Editorial Desk; Section A
The Rise and Fall of Enron

11/02/2001
The New York Times
Page 24, Column 1
c. 2001 New York Times Company

Earlier this year, most companies would have loved to have Enron's problems. Californians resented the energy trading company's huge profits during their energy crisis, and Democrats in Washington raised questions about Enron's influence within the White House and about the cozy relationship between Enron's chairman, Kenneth Lay, and Vice President Dick Cheney. Nobody seemed better positioned to thrive during the Bush presidency than this Houston-based apostle of deregulation. 
Wall Street was impressed with Enron's strategy of swooping into formerly regulated markets to broker contracts for natural gas, electricity or unused telecom bandwidth. The company was celebrated as a paragon of American ingenuity, a stodgy gas pipeline company that had reinvented itself as a high-tech clearinghouse in an ever-expanding roster of markets. Enron's push to force utilities into the Internet age with its online trading systems, at a seemingly handsome profit, became an epic tale of the dot-com revolution.
It now appears that Enron's tale may be more cautionary than epic. Enron envy has crashed, along with the company's stock price, as serious questions emerge about its bookkeeping. Enron disclosed earlier this month that $1.2 billion in market value had vanished as a result of a controversial deal it entered into with private partnerships run by its chief financial officer, Andrew Fastow. 
Most alarming was Enron's reluctance to shed light on management's wheeling and dealing. ''Related-party transactions,'' as the accountants call them, are fraught with conflicts of interest. Though much remains to be learned about these transactions, their scope and lack of transparency suggest that Enron may have in effect created its own private hedge fund to assume some of the risk and mask the losses of its complex trading. The extent to which company insiders profited from the partnerships is not yet clear. 
Enron has scrambled to dampen Wall Street's concerns, acknowledging its credibility problem while insisting on the health of its core businesses. On Wednesday it brought in William Powers, the dean of the University of Texas School of Law, to review the transactions. The Securities and Exchange Commission has launched its own formal investigation. Mr. Fastow was forced to resign, following Jeffrey Skilling, the man credited with driving Enron into new cutting-edge businesses, out the door. 
Enron's former admirers on Wall Street, mindful of recent scandals involving high-profile companies doctoring their earnings, and of the spectacular collapse of the Long-Term Capital Management hedge fund in 1998, are alarmed. Carole Coale of Prudential Securities summed up the prevailing sentiment when she told The Times: ''The bottom line is, it's really difficult to recommend an investment when management does not disclose facts.'' Analysts, as well as the media, are not entirely blameless. Enron did mention, albeit in passing, the troubling related-party deals as early as March 2000. But few analysts bothered to raise questions at a time when the company's revenues, profits and stock price were soaring. 
Harvey Pitt, the new Securities and Exchange Commissioner, must pursue the Enron inquiry aggressively in order to assure investors that he will be as vigilant as his predecessor, Arthur Levitt, when it comes to protecting the integrity of financial markets. Indeed, even if Enron is cleared of any wrongdoing and regains some of its past luster, as it well might, the company that preaches the merits of self-regulating marketplaces has reminded us all of the need for a strong regulator on Wall Street.

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