Enron 101:
A Guide to What Really Happened…and Why It Matters

The sudden and staggering collapse of Enron--which only a few months ago was the seventh biggest corporation in America--left thousands unemployed, many with their life savings depleted and cost unsuspecting shareholders tens of millions of dollars in evaporated wealth.

Investigators will spend years uncovering the trail of influence peddling, document shredding, and executive excess that led to the end of Enron. Below,
Mary Rouleau of the UAW’s Washington Office offers a brief guide to the story so far--and its implications for workers, employers and the U.S. economy.

1. I don’t work at Enron and I didn’t own Enron stock. Why should I care?

Even if this story of unbelievable corporate greed doesn’t faze you, Enron may impact you in ways you don’t realize. For example, if you live in a state that has deregulated electricity, you are probably paying higher prices (see #5).

If you own stock, it may have lost some of its value in recent weeks because analysts are concerned that other Enrons are out there.

2. Starting at the beginning, why are Enron’s business practices being criticized?

Enron began in 1985 as a natural gas pipeline company. It would deliver gas to a utility or business on a particular day at a market price. When state electrical markets deregulated (see #5), Enron expanded into an energy broker--or middleman--trading in electricity and other commodities. It would make money on the difference between the buying price and the selling price.

Some of the other commodities included things like television advertising time and insurance risk, businesses that had no relation to energy.

As these brokerage services grew and became more complex, Enron created a network of partnerships that allowed it to keep a significant amount of its true debt “off the books.” Minutes of an Enron board meeting in 1997 show that CEO Ken Lay and other top executives were present when the notorious partnerships were discussed.

Further, senior Enron officials were members of the partnerships, raking in millions. For example, Enron’s Chief Financial Officer made $30 million off his partnerships, in addition to his regular pay and stock options.

This past Oct. 16, Enron announced a big third-quarter loss and Wall Street reduced the value of shareholder equity by $1.2 billion. Then on Nov. 8, Enron announced that it had overstated earnings over the past four-year period and that it had $3 billion in obligations to various partnerships. The company essentially collapsed after that, filing for bankruptcy on Dec. 2.

During the period when Enron’s condition deteriorated, rank-and-file Enron employees lost millions in their 401(k) plans as their company stock tanked; many lost their life savings.

Unlike the executives, the rank and filers were unable to dump it because it was in a “lockdown” status (Enron says this was because it was changing plan administrators—an unhappy coincidence). They also saw the value of their defined-benefit retirement plan sharply reduced because the benefits under the plan were offset against Enron stock in the 401(k) plan when the stock price was riding high.

A damaging internal report released by Enron finds that company executives were guilty of across-the-board ethics failures, including the intentional manipulation of overstated profits.

3. Why is Arthur Andersen in so much trouble?

Arthur Andersen was, in theory at least, Enron’s outside auditor--which meant that it was to verify the accuracy of the Enron books, thus assuring investors.

However, Andersen, one of the so-called Big 5 accounting firms, also acted as a consultant to Enron, did some of Enron’s internal bookkeeping and had a revolving door of sorts with Enron as Andersen executives took jobs with the company.

Bear in mind that the practices described in the paragraph above do not, by themselves, appear to be illegal. This suggests the need for system-wide reform (see #7).

But Andersen was engaged in massive shredding of documents related to their audits of Enron, which is why the firm was indicted in March for obstruction for justice.

4. I’ve heard that Enron has many ties to the Bush administration.

You’re right. The halls of both the White House and Congress are papered with Enron greenbacks. While it’s true that many Democrats were also the recipients of Enron money, Republicans, and Bush in particular, were far greater winners.

Over the years, Enron and those with ties to its CEO Ken Lay have contributed more than half a million dollars to Bush’s campaigns. For more on campaign contributions, go to the Center for Responsive Politics at www.opensecrets.org

Before the public collapse, the Bush administration was carrying the water for Enron. It helped the company try to sell its doomed interest in an Indian power plant. Enron also had heavy input into the administration’s energy policy.

5. You mentioned electricity prices. What’s the connection to Enron?

For the past 10 years or so, led by Enron, the electricity industry sought deregulation at the state level.

Consumers were told they would see lower prices because they would have a choice in electricity providers. Consumers and utility worker unions fought these proposals but were largely on the losing end due to the overwhelming power of the electricity and big business lobby, lubricated by generous campaign contributions.

In the states that deregulated, the promises to consumers have not been met and good-paying utility jobs have been lost.

Last year’s widely-reported electricity crisis in California resulted from that state’s ill-conceived deregulation plan. Enron was able, according to Public Citizen, to manipulate supply in such a way as to cause power outages affecting millions of consumers and businesses while increasing its revenues. For more on this, see the Public Citizen report at www.citizen.org

6. On the “Today” show Ken Lay’s wife said that “Other than the home we live in--everything we own is for sale.” Surely, this collapse has caught up with them too, right?

Ah…not quite. Mrs. Lay conveniently failed to mention that her home is a condo with a market value of $7.1 million. Because Texas protects the primary residence in bankruptcy regardless of its value, the Lays will, at the very least, have an asset worth $7.1 million even if they are forced into bankruptcy.

You might recall that the credit card industry has pushed hard for the past five years for laws that would make it more difficult for the average family to file bankruptcy--families ruined by job loss, divorce and illness. The industry proposals did virtually nothing to close loopholes exploited by high rollers. The bankruptcy bill has been stalled this year, but Republican leadership is working to get it moving again.

7. What is labor’s response?

The UAW is working with the AFL-CIO to educate the Congress and the public about the effect of Enron on a variety of issues:

• Financial market reforms: Congress must act to ensure auditor and analyst independence, review conflicts-of-interest rules and disclosures, and change a recent law that makes it hard for shareholders to sue in cases like Enron.
• Pension reforms: Congress needs to consider whether limits should be set on the amount of company stock an employee can own, whether to give employees greater control over their 401(k) plans, and how defined benefit plans should be calculated.
• Social Security privatization: Enron is the most dramatic example to date of why privatizing Social Security is a terrible idea.
  
  For a quick overview, see the Economic Policy Institute’s chart: What if Enron workers had traded Social Security for stock? at www.epinet.org
• Utility deregulation: Electricity deregulation is a part of the energy bills now before the Congress, which could lead to even less oversight of utilities than exists now.
• Bankruptcy: Bankruptcy law must be changed to better protect employees as well as to eliminate loopholes that protect the assets of corporate executives.
• Campaign finance: Congress must act to eliminate the overwhelming influence of corporate money.

A longer version of this article first appeared in the At Issue section.