Twenty years after epic bankruptcy, Enron leaves a complex legacy


A logo glows in front of the new corporate headquarters of the Houston-based energy trading firm Enron November 29, 2001 in Houston, Texas.
James Nielsen | Getty Images

The bankruptcy of Enron on Dec. 2, 2001, spawned an epic scandal, nearly two dozen criminal convictions and sweeping government reforms. Enron became an enduring symbol of corporate fraud.

But 20 years later, multiple experts, former company insiders and others say the legacy of Enron deserves another look. They say the company that was repeatedly hailed as America’s “most innovative” truly was a pioneer in businesses we take for granted today, from energy trading to streaming video.

Among those defending Enron’s legacy are the daughter and son of the company’s founder and former chairman, Kenneth Lay. A federal jury convicted Lay in 2006 on 10 felony counts, but because he died of a heart attack six weeks later — before he could appeal — his convictions were vacated.

“Before 2000, Enron was one of the largest renewables developers and operators in the world (solar and wind primarily), the first major US Energy company to endorse cap and trade for CO2 credits, had targeted recruiting programs at historically black colleges, actively promoted women and minorities to senior positions and the board and committed more than $28 million to equity investments in underserved communities and entrepreneurs,” said Elizabeth Lay, an attorney who worked on her father’s defense team, and Mark Lay, a former Enron vice president, in a statement provided exclusively to CNBC.

“The model was simple, hire the smartest people you could find, give them capital and manage the back office for them so they could build new markets,” the Lays said.

Stephen Webster, a former executive in Enron’s international division, described a high-pressure, sink-or-swim culture.

“I would tell you it was probably one of the best jobs I ever had,” he said. But looking back, Webster said, he does not regret the stress. “We were charging into new markets. We were doing new things.”

Ravi Kathuria, a former director of strategy in Enron’s retail energy unit, Enron Energy Services, described a culture where employees were given a remarkable amount of autonomy — one where bosses never called to ask what workers were doing or how they were doing. Staffers were expected to make the most of the freedom.

“Enron fostered innovation, and it fostered an environment where everyone inside the company acted almost like an entrepreneur, your own internal entrepreneur, and you were responsible for your destiny,” he said.

The cutting edge

Even some of Enron’s harshest critics concede that the company was a pioneer.

“Did Enron revolutionize trading for natural gas and electricity? Without question,” said Ed Hirs, an energy fellow at the University of Houston, who served as a consultant to the Justice Department’s Enron Task Force. Hirs helped prosecutors craft their cases against Enron executives. “They were pioneers, and they brought efficiencies and transparency to the markets for these economies. It was really fantastic.”

In the 1990s, Enron transformed itself from a stodgy natural gas pipeline company to a corporate dynamo thanks to an innovation known as the Gas Bank, developed by a McKinsey consultant, Jeffrey Skilling. He would go on to become Enron’s CEO, and he would later serve the longest prison term — 12 years — of any Enron executive. But the charges against Skilling — including fraud, conspiracy and insider trading — had virtually nothing to do with Enron’s trading model, which remains in use throughout the industry today. Skilling declined to comment.

Had they not covered up the fact that they really weren’t making any money, they would still be here.
Ed Hirs
Former consultant, Enron Task Force, Department of Justice

Capitalizing on the deregulation of the natural gas industry, Enron set itself up as an intermediary between gas pipeline operators and customers such as utilities, taking its own cut in the process. It adapted the concept to electricity as well.

By 2000, Enron’s last full year as a public company, the division that included the trading operations accounted for more than 90% of the company’s $100 billion in revenue. The company’s internet trading platform, known as EnronOnline, reported processing more than $336 billion worth of transactions that year, making it the world’s largest e-commerce marketplace at the time.

While Enron’s trading operation had little to do with the company’s accounting scandal, the unit’s successes created incentives for tricky accounting in the trading unit and elsewhere in the company, Hirs said.

“As they brought transparency and liquidity to the market, the margins — the gaps between the bid and the ask — diminished,” Hirs said. “And so, it’s very, very difficult for them to ever continue to report revenues increasing and profits increasing.”

But, Hirs said, the business model itself was sound in the long run.

“Had they not covered up the fact that they really weren’t making any money, they would still be here,” he said.

And in a sense, they are. Enron alumni are scattered throughout the industry at companies that buy and sell natural gas using the same principles as Skilling’s Gas Bank.

Market maker

Enron would try to replicate the success it enjoyed with natural gas in other markets, with mixed results. It became a leader in electricity trading, though three Enron traders pleaded guilty to manipulating the market in California during a power crisis in 2000. Still, the business itself was sound. And some, including the Federal Energy Regulatory Commission, argued that much of the blame belonged to California for developing a system that could be gamed in the first place.

“Significant supply shortfalls and a fatally flawed market design were the root causes of the California market meltdown,” wrote FERC staffers in a 2003 post-mortem.

Kenneth Lay speaks during an interview in his office at the company’s headquarters February 5, 1996 in Houston, Texas.
Paul S. Howell | Hulton Archive | Getty Images

Enron’s attempt to work its magic on the nascent broadband market in the ’90s was perhaps the most problematic, even though it helped shape the way we communicate and consume content to this day.

The idea was to buy and sell internet bandwidth the same way the company was trading natural gas. And to help ensure demand, Enron Broadband would offer services including videoconferencing over the internet — an early version of cloud computing — and even streaming movies on demand in a joint venture with video rental chain Blockbuster. Those innovations occurred decades before Zoom and Netflix became household names.

“We said there’d be a new medium,” said F. Scott Yeager, a former director at Enron Broadband who worked on the new technologies. “The new medium would be the combination of streams, and interactivity and dynamic content based on databases that are user experiences that were unique.”

Ahead of the game

But with the collapse of the dot-com bubble, Blockbuster’s inability to license significant content from Hollywood studios, and a huge glut of bandwidth, the broadband division never lived up to Enron’s lofty goals. Allegations that the company tried to hide that from investors became central to the prosecution — and guilty pleas — of several Enron Broadband executives, as well as part of the case of Skilling, the former CEO.

I’m not saying that they didn’t have any good ideas or do anything, but they tried to monetize things before they were really ready.
Leslie R. Caldwell
Former Director, Enron Task Force

Yeager was accused of inflating the value of Enron stock by hyping technology that prosecutors alleged did not work. But a jury acquitted him on conspiracy, securities fraud and wire fraud, while deadlocking on some 20 counts of insider trading and 99 counts of money laundering. When the government sought to retry him on those counts, Yeager took his case all the way to the Supreme Court and won.

“Our network was real, yes, everything we did was real. And the infrastructure was real,” Yeager said.

But 20 years later, prosecutors who worked on the investigation still say broadband was typical of a pattern at Enron of being just a little too far ahead of its time, and not leveling with investors when gambles failed.

“Broadband may well have been a genius, brilliant idea, but it wasn’t ready for prime time. And in the meantime, they tried to cash in on it anyway,” said Leslie Caldwell, the first director of the Justice Department’s Enron Task Force. Caldwell would go on to head the department’s criminal division during the Obama administration. Today, she is a partner at Latham & Watkins in San Francisco.

“I’m not saying that they didn’t have any good ideas or do anything, but they tried to monetize things before they were really ready,” she said.