What is Enron?
Enron started life as a regional natural gas pipeline company, the result of a merger between Houston Natural Gas and InterNorth in 1985. Its chairman, Kenneth Lay, eventually transformed Enron into the world's largest energy trading company and America's seventh biggest firm. Enron filed for bankruptcy on December 2, becoming the biggest bankruptcy in US history.
 
How did Enron become so successful?
Enron specialised in contracts to deliver natural gas, electric power and other energy products to industries and utilities at a future date. It also sold financial instruments designed to protect customers against sharp swings in energy prices.
 
Enron was quick to exploit trading opportunities when deregulation in the late 80s allowed users to buy gas or electricity from a number of producers. Soon it became a darling of Wall Street as analysts heaped praise on the company for its "innovative" approach in bringing high-tech and complex finance to energy trading. Enron also cashed in on dot.com mania with Enrononline, a web-based trading service.

When did Enron start to unravel?
The rot started in August last year with the abrupt resignation of chief executive officer, Jeffrey Skilling, who cited "entirely personal reasons". At the time, Mr Lay denied that there were any problems with the company, but Mr Skilling's hasty exit did adversely affect the share price as doubts started creeping in.
 
What precipitated its collapse?
The situation deteriorated dramatically in October when Enron had to set aside $35m (£24m) to reflect losses in two complex partnerships, which were set up in 1999 to move debt off its balance sheet and hide losses. It was also forced to knock $1.2bn off shareholder equity at the time, a move that led to a crisis in investor confidence and a collapse in Enron's share price.

Why could the collapse become a political headache?
It has emerged that Mr Lay had conversations with Paul O'Neill, the treasury secretary, and Donald Evans, the commerce secretary, just weeks before the company filed for bankruptcy. Mr Lay asked for help to stop a private credit rating agency from downgrading Enron debt. Administration officials deny any intervention, but questions persist because of Enron's close connections with the Bush White House.

How close was Enron to the Bush administration?
Mr Lay is an old Texas friend of the president, and Enron executives contributed more than $500,000 to Mr Bush's various campaigns.

More specifically, the White House faces questions about the six meetings that Mr Cheney or his staff held with Enron executives last year. Mr Cheney has refused to release records on those meetings, saying they involved matters of policy. But even congressional Republicans are warning that a lack of openness will only fuel accusations of a cover-up.

What is the Bush administration doing about it?
The US justice department has launched a criminal investigation and Mr Bush has ordered sweeping reviews of pension and financial disclosure rules. Many investors lost their shirts, and many of Enron's 6,000 employees lost their savings because they had subscribed to retirement plans based on Enron shares - yet top executives were able to sell their Enron holdings before the shares became worthless.

In a red flag for financial investigators, Arthur Andersen, Enron's auditor and itself under investigation for possible misconduct, has admitted to destroying a "significant" number of documents.
 
Was there a rescue attempt?
Dynegy, a smaller rival, considered a rescue merger worth $9.4bn, but pulled out, citing "misrepresentations" on Enron's part. In other words, Dynegy saw how truly awful Enron's financial plight was.

Did Enron operate outside the US?
By1999, Enron was involved in a quarter of all electricity and natural gas deals in the world and had big operations in Brazil and India. Enron was particularly disliked in the developing world, after the company became embroiled in one of India's biggest corruption scandals in which large sums were paid to politicians involved in the privatisation of electricity firms. One of its directors is former Tory cabinet minister, Lord Wakeham, who has signalled his willingness to answer any questions asked by congressional investigators.
 
Did Enron have assets in the UK?
Some 4,000 people work for Enron or companies it owns in the UK. Enron owns Wessex Water, which employs 1,400 workers in Britain, and power stations on Teeside. Ofwat, the water regulator, insists the utility will not be affected as it is insulated from Enron's debts. Hundreds of traders in Enron's London office lost their jobs when the administrators were called in. In all, Enron employs 5,000 people in Europe.
 
Will there be a rethink on deregulation?
Enron's collapse raises questions about the wisdom of letting market forces - in reality a handful of energy companies - manage prices. The bungled privatisation of California's electricity industry, which led to blackouts earlier this year, also called deregulation into question. At the very least, regulators will have to watch the energy markets more closely and insist on more transparent financial practices among energy trading companies.

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January 22, 2002.

[Source: Guardian Unlimited, January 14, 2002]