The great Enron disappearing act: who is responsible for the biggest business scandal in a generation? Where did all the money go? Everyone from the public to Congress wants answers. (National).

At the peak of its power, Enron Corporation was a warpspeed money-making machine that brought in $100 billion a year trading contracts around the globe for oil, gas, electricity, and other commodities from its gleaming 50-story office tower in Houston, Texas.

Enron executives hobnobbed with Presidents, donated huge sums to politicians of both parties, and then won changes in government regulations that favored Enron. Company executives worked long hours, but some blew as much as $50,000 a month in expenses. Others showed up for work in a different luxury car for every day of the week.

Then a funny thing happened: Enron went broke. Though auditors were supposed to be keeping an eye on its finances, the seventh-largest company in the U.S. collapsed without warning. It was the biggest bankruptcy in American history.

Thousands of Enron workers lost their jobs. Hundreds of thousands of investors with Enron stock lost their money. The entire stock market shuddered, costing millions of people nationwide, since about half of all Americans own stock, either directly or through mutual funds.

As a business and political disgrace, the Enron collapse may top the 1920s Teapot Dome scandal, in which politicians and business people secretly sold U.S. energy reserves. With investigations already under way by Congress, the FBI and the Securities and Exchange Commission (SEC), the government agency that oversees the securities markets, some of the company's executives and the accountants responsible for checking its bookkeeping could go to jail. Some politicians who helped rewrite laws to favor Enron could face the wrath of voters.

"This was a massive failure in the governance system," says Robert E. Litan, director of economic studies at the Brookings Institution, a research organization. "This was like a nuclear meltdown where the core melted through all the layers."

ENERGY DEREGULATION OPENS THE DOOR

Until the 1990s, most power in the U.S. was bought and sold by strictly regulated public utilities. Then Congress and many state officials deregulated the electricity and oil markets. With deregulation, Enron discovered that it could act, as the middleman in power deals. If an electrical company in Idaho was short on power, for instance, Enron would find a utility in, say, Kansas that had power to spare. Enron would arrange the sale, and take a fee for its work.

The company then decided it could become the middleman for all kinds of energy trades. It then went a step farther, entering into high-risk contracts known as derivatives, which allow an investor the right to buy or sell something in the future for a fixed price.

For example, Enron might agree to buy oil for $22 a barrel, a year in the future. If gas prices rose, Enron could then buy the oil cheap, and sell it for a profit. But the trades became ever more esoteric, involving traffic in such things as Internet bandwidth and bets on future weather.

Too often, Enron guessed wrong. When the high-risk deals began to go sour, Enron executives set up side companies, called subsidiaries, many of them outside the United States, where government oversight is weak. With names like JEDI, plucked from Star Wars, or Raptor II, the side companies became a place for Enron to hide debts, losses, and bad business deals. As a result, the company's profits looked far bigger than they really were.

A DEAD-BROKE HOUSE OF CARDS

By last fall, at least some company insiders knew that Enron was running on fumes, a house of cards inside a house of mirrors.

"The woods were filled with smart people at Enron, but there were really no wise people, or people who could say, `This is enough,'" says John Olson, an analyst with the investment firm Sanders Morris Harris.

For some, the company's meltdown was cushioned. Enron executives collectively cashed in $1.1 billion in Enron stock from 1999 to mid-2001, before the value of the company's stock began to plummet.

But more than 4,000 workers farther down the ladder have already lost their jobs. And beyond them, many of the company's 27,000 workers had bought Enron stock for their retirement funds. Much of that money is now gone.

The trouble didn't stop there. Hundreds of thousands of other people owned Enron stock in public retirement funds, which have lost at least $1.5 billion.

Such losses have made Enron radioactive for politicians, many of whom were once major supporters of the company. Since 1989, Enron has donated $6 million to members of Congress. The recipients included half the members of the House and three quarters of the Senate. Republicans collected 74 percent of the money. No one has yet shown that Enron gave money in return for a direct favor or change in the law--a bribe. The company, nevertheless, won key changes in federal rules that allowed it to expand its operations. One of several major changes came in 1997, when the SEC granted Enron an exception to a Depression-era law written to prohibit companies from hiding losses in offshore firms--precisely what Enron then did.

Although the Enron debacle has not yet damaged President Bush politically, he has received more money from Enron than any other politician in the country: more than $700,000 since 1993. Relations between Bush and Enron were so close that Bush, who loves nicknames, called the company's founder and chairman Kenneth Lay "Kenny Boy."

The closeness is gone. As Enron began to tumble toward bankruptcy last fall, its executives made desperate phone calls to Bush administration officials. Those officials refused to help. Presidential aides later pointed to that refusal as proof that the Enron campaign contributions had not influenced the administration.

But that has not erased questions about Enron's reach into the Bush administration. Last spring, Vice President Dick Cheney's energy task force, which developed the Bush administration energy policy currently under consideration by Congress, met in private with numerous industry leaders, including six times with Enron executives. Cheney and administration officials insist Enron had no undue influence, but a study by U.S. Rep. Henry Waxman (D-Calif.) found 17 provisions in the Bush plan that would directly benefit Enron.

