Enron Scandal: The Fall of a Wall Street DarlingBy Investopedia| August 18, 2016 — 2:20 PM EDTEnronCorp. is a company that reached dramatic heights, only to face a dizzying collapse. The story ends with the bankruptcy of one of America's largest corporations. Enron's collapse affected the lives of thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75, but they plummeted to $0.67 in January 2002 following bankruptcy. To this day, manywonder how such a powerful business disintegrated almost overnight and how it managed to fool the regulators with fake, off-the-books corporations for so long.Enron Named America's Most Innovative CompanyEnron was formed in 1985 following a merger between Houston Natural Gas Co. and Omaha-based InterNorth Inc. Following the merger, Kenneth Lay, who had been the chief executive officer(CEO) of Houston Natural Gas, became Enron's CEO and chairman, and quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets onfuture prices, and Enron was poised to take advantage.The era's regulatory environment also allowed Enron to flourish. At the end of the1990s, the dot-com bubble was in full swing, and the Nasdaqhit 5,000. Revolutionary internet stocks were being valued at preposterous levels and consequently, most investors and regulators simply accepted spiking share prices as the new normal.Enron participated by creating Enron Online (EOL), an electronic trading website that focused on commodities in Oct. 1999. Enron was the counterpartyto every transaction on EOL; it was either the buyer or the seller. To entice participants
and trading partners, Enron offered up its reputation, credit, and expertise in the energy sector. Enron was praised for its expansions and ambitious projects and named "America's Most Innovative Company" byFortunefor six consecutive years between 1996 and 2001.By mid-2000, EOL was executing nearly $350 billion in trades. At the outset of the bursting of the dot-com bubble, Enron decided to build high-speed broadbandtelecom networks. Hundreds of millions of dollars were spent on this project, but the company ended up realizing almost no return.When the recessionbegan to hit in 2000, Enron had significant exposure to the most volatile parts of the market. As a result, many trusting investors and creditors found themselves on the losing end of a vanishing market cap.The Collapse of a Wall Street DarlingBy the fall of 2000, Enron was starting to crumble under its own weight. CEO Jeffrey Skilling had a way of hiding the financial losses of the trading business and other operations of the company; it was called mark-to-market accounting. This is a technique used when trading securities where you measure the value ofa security based on its current market value, instead of its book value. This can work well for securities, but it can be disastrous for other businesses.