The Downfall of Enron

No business episode of 2001 has been the subject of so much debate and despair as the swift descent of once-admired energy trader Enron. The saga of this firm, which rose to prominence as rapidly as it subsequently fell, serves as a kind of morality tale of corporations, regulators, and investors. The tragic effects of Enron’s overreaching arrogance provide a textbook example of both the best and the worst of American business culture and practice. Although the catastrophe’s complete impact cannot be determine yet, it seems likely that more than one major firm will cease to exist, several industries will experience radically changed environments, regulators and investors will modify their behavior, and all firms will be subjected to increase scrutiny and regulatory oversight. So how did one of the brightest stars of American business, the company that has been called “a proven winner” and “ a New Economy wonder,” come to epitomize one of capitalism’s most serious weakness—unbridled and unprincipled greed?

Enron began innocently enough with the 1953 formation of the Houston Natural Gas Production Company, which owned a few gas wells near Corpus Christi, Texas. From that time into the 1980s, the company grew by merger and acquisition, and in 1985, it merged with InterNorth, Inc., changing its name to Enron. Kenneth Lay, CEO of Houston Natural Gas, was named chief executive. An important part of Lay’s strategy for the firm was to diversify beyond the regulated and therefore relatively low-profit gas pipeline industry into unregulated markets. Jeffery Skilling joined the firm in 1989, the same year that Enron began to offer financing to oil and gas producers through a subsidiary. Enron continued to expand into other utility businesses, especially electrical power generation and trading, and also increased its international presence with offices in Europe, India, and South America.

In 1999, the company first ventured into a radically new...