In 1984 Ken Lay became chairman and Chief Operator of Houston Natural Gas. It quickly doubled when it bought Florida Pipeline Company. The next year in 1985 Houston Natural Gas merged Internorth Incorporation. With the merger they both combined to own around 40,000 miles of pipeline and shortly after they changed their name to Enron. Around that time Washington was being lobbied by energy corporations to deregulate business and let companies set their own prices.
Energy companies said this would not only lead to the end of monopolies but the extra competition would benefit companies and consumers. Over the next several years Washington began to lift controls on who could produce energy and how it was sold. With an influx of new suppliers energy prices were very unstable. With these deregulations Enron was allowed to sell natural gas on an open market such as oranges and wheat. With this new way of business Enron was able to grow into the seventh largest company in the United States with over 25,000 employees in over thirty countries.
It became an innovator in gas trading and technological advances in the energy field. In 1990 Enron hired Jeffery Skilling as the company Energys Trading Operation Consultant. At age thirty-six Skilling was able to create the Gas Bank. The Gas Bank is when a company buys large volumes of gas from producers and resells it to industrial customers at long term contracts. This helped stabilize the gas market which was very volatile at the time. It also helped expand gas production nationwide and helped Enron grow to a major player in the energy industry.
As Skilling went up in rank he started to get the company involved in risky investments to make more profit. In an interview with the University of Virginia he said We like risk because you make money by taking risk, This was one of the many reasons which got Enron into financial debt, Skilling also persuaded regulators to allow Enron to use market-to-market accounting. A technique used by brokerage companies for securities trading. It allowed Enron to count long-term contracts as immediate profit although most of the money wouldnt be coming in for several years.
For example if a pipeline in Europe was projected to produce $89 million of profit it would be posted, but there was one problem the pipeline hadnt been built yet. With the high tech boom Enron moved its gas and electricity online, hoping to cash in on the high stock prices of the dot-coms. Enron sold Wall Street and as a result the stock tripled in value from 1998 to 2000. This was not the only reason it tripled but a definite factor. Within this time Lay and Skilling cashed out around $475 million worth of stock.
Around this time the company was involved in horrible investments. They were buying ridiculous amounts of power plants, pipelines and other ventures which were over priced and not even going to be profitable. With Jay and Skilling wanting to continue this trend of growth Enron turned itself into a factory for financial deeds that would pump its profit, protect its credit rating and drive up its stock price. So Enron turned to its Financial Chief Officer Andrew Fastow who set up several partnerships. The very first one to note was called LJM1 which hedged risky stock investments.
Enron set up these partnerships using stock as funding which did not appear on the companys balance sheet. These partnerships were set up as an SPE or a Special Purpose Entity, which agrees to pay Enron if it investments decline in value. As the investments decline payments were made to Enron and posted as profit. But in reality Enron was paying it self with its own money. At the end of 1999 LMJ1 gave Enron a paper profit of $300 million. With the success of LMJ1 Fastow created LMJ2 with Skilling’s support. LMJ2 was started with $300 million of bank loans and investors money.
This partnership was about twenty times greater than LMJ1. As a result of these paper partnerships, Enrons stock price rose to new levels. LMJ2 was doing great it provided most of the profit in 2000 and was invisible to outside investors. Over the next year questions began to arise about the LMJ partnerships. The stock began to rollercoaster from $80 to just below $50. But on November 1, 2001 Enron announced that J. P. Morgan Chase and Citi Group would provide them $1 billion in additional loans. This announcement again shot the stock in an upward spiral and almost doubled it at around $85.
But in reality Enron was not being successful. They were only making one cent for every dollar they accounted for which is not profitable for any company. In the month of November Enron began to restate their profits from 1997 to 2000. In 1997 they reported $105 million in profit while in reality it was only $77 million. In 1998 they reported $733 million while in reality it was only $600 million. In 1999, $893 million was reported but in reality only $645 million was in profit. In 2000 they reported $979 million in profit when they only produced $880 million.
They were in true debt for more than $628 million by the end 2000. More than $630 million came from improper accounting and another $296 million in profit came from hidden tax cutting transactions. This sent the stock plummeting from $70 to 60 cents and produced losses of more than $60 billion on paper. With this fall in stock price, Enron filed for bankruptcy on December 2, 2001. Since the fall of Enron and other major corporations, Senate and Congress are now trying to configure a major reform bill which would protect workers and their pensions.
President Bush also signed off on a new accounting-reform legislature which creates an oversight board that would investigate and punish accounting violations. Now the last step by the government is putting everyone involved behind bars. Skilling is set to testify before a house committee and has chosen not to invoke the Fifth Amendment as many of the other board members have chosen to do. Fastow has to also testify before congress but will plead the fifth to avoid self incrimination. Kropper, Enrons director of global market pleaded guilty last weak to the demise of the company.