“Wall Street Miracle” was once called a company that reached unimaginable heights, only to crumble in an instant.
Only Enron’s catastrophic collapse swept away not only the lives of thousands of employees, but also its very foundations. Wall Street.
The great favorite of the investment world is still causing headaches to market analysts, despite the 20 years that separate us from its bankruptcy.
How did such a giant, which became the seventh largest company in the United States, disintegrate in an instant? And how did he manage to fool auditors and regulators for so long?
If we have to say, it was her boss who did it all, the man who would go down in business history as the “baron of bankruptcy.”
The name of Jeffrey Skilling is still causing a stir in the New York Stock Exchange. It was the golden boy chosen by Kenneth Lay, the owner and president of Enron Corporation, but also his close associate in crime.
Enron was founded as a major energy and interstate pipeline provider in 1985, and five years later, Lay would bring in a new general manager, a rising star of the space.
Skilling was the man who changed the course of the company, focusing on making products available in deregulated markets.
Within a decade, Enron’s growth has been so rapid that Forbes has rewarded it with the title of Most Innovative Company for five consecutive years (1996-2000).
Enron went on to become the seventh largest U.S. company and the sixth largest energy provider in the world, with revenue of $ 111 billion in 2000.
There, at the height of its heyday, however, it began to collapse like a paper tower. The turning point came in 2001, when its stock began to plummet. From $ 90.75, it fell to $ 0.26 shortly before it went bankrupt in December 2001.
Skilling left the boat a few months earlier, as Lay did.
When the case would be taken by Capital Market Commission, would talk about a proper seminar on fraud and sophisticated financial crimes, always with the aim of deceiving tens of thousands of investors. And employees.
The elaborate combinatorial network set up by Skilling had no precedent. The US energy giant was a bubble! He was making big money and accumulating debts, but he had a way of hiding them diligently in a vast network of affiliates.
This is his story biggest business scandal of the USA…
The birth of Wall Street’s big favorite
Enron was founded in 1985 following the strategic merger of Houston Natural Gas Company and InterNorth Incorporated. Kenneth Lay, owner and CEO of Houston, became president and CEO of the new band.
His first job was to redirect Enron to the energy industry, fundamentally reorganizing its operation. The deregulated energy market of the 1980s allowed him to trade funds he did not have, based on forecasts for the company’s future course.
After making the most of the “window” of the law, he brought in a golden boy in 1990 to lead the Enron Finance Corporation. Jeff Skilling worked for McKinsey & Company Consulting and his work had impressed many. He had also become McKinsey’s youngest partner.
Skilling became Enron’s general manager at an auspicious time for business. The minimal control of the regulators allowed Skilling to throw Enron into the general euphoria of the time.
One of the first jobs she did was to change her traditional model accounting for his company, adopting more “creative” solutions. For which, however, it received the green light from the Hellenic Capital Market Commission in 1992.
The new accounting practices allowed him to manipulate the market, as Enron’s value was not calculated on the basis of its actual capitalization, but on the basis of its future value. The estimates that is…
The stronghold of innovation
Skilling’s Enron created Enron Online (EOL) in 1999, a commodity-focused online stock exchange website. Only the parent Enron was the party to every transaction made on the internet, either as a buyer or as a seller.
To entice investors, Skilling cites Enron’s reputation, know-how and strong presence in the energy industry. And the thing caught on, the company was constantly expanding and undertaking more and more ambitious projects, making Fortune magazine describe it as “the most innovative company in the US” for six consecutive years, from 1996-2001 (and the Forbes for five years, 1996-2000).
Enron had become a real colossus. In 2000 it was expecting a turnover of $ 350 billion. But when the internet stock bubble burst that same year, the most innovative company involved in everything suddenly seemed extremely vulnerable.
How do you hide so much debt?
By the fall of 2000, Enron began to collapse. Not only because of her weight, but mainly because of her boss’s innovative accounting methods.
You see all this time the giant was accumulating debts, debts that the general manager diligently hid under the rug subsidiaries.
Skilling was building, say, a new factory. It immediately passed into the books as real amounts the expectations for the profits of the traffic. That is, despite the fact that he had not yet made a single dollar from the new factory.
If in the end the profits from the factory did not reach the initial estimates, Enron would not be charged the loss. Skilling was always there to hide the factory in its books, eventually passing it on to a third company.
So he worked for a whole decade, hiding the losses and making Enron look extremely profitable. While it never was! When the subsidiaries started to lose ground in 1998, Skilling brought in another golden boy from Wall Street, Andrew Fastow, whom he made general manager to continue his “metro” work in the subsidiaries.
Special purpose companies were constantly set up, relieving Enron of any burden or financial risk. So they hid the billions of debt, but also every toxic branch of the group. Investors and creditors never smelled it.
The comb had acquired such dimensions that Skilling needed help. He hired an independent accounting firm (Arthur Andersen LLP), the fifth largest accounting firm in the United States, to give auditing authority.
The fraud was complete, with Andersen stamped there was no control mechanism or regulator to search her books. Enron was safe.
And that was true for a number of years, until April 2001, when market participants and stock market analysts began to question its profits.
But also the transparency of its transactions.
Stock market shock and bankruptcy
By the summer of 2001, Enron was in free fall. The President and general Kenneth Lay made sure to leave the company in February, leaving the second General Skilling to fight alone.
He did not fight much, in August of the same year he also resigned suddenly, citing personal reasons. The rating agencies began to devalue the share of Enron, which in October for the first time showed losses in its balance sheet.
This was followed by the Hellenic Capital Market Commission, as a few days earlier Enron banned its employees from selling their shares for at least 30 days.
The final blow came from Dynegy, a company that was to merged with Enron and withdrew at the last minute in late November. On December 2, 2001, Enron filed for bankruptcy. It was the largest “cannon” in US history.
Shareholders lost $ 74 billion. The company paid more than $ 21 billion to its creditors from 2004-2011, liquidating its assets.
Skilling’s aggressive strategy, as well as his creative accounting, sent Enron soaring, but they also endorsed its downfall.
Ο Skilling was convicted In May 2006, she was sentenced to 24 years in prison and fined $ 45 million for fraud and embezzlement, as before her stock market crash, she made sure to sell his shares, pocketing $ 60 million. He paid her heavier than anyone else involved in the scandal.
Kenneth Lay, who died two months after the verdict before hearing her sentence, was also convicted. imprisonment of.
The Enron scandal cost 20,000 jobs, but also the savings of employees, who found themselves trapped in fraud and could not get rid of their shares.
Returning to Skilling, he struck a deal with the US Department of Justice in 2013 and saw his 10-year sentence removed. He was released in February 2019, having served 13 years.
Reuters revealed in June 2020 that Skilling was in the process of being funded for a new company it had in the pipeline, an online platform (Veld LLC) for energy stock trading…