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BY
TROY SEGAL
Updated Apr 16, 2019
Enron Scandal: The Fall of a Wall Street
Darling
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.
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Enron's Energy Origins
Enron 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
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Why Enron Collapsed
the
chief executive officer
(CEO) of Houston Natural Gas, 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.
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Mark-to-Market
"America's Most Innovative Company"
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
stocks
were being valued at preposterous
levels and, consequently, most investors and regulators simply accepted spiking share
prices as the new normal.
One of Skilling's early contributions was to transition Enron's accounting from a traditional
historical cost accounting method to a
mark-to-market (MTM
) accounting method, for which
the company received official SEC approval in 1992. MTM is a measure of the fair value of
accounts that can change over time, such as assets and liabilities. Mark-to-market aims to
provide a realistic appraisal of an institution's or company's current financial situation, and it
is a legitimate and widely-used practice. However, in some cases, the method can be
manipulated, since MTM is not based on "actual" cost but on "fair value," which is harder to
pin down. Some believe MTM was the beginning of the end for Enron as it
