Empire Decisions
The Quarter Enron Ran Out of Room
Enron's numbers worked for years because the losses lived in entities nobody consolidated and the profits were booked the day a deal was signed. In the autumn of 2001, one analyst finally asked the question that ran out of deferrals: 'how exactly do you make money?'
Houston, 2001 · Enron
What actually happened
Mark-to-market accounting let Enron book a decade of projected profit from a power contract in the quarter it was signed; special-purpose entities named after Star Wars characters absorbed the debt off the balance sheet. The structure needed a rising stock price to keep the hedges solvent. The shares themselves were the collateral.
In October 2001 Enron announced a $618 million loss and a $1.2 billion write-down of equity; the SEC opened an inquiry; the restatements followed. Sixty days later the seventh-largest company in America filed the then-largest bankruptcy in US history. Weeks earlier, it had still been collecting awards for innovation.
The longer arc
Fortune had named Enron "America's Most Innovative Company" six years running, from 1996 through 2001, based largely on the same mark-to-market accounting that let it book unearned profit as real. Jeffrey Skilling, who had championed that accounting and built the trading culture around it, resigned as CEO in August 2001, weeks before the collapse became public, citing personal reasons that regulators and reporters later treated as considerably less innocent than they sounded.
The wreckage reached well past the balance sheet. Roughly 20,000 employees lost their jobs, and many had their retirement savings concentrated in Enron stock that fell to pennies, a loss later addressed through a $356 million class-action settlement. Arthur Andersen, Enron's auditor, was convicted of obstruction in 2002 and collapsed as a firm, throwing tens of thousands of its own staff out of work, even though the Supreme Court overturned the conviction in 2005, too late to matter. Skilling was convicted in 2006 and served about twelve years; Kenneth Lay died of a heart attack before he could be sentenced.
The play to remember
The play.
When the collateral for the machine is the market's belief in the machine, the first hard question is systemic risk.
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