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4/30/2019Enron Scandal: The Fall of a Wall Street Darling1/11BYTROY SEGALUpdated Apr 16, 2019Enron Scandal: The Fall of a Wall StreetDarlingThe story ofEnronCorporation depicts a company that reached dramatic heights only toface a dizzying fall. The fated company's collapse affected thousands of employees andshookWall Streetto its core. At Enron's peak, its shares were worth $90.75; when the firmdeclaredbankruptcyon December 2, 2001, they were trading at $0.26. To this day, manywonder how such a powerful business, at the time one of the largest companies in theUnited States, disintegrated almost overnight. Also difficult to fathom is how its leadershipmanaged to fool regulators for so long with fake holdings and off-the-books accounting.
4/30/2019Enron Scandal: The Fall of a Wall Street Darling2/11Enron's Energy OriginsEnron was formed in 1985 following a merger between Houston Natural Gas Company andOmaha-based InterNorth Incorporated. Following the merger, Kenneth Lay, who had been
4/30/2019Enron Scandal: The Fall of a Wall Street Darling3/11Why Enron Collapsedthechief executive officer(CEO) of Houston Natural Gas, became Enron's CEO andchairman. Lay quickly rebranded Enron into an energy trader and supplier.Deregulationofthe energy markets allowed companies to place bets on future prices, and Enron waspoised to take advantage. In 1990, Lay created the Enron Finance Corporation andappointed Jeffrey Skilling, whose work as a McKinsey & Company consultant hadimpressed Lay, to head the new corporation. Skilling was then one of the youngestpartners at McKinsey.
4/30/2019Enron Scandal: The Fall of a Wall Street Darling4/11Mark-to-Market"America's Most Innovative Company"Skilling joined Enron at an auspicious time. The era's minimal regulatory environmentallowed Enron to flourish. At the end of the 1990s, thedot-com bubblewas in full swing,and theNasdaqhit 5,000. Revolutionary internetstockswere being valued at preposterouslevels and, consequently, most investors and regulators simply accepted spiking shareprices as the new normal.One of Skilling's early contributions was to transition Enron's accounting from a traditionalhistorical cost accounting method to amark-to-market (MTM) accounting method, for whichthe company received official SEC approval in 1992. MTM is a measure of the fair value ofaccounts that can change over time, such as assets and liabilities. Mark-to-market aims toprovide a realistic appraisal of an institution's or company's current financial situation, and itis a legitimate and widely-used practice. However, in some cases, the method can bemanipulated, since MTM is not based on "actual" cost but on "fair value," which is harder topin down. Some believe MTM was the beginning of the end for Enron as it

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