Power Failure

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Charlie Sanchez was working at his computer in the eight-man office of Houston-based energy market managers Gelber & Associates last Wednesday when the quotes for natural-gas futures went blank. Then West Coast spot prices for gas vanished. One by one the handful of markets that update continuously on his screen darkened like spent light bulbs. "Within a minute the screen was blank," recalls Sanchez. There was nothing wrong with his PC. But there was something terribly wrong with the company that managed all those quotes: the brash energy-trading giant called Enron.

After weeks of escalating financial troubles, business had effectively collapsed in many of Enron's most important markets. Only months earlier, Enron was considered one of the most innovative U.S. companies, having brought new-economy tools such as Internet trading and sophisticated hedging strategies to the old business of matching producers and consumers of electricity, oil, natural gas--and eventually some 800 other commodities and services. Its operations directly or indirectly touch almost every American home and business.

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Enron's immolation--sparked by slumping energy prices, dubious accounting and trading practices and piles of debt--surprised just about everyone from regulators to investors to thousands of soon-to-be-jobless Enron employees. Now, as the company prepares to file for bankruptcy protection in the U.S., probably this week, huge questions loom as to how widespread the damage will be, who is to blame and what is going to be done about it.

No fraud or other illegal behavior has been proved--though those issues will be examined in a spate of lawsuits, congressional hearings and an investigation by the Securities and Exchange Commission. This much seems clear: what went wrong was not Enron's business plan--which other firms are already emulating. Rather, Enron's fatal flaw was management hubris, tacitly encouraged by board members, regulators, politicians and stock analysts--many with financial ties to Enron--who looked the other way as warning lights began to flash. Feeling it could do no wrong, the company too often pursued unprofitable markets, obscured the costs and stiff-armed anyone who asked for an explanation. It began taking sides in complicated trades instead of simply matching buyers and sellers, and its hedges then backfired.

Enron shareholders, including large mutual funds and pension funds, took a nasty hit as the stock lost 99% of its value over the past year, dropping to 26[cents] at Friday's market close. The Alliance Capital family of mutual funds doubled down on its Enron stake this summer as the energy company's share value dropped from $49 to $27, according to filings at the SEC. Alliance declined to comment on whether it has sold any of the 43 million Enron shares it owned as of Sept. 30.

Enron's 401(k) plan, available to its 21,000 employees and loaded with the company's stock, has been devastated. The company owes banks billions of dollars. Payment of those loans is in doubt, as is payment on hundreds of millions of dollars in obligations to Enron's trading partners. But those losses appear to be sufficiently spread out to make a wider financial crisis unlikely. There's been no talk of a bailout like the one in 1998 for the failed hedge fund Long Term Capital Management. And so far, energy prices are stable--good news for consumers heading into winter.

Still, there's a search for accountability, to make sure nothing like this happens again. John Dingell, ranking member of the House Energy Committee, said it best: "Where was the SEC? Where was the Financial Accounting Standards Board? Where was Enron's audit committee? Where were the accountants? Where were the lawyers? Where were the investment bankers? Where were the analysts? Where was common sense?" Byron Wien, an investment strategist at Morgan Stanley Dean Witter, says, "This is an indictment of a lot of different things, from the debt-rating agencies to bank lending practices."

There have been warnings in the accounting abuses revealed by smaller corporate blowups in recent years, including appliance maker Sunbeam in 1998 and travel-services firm CUC International after it became Cendant in a 1997 merger. But Enron fell much harder and faster. Its stock had nearly tripled in two years, to $90 in August 2000. It booked sales of more than $100 billion last year, seventh on the FORTUNE 500. Its chairman, Kenneth Lay, 59, was a celebrity in Houston, a pillar of civic and charitable causes. An early financial supporter and confidant of George W. Bush, Lay was the only energy executive to be invited for a one-on-one with Dick Cheney when the Vice President was framing the Administration's energy policy. Enron led the energy industry in 1999-2000 campaign contributions, giving both parties--but mostly Bush and the G.O.P.--$2.3 million overall, nearly twice as much as Exxon-Mobil, according to the Center for Responsive Politics.

Just 10 years ago, Enron was a stodgy pipeline company, generating 85% of its revenue through the transmission of natural gas. By this year, although the company still controls 30,000 miles of pipeline, 80% of its revenue was generated on trading screens. Enron made markets in everything from energy to paper to broadband capacity. Says Peter Fusaro, president of Global Change Associates, a consultancy that has studied Enron: "They tried to commoditize everything."

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