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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