Power Failure

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    And they were well on their way. Before resigning in August, Enron's hard-charging chief operating officer, Jeff Skilling, was using supercomputers and fiber-optic cable to operate a global trading grid. The ultimate goal was never to touch another cubic foot of natural gas, yet to make billions by trading it. By 1998 Skilling's vision was taking shape, and he had become Lay's heir apparent.

    Enron's headquarters in Houston exuded success. The garage housed Ferraris and Porsches, and the company's new skyscraper was going up next door. But Skilling made a huge mistake. Enron, already saddled with about $5 billion in money-losing investments from utilities around the world, borrowed $1 billion more in the past three years to get into the business of trading data-transmission capacity on fiber-optic cables.

    To minimize the impact of this debt on Enron's financial statements, Enron insiders say, Skilling and chief financial officer Andrew Fastow created complicated private partnerships that did business with Enron but whose finances were not subject to much scrutiny. When these partnerships first began to come under the microscope three months ago, Enron was unwilling to explain them fully. In August, Lay, who is paid to look out for shareholder interests, told the New York Times, "I just can't help you on that...You're getting way over my head." An Enron spokesperson says the remark was taken out of context.

    In the face of confusion about Enron's finances, investors began to flee the company's stock. Rating agencies downgraded their assessments of the safety of Enron's bonds. Those moves caused lenders to demand immediate payment of hundreds of millions of dollars in debt. And those who had traded with Enron became reluctant to continue, for fear they would not be repaid.

    Losing business, Enron executives tried to sell the company to competitor Dynegy, but that deal fell apart last week. The death blow came on Nov. 19 in a filing by Enron with the SEC, detailing $690 million in debt that had to be paid almost immediately. Enron's stock plunged. "We were renegotiating daily because every time I turned around their stock price was falling," Chuck Watson, CEO of Dynegy, told TIME. "It got to the point where there was hardly any equity left in the business." Says a source close to Lay: "The Greeks would have loved this story. It's got hubris, ambition and a great disaster at the end."

    That disaster falls on many shoulders. Washington policymakers must determine how to better regulate an obviously undersupervised energy-trading market--but without creating so much red tape and uncertainty that they choke off development of new wells, pipelines and power plants. "Our committee is keenly aware of the need for enhanced oversight," says Senator Jeff Bingaman, the New Mexico Democrat who chairs the Energy and Natural Resources Committee and has called for hearings on the Enron debacle.

    Another stage in this drama is the impact on the administration of 401(k) retirement plans. Bobbie and Jerry Dotson are Enron employees who live in Baker, Fla. They lost most of their life savings of $1.5 million when Enron's stock tanked, taking down their 401(k) account, which was loaded with company shares. Bobbie, 62, put in for retirement last month. She had anticipated a monthly check of at least $800 plus her pension. Now she will consider herself lucky to get even the estimated $317 monthly pension that company officials recently quoted to her. "We trusted the company because we had so many years with them," she says.

    The Dotsons have a familiar problem. Many 401(k) plans do not give employees the flexibility to diversify properly, and even when they do, employees hold a large slug of their employer's stock--an average of 62% in Enron's case. In 1996, Senator Barbara Boxer, a California Democrat, introduced a bill that would have required that 401(k) plans have no more than 10% of assets in the sponsoring company's stock. Firms that offer 401(k) plans lobbied against it, and the bill went nowhere. Now, "Enron is a call to arms," says Mike Scarborough, president of Scarborough Group of Annapolis, Md., which advises 401(k) participants. "Corporations need to do something about that, or change will get forced down their throats."

    The demise of Enron further tarnished the reputations of stock analysts at big brokerage firms, who already stood accused of urging investors to buy the shares of troubled companies that did business with their firms. J.P. Morgan Chase maintained a "long-term buy" rating until Nov. 29, when the stock closed at 36[cents] off its December 2000 high of $84.62. The bank has loans out to the company totaling $900 million and stood to collect millions of dollars in fees for advising on the aborted Dynegy deal.

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