Last week marked the 20th anniversary of the bankruptcy of Enron, which at the time was the largest chapter 11 filing in U.S. history and one with economic, financial, law enforcement, and public policy ramifications still felt to this day.
At its peak in 2000, Enron had a market capitalization of approximately $70 billion; when it filed for bankruptcy on December 2, 2001, Enron employed approximately 29,000 staff and reported a prior year revenue figure of $101 billion. Enron would prove to be the first and most salacious of several accounting-related corporate failures of the early 2000s, and the scandals giving rise to the fall of Enron, Global Crossing, WorldCom, Tyco, and the like would ultimately lead to the passage of the Sarbanes-Oxley Act of 2002 and find an echo in the financial services-focused Dodd-Frank legislation passed after the Great Financial Crisis of 2008.
I was fortunate (although it didn’t always feel so at the time) to have a front-row seat to the events immediately preceding Enron’s collapse. My then-employer was retained by Enron in late November 2001 in an attempt to resuscitate its fading hopes for a merger with its energy-sector competitor Dynegy, and as a mid-level restructuring banker, I found myself on one of Enron’s several corporate jets early in the morning on the day after Thanksgiving flying to Texas, with no idea of what the coming days might bring.
Later that morning, I sat in the board room of Enron’s futuristic headquarters building in downtown Houston, next to Chairman and CEO Ken Lay (I still have a photocopy of the sign-in sheet with my name next to his; many of the attendees at this meeting had not met previously). Bankers, lawyers, consultants, and company executives convened around a large, square table and tossed around ideas for how to save the merger and the company. Most of those present had only a superficial understanding of the company’s structure and financial position; subsequent events would reveal the executives in attendance were only marginally better informed. Enron would prove to be “a riddle, wrapped in a mystery, inside an enigma” — while much has been written about Enron in the years since, the elemental “who did what to whom” and journalistic “Five Ws” remain elusive to this day.
In advising Enron through its ensuing years of liquidating assets, entering into financial settlements, and confirming a Plan of Reorganization to pay creditors, I collected more stories than I can count, and could easily add to the number of Enron-themed histories collecting dust on my bookshelf.
Of course, tales related by the cleanup crew are no match for the legends of the fall.
Perhaps more instructive than war stories are the lessons I accumulated, which still resonate today and have informed my perspective in myriad and unexpected ways. As a young man, I believed the world to work in a certain way, and viewed deviations as both abnormal and unpredictable; through the lens of experience, I better appreciate how non-zero probabilities are far more likely to occur than they seem. With the benefit of 20 years’ hindsight, I note the following shibboleths of which I was starkly disabused from my Enron exposure:
It Can’t Happen Here. This is the easiest lesson to understand but perhaps the most difficult to internalize. As best expressed in Nassim Taleb’s Black Swan and his parable of the turkey and Thanksgiving, just because things have always been a certain way doesn’t mean they’ll continue. At its height, Enron was the seventh-largest publicly traded company by market capitalization in the U.S. In my first weeks of working with the company, I reflected on my experience just a few years prior in Korea, Indonesia, and elsewhere during the Asian financial crisis, advising companies, financial institutions, and governmental bank resolution agencies. My charge was to help disentangle a web of cross-guarantees, affiliate relationships, and various other less than arms’ length dealings between and among “group” companies with byzantine corporate structures seemingly designed with a single end in mind — the enrichment of a founding family or small group of insiders. At the time, I thought “this couldn’t happen in the United States”; less than two years later, my professional life would be reduced to an 18-hour daily habitrail between the Houston Four Seasons and Enron headquarters engaged in a similar effort.
Innovation Is Its Own Reward. A year before its demise, Enron launched its iconic “Ask Why” advertising campaign, described in internal company communications as reflecting the firm’s “restless dissatisfaction with the status quo and its ability to quickly grasp how most things can always be improved.” Enron was indeed a legitimately innovative firm in many respects; its role in the 2000-1 California electricity crisis was a direct consequence of its ability to exploit energy market deregulation through its wholesale energy trading business, a sector it largely created. More typically, other businesses incubated by Enron, including its broadband and (retail) energy services divisions, were ultimately revealed to have little intrinsic value and in retrospect seemingly conceived only to enhance Enron’s stock price, generate phantom accounting income through mark-to-market accounting, fuel financing activity to create ephemeral cash flow, or some combination of these.
Authority Can Be Outsourced. Much has been written about the governance and oversight failures of Enron’s Board of Directors, which were legion. More notable are the various failures of others charged with calling out the emperor’s lack of sartorial cover — the accountants’ blessing of transactions without economic substance yet tenuously adhering to the requirements of a rules-based accounting regime, the regulators and public officials squarely captured by an important economic actor, the financial counterparties to Enron and its affiliates assuming significant financial risk with only a modicum of due diligence, and the ever-credulous credit rating agencies always last to the party in acknowledging metastasizing risk.
Government Will Hold Those Most Responsible Accountable. The Enron meltdown would prove a prescient first act for many of the frustrations more palpably felt by the American people following the Great Financial Crisis, in that accountability seemed to elude those individuals and institutions most responsible, while targeting bit players. Although several senior Enron executives were criminally prosecuted, a greater number of small fry far from the central action were pursued aggressively while countless others escaped culpability. Perhaps the greatest malfeasance of justice was the 2002 criminal conviction of Arthur Andersen, which (notwithstanding certain firm employees’ role in Enron’s accounting misdeeds) resulted in that firm’s needless dissolution and the loss of 28,000 jobs. The Supreme Court ultimately overturned the conviction in a unanimous ruling, which had been originally prosecuted by a DOJ team later central to propagating the Russian collusion hoax of the Trump era — again showing that while history rarely repeats, it often rhymes.
“Anniversary” may seem the wrong term with which to recall the Enron implosion; perhaps “memorial” is the better word. As with all memorials, it’s essential to seek out and apply the larger lessons from what has been lost.
Richard J. Shinder is the founder and managing partner of Theatine Partners, a financial consultancy.