Leadership, Culture and Capital Allocation

On 16 October 2001 Enron, the Houston company that had made itself the largest trader of natural gas and electricity in North America, reported a third-quarter loss of $618 million and a $1.2 billion reduction in shareholders' equity, the second linked to partnerships run by its chief financial officer, Andrew Fastow (company release). The Securities and Exchange Commission opened an inquiry on 22 October. Fastow was replaced on 24 October. On 8 November Enron restated its results back to 1997. On 9 November Dynegy, a smaller Houston rival, agreed to buy it, with ChevronTexaco backing about $1.5 billion of immediate cash secured on Enron's Northern Natural Gas pipeline (reported). On 28 November Standard & Poor's and Moody's cut Enron's debt to junk, Dynegy walked away, payments tied to Enron's rating fell due and counterparties stopped trading with it. On Sunday 2 December Enron and its affiliates filed for Chapter 11 in New York with about $63 billion of assets, then the largest bankruptcy in American history (reported).

Fifteen months earlier its shares had peaked at about $90 and its market value at about $70 billion (reported). Its chief executive of six months, Jeffrey Skilling, had resigned on 14 August 2001 for "personal reasons", and Kenneth Lay, its chairman, had returned to run it. Days later a vice-president, Sherron Watkins, wrote to Lay that Enron might "implode in a wave of accounting scandals" (her memo, as later published). It did, in seven weeks. Employees whose retirement accounts were concentrated in Enron stock lost more than $1 billion (reported). Fastow pleaded guilty in 2004, and Lay and Skilling were convicted in May 2006.

Through all of it the pipelines kept running. Separately regulated and earning fees set by the Federal Energy Regulatory Commission, they still had value at the end; the estate sold them and paid creditors about $21.8 billion, about 53% of allowed claims on average, by 2012 (reported). The liquids-pipeline business that Enron had sold in 1997 for about $40 million had become the seed of Kinder Morgan (Chapter 6), and the oil and gas producer it had let go in 1999 had become EOG Resources. Enron's management had treated as surplus the parts of the company that would outlast it.