The Tragic Collapse of Enron

The BBQ Pit
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Not a rant. More of a lament really, about what I consider a major news story that has not gotten much attention here. Enron Corp, one of the largest companies in the US (I believe they were #7 on the Fortune 500 list) has collapsed, and the company’s stock has become almost worthless. (Chart). Mostly it appears to be due to financial shenanigans pulled by the companies officers, which caused a lack of confidence in the company’s financial security, which in turn imploded the business. (See A Big Fall Evoking Nasty Old Memories of a Run on a Bank). Repercussions will abound for almost everyone involved, including the accounting firm that failed to catch the cooked books (Arthur Anderson). Lawsuits will abound.

But the real losers are the innocent investors, who now hold almost worthless stock, and are next to last in line in the list of creditors. Many of these are already filing lawsuits, but the bad news here is that lawsuits are absolutely last in line. So there’s no recourse.

Savvier investors do not invest all their holdings in any one stock, and many took a calculated gamble that did not pay off. But there are always fools out there, who are to be pitied as well. On the related Yahoo message board, several people said they would commit suicide, having lost everything. (Caveat: these message boards are full of spam, and anything said there is to be regarded extremely skeptically).

But the real heartbreaker is thew company’s employees. Many of these were incented by Enron to invest their 401k money in company stock. They had the option of switching, I believe, but during a crucial time period when the company’s stock was collapsing, the company switched plan administrators, and froze everyone’s account. There are many people who worked many years for Enron who have now lost their life savings, and will soon be out of jobs as well, in a difficult job market to boot. There will undoubtedly be calls for government regulation with regards to 401k money (there was thought of regulating this in the past, but the corporations lobbied heavily against it, and defeated the proposal). Anyway, a sad story, all around. See:

Enron lawsuit seen as wake-up call for pensions

Employees’ Retirement Plan Is a Victim as Enron Tumbles

Enron employees fatalistic as Dynegy deal crumbles

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The city of Houston is a big loser as well. I would say comparable to Boeing/Seattle type of relationship.

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What’s really shameful is the crooks Kenneth Lay and Jeff Skilling, former and current CEOs - are going to be just fine - unless they end up in jail - while their employees get shafted. I work in the same industry and I can tell you there is a certain amount of satisfaction in this simply because Enron was so arrogant, they acted and thought they were smarter and better than the competition. It just seems that they are getting what they deserve. But that only extends to the highest level execs who have hurt so many and to the corporation as an abstract legal entity. I certainly hope the the talented people that work there are not put out for too long because of this. It is a shame that so many are being hurt by the shenanigans of the shysters who ran this company

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This is the type of thing Americans should be demanding the heads of politicians over… not what happened but about what is about to happen: No jail for anyone involved even though there will be ample evidence of willful wrongdoing. Most likely some form of government bailout that will benefit only the most wealthy creditors. Class action lawyers will make millions while their ‘clients’ - the ‘little’ investors… zilch, zero, nada, zip. Break out the lube cause the small guys are gonna get screwed.

(Rich) bad people do bad things and other (rich) friends look the other way so there is no person(s) to really take responsibility. All the while the honest investors who did the absolute best DD that they could loose everything. I have seen it before with companies I had investments in. GreenTree financial is one example, ADM is another but at least somebody went to jail (if only for a short while) in that one.

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Merry Christmas, eh? Gotta love a system that carries the potential for the kind of event that can negatively affect thousands of people so suddenly, but those ultimately responsible for this probably aren’t, as Tretiak noted, going to get into any sort of serious trouble for it.

So is the market supposed to work this way, or is it the result of too much human interference of whatever sort? And how can you justify the market’s existence if it carries the potential of such outcomes either way?

Just a few musings.

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Well the SEC is investigating, and I would not be surprised to see some execs serve some jail time. But jail or no jail, the tragedy of people who have lost their life savings at an advanced age will stay the same.

