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Thursday, 10 January, 2002, 11:55 GMT
Q&A: Enron's plight

US energy giant Enron, once the world's most admired company, is now better known for being the biggest failure in US corporate history. Its collapse has prompted a host of investigations, including a criminal one. BBC News Online takes a look at the firm and some of the charges it faces.

What precipitated the collapse of Enron?

When the firm reported its third quarter results in October, it revealed a large, mysterious black hole that sent its share price tumbling.

The US financial regulator - the Securities Exchange Commission - launched an investigation into the firm and its results.

Enron then admitted it had inflated its profits, sending shares even lower.

A potential buyer for Enron, shied away from the company, leaving it no choice but to file for bankruptcy on 2 December.

The rapid demise of Enron from one of the most admired companies in the world to the US' largest corporate failure has raised a great deal of suspicion surrounding its complex transactions.

A host of different congressional hearings and regulatory investigations culminated in the announcement that a criminal inquiry is also underway.

Why has a criminal investigation been launched?

Because it is a possibility that senior executives at the firm were involved in fraud.

In order to fiddle its balance sheets, the firm used complex financial partnerships in order to conceal debt.

And many of the company's executives allegedly raked in massive profits, selling their shares before the stock collapsed.

But Enron's 20,000 employees lost billions of dollars in their pension plans, after they were barred by the company from selling shares when their value plummeted.

What sort of company is Enron?

A highly unusual one.

On the one hand, it is a traditional diversified utility, owning power plants, water companies, gas distributors and other units involved in the relatively straightforward delivery of services to consumers and businesses.

But the company really made its name by applying Wall Street-style financial wizardry to these once-sleepy markets.

The genius behind Enron was the realisation that energy, water, and even obscure products such as telecom bandwidth were essentially commodities that could be bought, sold and hedged just like shares and bonds.

Enron was a huge "market-maker" in the US, meaning that it acted as the main broker in energy products, taking financial punts far bigger than its actual core business.

The size of these dealings made Enron briefly one of the biggest energy companies in the world, with sales of $101bn last year, rivalling venerable names such as Shell and Exxon.

And it dived into the liberalising utility markets of Europe and beyond, becoming a massive financial force - especially in the UK, where it also owns a power station in Teesside and Wessex Water.

So where did it all go wrong?

For a decade or so, Enron's revolutionary approach was universally applauded.

The firm was seen as having cracked the puzzle of how to make huge money out of the reliable but dull business of supplying energy.

Enron was repeatedly voted the world's most admired company, and its advice was sought by governments around the world.

But that wizardry proved its downfall.

Enron's trading operations relied heavily on exceptionally complicated financial transactions, some relating to deals many years in the future.

Auditing this sort of business is never easy, but it seems the situation at Enron was exacerbated either by incompetence or criminality among certain senior managers.

No one, it seems, really understands what Enron has been doing these past few years.

What will be the effects of Enron's failure?

The fall-out is immense.

Enron has left behind $15bn of debts.

And many banks around the world are exposed to the firm, from both lending it money and trading with it.

Amongst others, JP Morgan has admitted to $900m of exposure, and Citigroup to up to $800m.

Some banks are already proceeding with legal action, and the New York based Amalgamated Bank is suing Enron top executives for $15bn.

It seems likely that a few smaller firms that dealt extensively with Enron could go bust soon, too.

On an individual level, many employees have lost their jobs and seen the value of their pensions - which had been invested heavily in Enron's own stock - wiped away.

And Enron's shareholders have seen shares which were worth $85 just a year ago become virtually worthless.

And in the longer term?

Enron's failure raises some uncomfortable questions about rampant free markets.

In the longer term, the failure of Enron makes all-out market deregulation look a lot less attractive.

Policy-makers used to be keen on the idea of applying Wall Street techniques to energy markets, hoping that it might result in greater efficiency and cheaper prices.

Until recently, that hope seemed to be coming true.

But now, governments are likely to be far more careful about allowing private companies to play too crucial a role in crucial areas such as energy supply.

With luck, investors will also be more cautious about putting their money into companies that they do not understand.

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