Tuesday, October 20, 2009

Enron's implosion was anything but sudden

An old article, but a good one.

* * *

Enron's tumble from Wall Street darling to corporate deadbeat seemed precipitous. Now, however, it's clear the fall was a long time coming.

While the company grew rapidly through the 1990s, some of the worst manifestations of its culture -- obsessions with bonuses, the stock price and exotic accounting -- were also growing, and out of control.

Though the corporation's character flaws can be traced to its earliest days, they flourished under top executive Jeff Skilling.

He didn't act in a vacuum. Enron had a distracted, hands-off chairman, a compliant board of directors and an impotent staff of accountants, auditors and lawyers.

But it was Skilling's relentless push for creativity and competitiveness that fostered a growth-at-any-cost culture, drowning out voices of caution and overriding all checks and balances.

Skilling's attorney derides as "ridiculous" any suggestion his client allowed internal controls to be overriden. But interviews with dozens of current and former employees over the past year reveal that the creative aggressiveness Skilling deemed essential to dominating new markets went untempered by good business sense or fiscal discipline. The same decisions lauded as key to the company's future were also key to its demise.

"It was all about taking profits now and worrying about the details later," said one former Enron deal maker. "The Enron system was just ripe for corruption."

Enron's culture wasn't spawned overnight. Its roots go back to the earliest days of the company, before Skilling came aboard.

In 1987, company auditors learned of a billion-dollar oil-trading scandal at the company's Valhalla, N.Y., offices. For years, traders there had falsified transactions to boost volume -- and fatten their bonuses.

Instead of firing the traders and contacting authorities, Chairman Ken Lay and his management team kept them on the payroll and tried to cover up the problems. Lay said the company needed the revenue.

Six months later, however, the traders had dug the hole even deeper and competitors were growing suspicious. If word got out, Enron's trading partners could have demanded the company cover its positions with cash, which it didn't have.

Only then were the traders fired and charged with crimes. Enron narrowly skirted insolvency by bluffing the markets, then slowly unwinding the trades. The company later reported an $85 million loss, but sources say it was probably at least $136 million.

Not long after, in the early 1990s, Enron made one of its earliest uses of creative financing, through a massive English power plant project known as Teesside. Enron owned about half of the project but was able to book as much as $100 million in revenue while the plant was still being built by acting as its own general contractor. That was years before the project earned a dime.

Teesside was also one of the earliest deals where managers reaped the benefits of an aggressive bonus program. Those who closed major deals were paid up to 3 percent of the value of the entire deal, payable when it was struck, not when the project actually began earning money. Many former employees say this upfront bonus encouraged deal makers to inflate their projected returns.

Deal inflation eventually became so widespread that one division, Enron Energy Services, had to eliminate its bonus program.

"They realized they couldn't pay us real bonuses based on alleged profits," said a former deal maker with EES.

Such practices were a byproduct of the company's obsession with its stock price, which was driven in the earlier years by Rich Kinder, chief operating officer from 1990 to 1996.

Read the rest