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Enron Scandal: The Major Downfall ofthe Wall Street DarlingFrom $90.75 worth of shares to $0.26 leading to Enron’s bankruptcy on December 2, 2001.
The story of Enron Corporation depicts a company that reached dramatic heights only to face a dizzying fall. The fated company's collapse affected thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75; when the firm declared bankruptcy on December 2, 2001, they were trading at $0.26. To this day, many wonder how such a powerful business, at the time one of the largest companies in the United States, disintegrated almost overnight. Also difficult to fathom is how its leadership managed to fool regulators for so long with fake holdings and off-the-books accounting. Enron's Energy OriginsEnron was formed in 1985 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of Houston NaturalGas, became Enron's CEO and chairman. Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices, and Enron was poised to take advantage. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the youngest partners at McKinsey. Skilling joined Enron at an auspicious time. The era's minimal regulatory environment allowed Enron to flourish. At the end of the 1990s, the dot-com bubble was in full swing, and the Nasdaq hit 5,000. Revolutionary internet stockswere being valued at preposterous levels and, consequently, most investors and regulators simply accepted spiking share prices as the new normal.KEY TAKEAWAYSEnron's leadership fooled regulators with fake holdings and off-the-booksaccounting practices.Enron used special purpose vehicles (SPVs), or special purposes entities(SPEs), to hide its mountains of debt and toxic assets from investors andcreditors.The price of Enron's shares went from $90.75 at its peak to $0.26 atbankruptcy. The company paid its creditors more than $21.7 billion from 2004 to 2011.
By the fall of 2000, Enron was starting to crumble under its own weight. CEOJeffrey Skilling hid the financial losses of the trading business and otheroperations of the company using mark-to-market accounting. This techniquemeasures the value of a security based on its current market value instead of itsbook value. This can work well when trading securities, but it can be disastrousfor actual businesses.In Enron's case, the company would build an asset, such as a power plant,and immediately claim the projected profit on its books, even though thecompany had not made one dime from the asset. If the revenue from the powerplant was less than the projected amount, instead of taking the loss, thecompany would then transfer the asset to an off-the-books corporation where theloss would go unreported. This type of accounting enabled Enron to write off