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The rise and fall of Enron

November 28, 2018

From a Houston Chronicle online article dated Nov. 28, 2001:

Standard & Poor’s this morning cut Enron Corp.’s long-term credit rating to single B minus -- or junk status -- saying it was doubtful Dynegy would go through with plans to buy Enron.

And a source familiar with the two companies said late this morning that the merger deal had indeed been terminated. Officials with Dynegy and Enron couldn’t be reached for comment.

S&P’s action raised the likelihood that the merger deal would fall apart and that Enron could be forced to file for bankruptcy protection.

Enron was soon to be in free fall for all the world to see and 17 years later the name itself still makes some Houstonians shudder.

It was the darling of Wall Street, a Houston-grown company that made its vaunted place in the city evident with its new downtown skyscraper - the tallest in a decade - and the hand-etched map of the world hanging in the atrium.

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Once a sleepy pipeline firm, Enron became one of the nation’s hottest companies, its market capitalization ballooning nine-fold in just a decade. Wall Street analysts gushed over its nonstop growth. Business management professors hailed it as a paragon of the new economy. Investors snapped up its shares.

But it all proved an illusion. In the early morning of Sunday, Dec. 2, 2001, Enron filed for bankruptcy as it became increasingly clear that its blockbuster growth was built on accounting gimmicks and fraud.

“Houston is a business center, so you’ve had rakish individuals throughout the years,” said Tom Kirkendall, a Houston attorney who represented three Enron executives during the later federal investigation. “But Enron caught people off guard. I want to say it was Hemingway who said insolvency starts slowly and then happens very fast.”

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Enron’s collapse marked the end of an era of dot-coms, day-traders and soaring stock prices, when investors snapped up shares of companies without revenues, investment banks earned big fees on stock offerings hyped by their analysts, and accountants tweaked balance sheets to make earnings appear better than they were.

It all changed after Enron - at least for a while. Regulators cracked down on financial reporting and Congress passed another reform bill aimed at stopping such abuses. In the years ahead, news stories, books and an Oscar-nominated documentary titled “Enron: The Smartest Guys in the Room,” detailed how Enron’s chairman Ken Lay and chief executive Jeff Skilling built a hugely successful trading desk that revolutionized energy markets only to watch the company’s profits wither away in a series of blunders.

“Because they were Enron,” said Craig Pirrong, a professor of finance at the University of Houston, “they thought everything they touched would turn to gold.” Before its downfall, Enron was a source of pride for Houston, a local business that became one of the nation’s most admired companies. Its executives were well-known and well-liked, playing big roles in civic life here and making big contributions to local cultural institutions and politicians.

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Enron sprang from the pipeline company Houston Natural Gas. After being named chief executive, Lay, the son of a Baptist preacher, helped engineer a merger with Omaha-based InterNorth in 1985.

From there, Enron grew into an energy monolith, not only operating pipelines and power plants but revolutionizing commodities trading. Its high-powered trading desk in Houston not only dealt in gas and electricity but also internet bandwidth and weather futures. Fortune Magazine named it the most innovative company in America six times.

Behind the scenes, however, cracks were showing. A $3 billion power plant in India ran into dire financial problems in 1996 after political changes there forced Enron to renegotiate a lower rate for electricity. A move to bring streaming video into homes a decade before that technology became ubiquitous failed.

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None of this seemed to matter. Enron kept reporting stellar earnings and its stock kept rising.

But Enron, as detailed later by federal prosecutors, had created an elaborate scheme to dupe investors and regulators, manipulating earnings and overstating assets to make the company look far more valuable than it was. After the dot-com bubble burst in 2000, and stock markets plunged, Enron’s problems and accounting gimmicks were exposed.

The company’s stock fell from more than $80 a share at the beginning of 2001 to less than $10 by mid-November. Enron found itself begging banks to extend lines of credit to keep it from running out of cash.

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At one point, Chuck Watson, then Dynegy’s CEO, made a deal to buy Enron for $4 billion - a fraction of the nearly $70 billion value in 2000. But after negotiations fell apart, Watson pulled out and left Enron’s board no choice but bankruptcy. Many Enron employees, whose retirement savings were tied up in the company’s stock, were wiped out.

Two months after the bankruptcy filing, FBI agents raided Enron’s headquarters, pulling hard drives and boxes of documents, as Lay met with the Rev. Jesse Jackson for spiritual counsel. A few days later, Cliff Baxter, the former vice chairman of Enron, was found parked on the side of Palm Royale Boulevard in Sugar Land in his black Mercedes-Benz S 500.

He was dead, a gunshot wound to the temple. A suicide note was found by his wife at their home.

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By October 2002, the government had brought charges against chief financial officer Andrew Fastow, alleged to have defrauded Enron investors of millions of dollars by shifting revenues into off-the books enterprises in which he and a select few had personal stakes. As prosecutors cut deals with Enron executives for reduced sentences, they steadily built cases against Lay and Skilling, setting up a 2006 trial on which the media spotlight was bright enough to rival those of major sporting events. Jurors spent four months inside Houston’s federal courthouse before finding Lay and Skilling guilty on charges including fraud, conspiracy and insider trading.

Skilling was sentenced to 24 years in prison. The sentence was later reduced by 10 years.

Lay was never sentenced. Six weeks after the verdict, he died from a heart attack while on vacation in Aspen, Colo.

Lay had loomed large not just at Enron but also in his adopted hometown, where he and his wife Linda were luminaries in Houston society. When the Astros threatened to leave if they could not get a replacement for the aged Astrodome, Lay helped pull together a new taxpayer-funded baseball stadium.

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It was named Enron Field when it opened in 2000; today it’s Minute Maid Park.

Since the scandal, Enron and Lay’s names have been scrubbed from donor rolls and wall plaques of museums and civic organizations.

But Enron remains a part of Houston’s business scene. Enron Oil and Gas, spun off in 1999 and now named EOG Resources, helped revolutionize the oil business by tapping South Texas shale fields long thought too expensive to drill. Kinder Morgan, one of country’s biggest pipeline firms, was built on Enron assets purchased by founder Richard Kinder after he stepped down as Enron’s president in 1996.

The company’s name has not completely vanished, either, added Pirrong: “Enron is a very common part of a lot of people’s résumés around Houston.”

This article was previously published in the Houston Chronicle during a six-month retrospective tracing of Houston history in 2016...

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