101 Pages Posted: 4 Jun 2007 Last revised: 14 May 2009
Date Written: Fall 2007
Enron's collapse is generally viewed as a morality tale - the natural result of managerial greed, a clueless board, and feckless gatekeepers. But none of these aspects of the story clearly distinguishes Enron from other major firms during the bubble era of the late 90s. This material identifies certain economic facts from the many moving parts that was Enron, and organizes them along two main threads. The first describes Enron's major businesses, and the incentives and constraints under which the managers of those businesses operated. The second thread describes the basic financial engineering tools developed by Enron's finance department. These threads are then woven into the timeline of Enron's ultimate collapse.
What emerges is a tale of how bad bets that resulted in good outcomes came to be viewed by top management and the board as bets worth repeating on an ever-larger scale. Early success in highly risky ventures were ramped up and duplicated, under perverse incentives, into a financial disaster. The firm then doubled down on that disaster with non-economic hedges developed by the finance group. The CFO, in a wholesale breach of his fiduciary responsibilities, including corruption of various gatekeepers, managed to cloak the poor quality of his hedges and his motivation in creating them. This duplicity prevented top management or the board from fully recognizing or acting upon the danger that those hedges posed to Enron's survival, until it was too late. The political and economic reactions to Enron are usefully viewed in terms of these distinguishing elements of its failure.
Keywords: Corporate governance, Enron, gatekeepers, scandal
JEL Classification: A23, D21, G31, G32, G38, K22, M14, M41, M52
Suggested Citation: Suggested Citation
By Robert Rosen
By John Coffee
By John Coffee