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I worked at the ComEd IT department 3 years ago, and at the time Enron was making an aggressive bid to buy into the power generating business in the Midwest in anticipation of deregulation. Maybe they spread themselves too thin, and got too far away from their core competencies. We were conditioned to hate them, of course, so I’m feeling some perverse Pavlovian sublime satisfaction over here.

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I’m appalled.

42 cents when I checked. Enron has become a penny stock. They’re still listed, because they still have a capitalization of over US$300 million, but in some ways that’s even more shocking. Think about how many shares are required to produce a $312+ million market cap when the stock’s worth 42 cents.

743,809,523 shares (give or take a bit). That’s lot of shareholders getting stiffed. Yes, I know that the actual number of share holders will be FAR less, but it gives a little scope to the disaster.

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I’d like to add a few musings as well.

I see some familiar faces in this thread. Many of you guys know me as a GD liberal. So naturally I’d love to join some of you cursing the big banks who are going to get their money back and moaning that the little man is going to get it up the ass.

But that is not entirely how it works.

FTR, I work for a law firm in the bankruptcy/creditor’s rights division in NYC. Right now we are representing some of the largest bankruptcy issues in the country, no, in the world.

We represent the Big Evil Banks who are going to get their money back first. To the tune of nearly $2 billion in some cases.

I have a tremendous amount of sympathy for people who gave their lives working for Enron and put their own money aside prudently and responsibly. Likewise for the small investor who considered Enron a bedrock American corporation.

What people tend to forget is that the bank group’s money was not gleaned from thin air. The money they sank into Enron in the form of credit agreements, revolving facilities, term loans, etc. consists of billions of dollars lifted from potentially millions of people. Families with accounts. Small businesses. Other ordinary folks. Loans from other banks. This is not the Man’s money, it’s money that every Ma and Pa with an account at Morgan Chase puts away at the end of the month. If their money can’t be guaranteed, then the banks, which spread the resources required to keep our economy producing, essentially go to hell. Needless to say, the economic welfare of millions could be affected.

As a side note, Enron factories can still produce, hence they can still turn a profit. Investors right now are coming out of the woodwork to buy Enron debt on the secondary market. They will extend Enron even more loans to get back on its feet and eventually turn a profit again. Such a large corporation is extremely difficult to dismantle in one fell swoop. IMHO Enron will toss out its board and bring in a restructuring company, take out more bank loans to pay its employees and maintain its facilities, and seek chapter 11 bankruptcy protection for its other debts.

And if Santa loves me, the committee of unsecured creditors will choose my firm to represent it, giving me lots and lots of paid overtime. :wink:

MR

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The ENE message board on Yahoo.com had 555 messages posted today between 11:00 and 12:00.

I’ve never seen that level of activity on a financial board.

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Not so fast. Enron is primarily a financial services business - trading commodities (primarily energy). They have few capital assets, and those they had are already pledged as collateral.

One of the final nails in the coffin of the company was that other traders became wary of doing business with them, fearful that they could not pay. With a company such as Enron, once that happens there’s not much left to do. There are no factories sitting and waiting for someone to run them. Once you stop doing business, there’s nothing left.

Whether Enron makes it out of Chapter 11 is an open question. But it any event, the shareholder equity is likely gone forever.

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I think that was the crack speaking, not me. I momentarily swapped Enron for Halliburton. Damn.

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Not only that, but Enron traded nearly 350 million shares yesterday, and is over 150 million today. That is unprecendented (it also leads to the question of who the hell is buying?)

This fiasco will be taught in business schools for years to come. How is it possible to vaporize that much value?

I checked on Yahoo for executive compensation. Ken Lay made $135 million last year in salary, bonuses, and options. No doubt for a “job well done”. Well, the company is certainly “well-done” now, as in toasted. If there were any justice, ol’ Kenny (and other managers) would have to use their funds to repelensh the retirement funds they wiped out in under a year.

They also deserve prison time. Not nice prison either, but “federal pound-me-in-the-ass” prison.

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Izzy, I was happy to see this thread because on the way to work this a.m. I was thinking how much this deserved an incredulous pit rant, but I am not knowledgeable enough to start one.

