THE SLIDE

At that point, Enron executives reassured the business world that its falling stock price was surely temporary. After all, they’d say, most of these other Internet-related companies weren’t dealing with real-world stuff like electricity. And they had a point: most internet companies banked on crazy visions such as everyone suddenly doing all their grocery shopping online. Electricity, in contrast, wasn’t about to become an obsolete vision. However, when Enron stock continued falling throughout summer 2001, investors began getting worried.
Some pretty nasty vicious circles can start spinning when your stock starts falling, and in Enron’s case, the vicious circles began spinning very quickly. First, people start asking, when’s the stock going to go up again? Enron says, ‘oh very soon, no doubt about it,’ in hopes that this alone will make investors buy more of its stock– thus making it go up. But every three months, Enron had to file reports showing whether their profits were still high enough to warrant a high stock price. If profits were down, investors would sell off the stock, the stock price would go down even more, and so on. So unless Enron produced impressive profit numbers, their stock would keep sliding.
Now, Enron had taken out billions of dollars in loans to buy rivals and keep enough cash on hand to buy that electricity they were in the business of buying and selling. It turned out many of those loans stipulated that if Enron’s stock price ever went below $50 a share, they would automatically have to repay the loans. This is a standard clause which banks use to make sure they get their money back before a company’s stocks sink to nothing. By the summer of 2001, Enron was pretty desperate to keep the stock from sliding, to the point where they knowingly set up all kinds of fake companies with which to hide their debts and inflate their profits. This was illegal, of course, but they hoped that once the stock price went back up again, they could start paying off their debts for real and shut down the fake companies.
But that never happened. The stock kept going down, and many investors and accountants wondered what was up with all the numbers—where was all the debt disappearing to, and where were these profits coming from? Apparently, Enron’s financial statements were so complicated that many nervous investors just told themselves that that’s how it is with companies that are so innovative and forward-looking. After all, Enron was the single most impressive company of the biggest economic boom in history—these guys were geniuses, superstars.
But the top people at Enron knew that they couldn’t keep up this act for long. In fact, they were fully aware that the whole company could suddenly collapse. Because, if the stock price got any lower, they would have pay back a ton of loans which they didn’t have money for. With a sinking stock price, it’s not like they could’ve taken out even more loans to pay back the first loans with. And if they defaulted on these huge loans, their stock price would sink like a rock, and the company would have to declare bankruptcy.

THE SCANDALS

It’s in this context that the first big scandal occurred. While this was all happening, Kenneth Lay, the CEO— and the best friend of George W. Bush, who calls him “Kenny Boy”— encouraged investors and his employees to buy as much Enron stock as possible. He told them that this cheap stock price wasn’t going to be around for very long—imagine how much money they would make once it got back up to $80 or more! It was now a bargain!
This wouldn’t have been such bad advice if there was any chance the stock would go back up, but Lay knew full well by then that things would only get much worse. The company was, in fact, totally screwed. Lay may as well have been telling his employees to throw their money away. By then, he’d already thrown out their pension plans: that summer, Enron converted each employee’s pension funds from cash to Enron stock, in part to raise money (by freeing up the pension cash and using it to pay debts), and in part to keep employees from cashing in their pension plans, which would further deplete cash reserves. Even though many employees had spent decades putting actual money into their pension funds, they were now stuck with stocks that were dwindling in value. They faced a tough choice: sell at a loss, or hope Lay was right. Lay kept on assuring them everytime the stock price went down: don’t sell it; it’s going down a bit now, but it’ll go back up.
Meanwhile—and this is the real crime in all this—Lay and other insiders were actually selling Enron stock like it was going out of style. Among the Enron executives making millions was the man Bush appointed Secretary of the Army, Thomas White. White had worked for Enron for 11 years and still worked there after he became Secretary of the Army. He sold all his Enron stocks less than a month before their price began going down. He said he only sold it so he could concentrate on his new government job, but a memo he wrote just before he sold the stock proves he knew exactly what he was doing. The memo is a response to a subordinate who warned him there would be millions more in losses in the upcoming quarter. In the memo White instructs the subordinate to “Close a bigger deal. Hide the loss before the first quarter.” With the loss safely hidden, the stock price stayed nice and high while White sold off all he had left. That one stock sale made him a cool $12 million U.S. (In all, insiders such as White cashed in over $1 billion before Enron’s collapse.)
By then, Lay’s main job was convincing employees to buy more stock so the price would stay high while his friends sold all of theirs. This outright robbery was just the first scandal.
By fall 2001, everyone knew Enron was in serious trouble. Their stock was at a fraction of what it was just months earlier. A much smaller Houston company, Dynegy, considered buying Enron to save it from collapsing—and also to get all of its actual property, like its pipelines, for cheap. Just six months earlier it would have been laughable to suggest that any but the world’s largest companies could possibly buy Enron. So the temptation for Dynegy was large. Alas, once they gave Enron’s finances a closer look, they backed off, saying it was just too hard to figure out what was going on. In a final desperate move, Enron tried sueing Dynegy for backing out, essentially saying “Hey, you promised!”
In late October, Enron was finally forced to declare bankruptcy. It had no real money to pay back its loans with. Its value had shrunk to $50 billion from $100 billion by then, but that still made it the largest bankruptcy in history.
By then, all kinds of investigations were going on into Enron’s various accounting tricks. Also by then, Enron’s accounting firm, Arthur Andersen, was furiously shredding the documents which proved how illegal Enron’s accounting methods were. They kept on shredding even after government investigators ordered them to stop. That’s called obstruction of justice, of which the firm was later proven guilty. After this ruling, Arthur Andersen, one of the world’s biggest accounting firms, lost all their customers, and the firm was destroyed. Now not one, but two massive corporations had fallen.
This particular scandal sent huge shock waves through the corporate world. Every corporation delayed their profit announcements to double-check whether they were up to the same tricks Enron was. Rarely, if ever, has the corporate world been backed into such a corner. A great many companies were forced to admit that they did, indeed, employ some dirty accounting. The list of companies admitting “accounting irregularities” included such heavyweights as GE, AOL-Time Warner, IBM, Tyco International– which ended up losing $75 billion– and MCI-Worldcom, whose eventual $100 billion bankruptcy was even bigger than Enron’s.
All through fall and winter, investors sold off stocks like crazy, fearful of more Enron-style collapses. Tens of billions of dollars disappeared from the stock market immediately after Enron’s bankruptcy; all the corporate scandals eventually took over $10 trillion dollars off the market—more than the September 11 attacks had cost. It’s no exaggeration to say that if September 11 hadn’t happened, Bush would not have survived being so implicated with Enron and the costly scandals it kicked off. If Bill Clinton was supposed to get impeached for lying about never having had “relations with that woman,” than surely Bush could get impeached for lying about never having “financial relations with that man,” Kenneth Lay. Or about engaging in insider trading himself awhile back.

Pages: 1 2 3 4 5