financial disclosure rules. About a dozen congressional
investigations are going on too. Many investors lost their shirts,
and many of Enron's 19,000 employees lost their savings
because they belonged to retirement plans based on Enron
shares - yet top executives were able to sell their Enron
holdings before the shares became worthless.
In a red flag for financial investigators, Arthur Andersen, Enron's
auditor and itself under investigation for possible misconduct,
has admitted to destroying a "significant" number of documents.
Was there a rescue attempt?
Dynegy, a smaller rival, considered a rescue merger worth
$9.4bn, but pulled out, citing "misrepresentations" on Enron's
part. In other words, Dynegy saw how truly awful Enron's
financial plight was.
Did Enron operate outside the US?
By 1999, Enron was involved in a quarter of all electricity and
natural gas deals in the world and had major operations in Brazil
and India. Enron was particularly disliked in the developing world
after the company became embroiled in one of India's biggest
corruption scandals, in which large sums were paid to politicians
involved in the privatisation of electricity firms.
Did Enron have assets in the UK?
Some 4,000 people work for Enron or companies it owns in the
UK. Enron owns Wessex Water, which employs 1,400 workers
in Britain, and power stations on Teeside. Ofwat, the water
regulator, insists the utility will not be affected as it is insulated
from Enron's debts. Hundreds of traders in Enron's London office
lost their jobs when the administrators were called in. In all,
Enron employs 5,000 people in Europe.
Will there be a rethink on deregulation?
Enron's collapse raises questions about the wisdom of letting
market forces - in reality a handful of energy companies -
manage prices. The bungled privatisation of California's
electricity industry, which led to blackouts and powercuts last
year, also called deregulation into question. At the very least,
regulators will have to watch the energy markets more closely
and insist on more transparent financial practices among energy
trading companies.
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