I feel so deeply for the employees whose retirement plans were heavily invested in Enron stock. Not only are they out a job, they’re also screwed screwed screwed for retirement. The Wall Street journal discussed one man whose retirement had been valued at $470,000 and was then at $70,000. And that was over a week ago–who know where he’s at now. Imagine, this guy would have been better off spending the money on stupid stuff like some kind of irresponsible idiot. Then he’d have a gold-plated bidet or somesuch to show for it. Instead, he did the wise thing (saved, invested, planned ahead) and his reward is that he’s fucked six ways to Sunday.

I can hardly wrap my mind around it. I’m broke at the end of every month but my one comfort is that I am socking a goodly amount of money away each month for retirement. I would freak if it was decimated like this.

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Let this be a lesson ** Cranky**. There are 3 primary rules in investing:

[ul]
[li]diversify[/li][li]diversify[/li][li]diversify[/li][/ul]
Oh, and also remember Warren Buffet’s “never invest in something you don’t understand” rule.

If Wall St. pros can’t figure out how Enron is making their money and financing their operations, you know something funny is going on.

Interesting aside. I am in school right now at night pursuing my MBA. One of my classes is analyzing financial statements and valuing companies. Enron’s statements were used as an example of how “cloudy” a company’s reports can get. Should be an interesting class next Monday!

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…which makes me wonder if the junior auditors at AA weren’t complicit in the book cooking.

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This was my earlier comment about fools. But many employees (not necessarily in Enron) are locked into their company’s stock. The companies do this because it is cheaper to make matching contributions out of their own stock. If, as is very possible, this practice is outlawed, it is likely that many companies will reduce the amount of employee contributions that they match.

This makes a lot of sense for Buffet. But the average guy trying to save some money for retirement is not going to understand anything. So there’s no choice.

That’s what they say now. But I’ll bet when Enron was flying high they were all babbling confidently about how Enron was doing it.

One interesting aside is that Enron is/was an extremely well connected company politically, and gave heavily to Bush campaign. Apparently there are no plans at all for the gov to bail them out. So it’s nice to know that not everything in government is bought.

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Points all well taken, Izzy.

I believe that it is illegal to prohibit people from investing their 401k where they want to. You can restrict the match to company stock, though.

I think most people are intelligent enough to invest at least in some mutual funds or other risk-averse vehicles (course, whether or not you should be putting your retirement money into a low risk/low return vehicle at all is another matter of debate altogther!). By not investing in things you don’t understand, I mean investing in individual stocks of companies that you don’t comprehend what their business plan/industry/financing methods are.

As to your last point, yeah analysts are about the most fickle, hypcritical people on the planet. Some were hyping Enron a week ago. There was at least one doubter that I found though. Here is a Fortune magazine article from last March questioning Enron.

Cripes, this is turning into a GD!! Just FTR, Izzy, I’m not arguing with you. Merely bringing up some other points.

What say we get this thread back to bashing the pigf***ers in management that trashed people’s lives for their own gain, shall we?

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It looks like the creditors aren’t even going to get ahold of Enron’s pipelines:

It appears that when Dynegy entered the “due dilligence” phase, they bought a buttload of preferred stock, which is convertable to title to pipelines in event of a default on Enron’s part. The merger default is here, and Dynegy is going after the pipelines. Recent Deleware court rulings will make this grab a little chancy, but Dynegy’s got nothing to lose, and they’ve got a far stronger claim than presented in the recent case.

The holders of common stock are really in a bind now. It’s been speculated that Dynegy saw this coming, and planned the abortive merger with just this outcome in mind. If so, it’s a shrewd and vicious grab, one that likely will succeed.

Bastards.

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That smells kinda odd, Tranq. Izzy says:

I guess I just find it hard to believe that Enron hadn’t already pledged the pipelines in prior credit agreements. And it’s certainly going to need them as collateral for any bankruptcy proceeding.

I’m starting to wonder if the guilty parties won’t soon be drawing paychecks from Dynegy.