The fall of mighty Enron Corp. (ENE
)--just months ago one of the most valuable companies in America--is a collapse of mind-boggling proportions. Only last year, Enron had $101 billion in revenues, a stock-market capitalization of $63 billion, and a chairman who was a high-profile confidant of President Bush. Yet in a sickeningly swift spiral, the powerful energy trading company tumbled to the brink of bankruptcy in late November--the victim of a botched expansion attempt, an accounting scandal, and the overweening ambition of its once widely admired top executives.
The end came quickly because Enron had overextended itself--and because investors and customers lost faith in its secretive and complex financial maneuvers. With legions of traders working out of a Houston skyscraper, the company put together trades so exotic that they mystified many Wall Street veterans. Under Chairman Kenneth L. Lay--who pressed the Administration to embrace a controversial policy of electricity deregulation--and former CEO Jeffrey K. Skilling, Enron had become largely a trading operation, dubbed by some the Goldman, Sachs & Co. of the energy business.
Enron's success depended on maintaining the trust of customers that it would make good on its dealings in the market. But that trust evaporated in recent weeks as it shocked the market with changes to its nearly incomprehensible financial statements. "If you are running a trading operation, you have to be like Caesar's wife, beyond reproach. Unfortunately, the company didn't realize it," says a senior Enron employee who asked not to be identified. Today, the company seems unsalvageable. "Bankruptcy is a foregone conclusion at this point," says analyst Andre Meade of Commerzbank. Enron did not return calls seeking comment.
The fall of Enron--to 61 cents a share on Nov. 28--has already wiped out more than 99% of its stock-market value. Some $3.5 billion of its bonds are trading at just a quarter of their face value. Banks that lent billions to Enron will have to fight for a share in bankruptcy court. Enron's biggest lenders are J.P. Morgan Chase & Co. and Citigroup, which together have an estimated $1.6 billion in exposure. Of that, $900 million is unsecured, according to sources. Other losers: Enron's customers, who traded everything from electricity, gas, and metals to telecom bandwidth, credit insurance, and weather derivatives.
Already the once-arrogant Enron has become vulture meat. In addition to clamoring creditors, it faces class actions by shareholders and employees, whose pensions were heavily invested in Enron stock. That raises questions about how much value is left in the company, which will probably be dismembered and sold off in parts. "We will be crawling all over the carcass," looking for value in Enron's heavily discounted bonds, says David J. Winters of Mutual Series Fund Inc.
Since creditors had time to shield themselves, it doesn't appear that the implosion of Enron will drag down any other big players. "The Wall Street firms have had plenty of time to unwind whatever exposure they may have had," says Richard Strauss of Goldman Sachs. "What they may still have remaining is either collateralized or hedged." Still, there will be fallout. J.P. Morgan Chase & Co. could face a hit of 7 cents a share, while Citigroup could suffer a 6 cents hit, estimates U.S. Bancorp Piper Jaffray banking analyst Andrew Collins.
Some counterparties to Enron trades may be at greater risk--especially if they don't hold any collateral. "Everyone who has done deals with Enron has to be scrambling, because if there was any profit, they won't get it. It's a complete disaster," says Sol Waksman of Barclay Trading Group Ltd., a commodity-trading firm in Fairfield, Iowa.
Enron's fall is likely to add volatility to commodity markets. "They touch a lot of megawatts. I wouldn't be surprised if it's 25% to 30% of the national market," says Gary Ackerman of the Western Power Trading Forum. "There's a river of tears behind this thing."
"WHAT A MESS." Who's to blame? Perhaps the biggest culprit was arrogance, which has caused Enron to be compared to past self-proclaimed masters of the universe such as Drexel Burnham Lambert Inc. in the 1980s and Long-Term Capital Management in the 1990s. Many fingers are pointing at Skilling, the longtime Enron financial engineer who took over as CEO in February and then resigned with little explanation in August, shortly before the company hit the skids. "[Skilling] woke up one day and realized what a mess he created, and he showed how immature he was [by quitting]. He probably could have engineered a soft landing," says the senior Enron employee. Skilling won't comment on Enron's meltdown.
Also facing the music are Lay and Andrew S. Fastow, who was ousted as chief financial officer on Oct. 24. Fastow put together several partnerships that were intended to streamline Enron's balance sheet by taking on certain assets and liabilities. That created a conflict of interest for Fastow, who made over $30 million from his partnerships. A key factor in Enron's downward spiral was the October announcement that losses from partnerships had wiped out $1.2 billion in the equity of Enron shareholders.
On Nov. 9, it looked as if Enron's troubles were finally over. Dynegy (DYN
), its smaller crosstown rival, rode to the rescue by agreeing to buy it for $10 billion, on top of assuming its $13 billion pile of debt. Dynegy, through its 26% owner, ChevronTexaco Corp., also kicked in an immediate $1.5 billion in cash to shore up Enron's balance sheet and its credit rating.
But Enron's trading and marketing business continued to deteriorate, and Dynegy started to send signals that it was losing faith. There were rumors--denied by Dynegy--that it had stopped trading with Enron. Dynegy issued an alarmingly tepid statement of support for the deal just before Thanksgiving. Afterwards, as the stock slid, Dynegy maintained radio silence, further scaring away counterparties for Enron's crown jewel, its trading operation.
With business shrinking by the day, Standard & Poor's pulled the trigger. It lowered Enron's senior debt rating by six notches, to B-, deep in junk territory. Other credit raters quickly followed. Within hours, Dynegy announced it was abandoning the deal. "Sometimes a company's best deals are the ones they did not do," says Charles Watson, Dynegy's chairman and CEO. "We knew when to say no, and this morning we said no."
The most poignant aspect of Enron's failure is the damage to its own employees. "People have had their total savings disappear," says William Miller, business manager of the International Brotherhood of Electrical Workers union local in Portland, Ore., which represents employees of Enron's Portland General Electric Co. subsidiary. "Some lives have been pretty well destroyed." Enron flew high, but when it fell, it fell hard.
By Peter Coy and Emily Thornton in New York and Stephanie Anderson Forest in Dallas, with Christopher Palmeri in Los Angeles, and bureau reports
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