I'm riding the commuter train last night with a very knowledgeable fellow from a major brokerage firm. You know, one of those really smart guys who graduated Harvard at age 11. So, I figured the opportunity was afoot to ask him what I always wanted to: What's the story with Enron? What's it truly all about?
"Enron started in Houston in 1985 as a pipeline company," says my friend, "promising to deliver so many cubic feet of gas to a certain business on a certain day at a market price. Of course, that changed with the deregulation of electrical power markets. Enron then expanded into being an energy broker, trading electricity as well as other commodities."
So far, so good. I understood all that.
"Go on," I prompted.
"Okay, Enron is now a middleman. But instead of simply bringing buyers and sellers together, it decides to enter into arrangements with the sellers and buyers, thereby making money on the difference between a selling price and a buying price. Naturally, it keeps its books tightly closed."
My friend sighs. He obviously has recounted this history before…to many people.
"Over time, Enron begins to implement complex contracts so that its customers could protect themselves against eventualities such as a rise or fall in interest rates. The volume of such financial contracts far outstrips the volume of contracts to actually deliver commodities."
"And?" I asked.
"And, as its services became even more varied while the stock leaps dramatically, Enron creates a series of partnerships, each with Star War-sounding names, that allows executives to shift debt. Any losses would be paid out of Enron stock or cash in 2003, bringing the debts back home. Last October, Enron announced a $638 million loss for the third quarter, and Wall Street reduced the value of stockholders' equity by $1.2 billion. In November, Enron announced that it had overstated earnings by $586 million and that it was responsible for up to $3 billion in obligations to various partnerships."
That was enough for me. Actually, it is enough for anyone. The impact is well known. Thousands of Enron employees were left unemployed and because the company encouraged its employees to invest in the company, matched their 401(k) contributions with company stock, and then subsequently froze the plan, barring employee sales, thousands of employees and retirees have next to nothing in their accounts.
Enron's stock has lost nearly all of its value. Billions of dollars in stock value was erased. The stock is being de-listed from the New York Stock Exchange.
And, Arthur Andersen faces serious problems, or is that an understatement? Its most talented employees might choose to leave. Who wouldn't? There is also the possibility of monumental liability claims.
So, the story continues. Remember Carol Burnett's takeoff on a well know soap opera? She called it "As the Stomach Turns." Right on!
-Stuart Kahan