PAYING FOR INFLUENCE

The Bush administration has refused to release records of those meetings, arguing that the executive branch of the government needs to be able to discuss Ideas in private. But in February, the General Accounting Office (GAO), the non-partisan investigative arm of Congress, announced that it would sue Cheney and the White House for release of the documents.

Just how much influence Enron held in Washington is not yet clear. But some people familiar with past scandals say that Enron's money was well spent.

"Money allowed the Enron leadership to come to town," says Charles A. Bowsher, a former head of the GAO. "Everyone says they didn't get anything... But if you look back over the last five years, what they did get was no oversight."

That oversight was supposed to have been provided by outside auditors, responsible for reviewing Enron's operations and bookkeeping, to protect investors. So why was Wall Street caught unaware by Enron's collapse?

Within days of Enron's bankruptcy, revelations about the company's finances showed that Arthur Andersen, the accounting company hired to audit Enron's books, had kept quiet about Enron's shaky condition.

CONFLICT OF INTEREST

At the same time it was handling Enron's audits, Andersen was being paid millions of dollars by Enron as a consultant on new business--an apparent conflict of interest.

When the bankruptcy hit, Andersen employees, and their counterparts at Enron, began shredding documents to keep them from falling into the hands of federal investigators--actions that may lead to criminal charges.

In the Enron aftermath, Congress is rethinking laws on campaign finances that would limit political donations. It is also looking for ways to protect employee retirement accounts from Enron-style investments. New conflict-of-interest rules for accounting firms may be put in place, as well as new limits on the highly creative trades Enron favored.

"If a company of this size, advised by top-tier accountants and law firms, could conclude that our laws permit some of what happened here," says Richard C. Breeden, a former chairman of the SEC, "then our laws are inadequate."

[ILLUSTRATION OMITTED]

lesson plan 2 * NATIONAL * pages 12-17

The Great Enron Disappearing Act

FOCUS: Unscrambling the Biggest Bankruptcy in American History

TEACHING OBJECTIVES

To help students understand how Enron, once the seventh-largest company in the U.S., collapsed, taking with it the value of employees' pensions and investors' stocks--and whether fraud lies at the core of this economic disaster.

Discussion Questions:

* Do you believe that government officials who benefited from Enron contributions are guilty of anything?

* Has the Enron failure affected your respect for American business?

* Does the U.S. government owe anything to people who lost their life Savings in the Enron debacle?

CLASSROOM STRATEGIES

Critical Thinking: Discuss two key elements in the Enron case: government regulation of business, and the belief that Enron's campaign gifts bought it favors.

Bring the concept of regulation to the students' world. Ask what driving would be like if there were no traffic lights and private companies, free to make their own interpretatons, governed traffic. Explain that a similar situation happened at Enron. With no one to regulate them, executives drove the company wherever they wished at whatever speed they wished until it crashed, killing the jobs and savings of thousands.

Note the 1997 decision to exempt Enron from a Depression-era law prohibiting the hiding of losses in foreign subsidiaries. Then mention the study by U.S. Rep. Henry Waxman detailing 17 provisions in President Bush's energy plan that would directly benefit Enron. Ask students whether it is reasonable to assume that there is a link between Enron's contributions of $6 million to members of Congress and $700,000 to President Bush and the benefits that flowed to the company.

Now ask students to assume that an investigation fails to prove that policies favoring Enron were payoffs for political contributions. Should that finding affect proposed legislation limiting campaign contributions?

Fair Hearing: Tell students that critics say business regulations hamper free enterprise. And foes of limits on campaign gifts say that giving money is a form of free speech, a right protected by the First Amendment.

PENSION FUNDS that invested in Enron and their losses,
in millions of dollars

Florida state board of administration       335
University of California regents            144
Georgia state pension fund                  127
Ohio state pension fund                     114
New York City pension fund                  109
Washington state employees                  103
Oregon state pension fund                    77
New Jersey state pension fund                61
New York state pension fund                  58
California teachers                          49
Alabama retirement system                    47
California public employees                  40
Texas teachers retirement system             36
Alaska state pension fund                    26
Texas employees retirement system            24
Missouri public schools retirement system    23
Nevada state pension fund                    22
Minnesota state pension fund                 20
Connecticut state pension fund               15

Note: Table made from bar graph.
THE ENRON CLUB

A huge number of politicians
were entwined with
Enron--they received
political donations, owned
stock, or worked for the
company. For years, Enron
predictably delivered
golden eggs to Washington
politicians. But when
Enron went bust, many of
those politicians wound up
with egg on their faces.

Enron-connected donors of more than $100,000 to Bush in 2000

Kenneth L. Lay
Enron chairman
and chief executive

D. Stephen Goddard Jr.
Head of Arthur
Andersen's Houston
office, Enron's auditor

Joe B. Allen
Lobbyist, lawyer at
Vinson & Elkins,
Enron's law firm

Thomas P. Marinis Jr.
Lawyer at
Vinson & Elkins

Robert H. Whilden Jr.
Spent 39 years
working at
Vinson & Elkins

Influential political figures who are current or former
Enron stockholders

Karl Rove
Senior Adviser to
the President

Donald Rumsfeld
Secretary
of Defense

Thomas E. White
Secretary
of the Army

Influential political figures currently or formerly on Enron's payroll

James A. Baker
Ex-Secretary of State;
spokesman for Bush
during 2000 ejection

Marc Racicot
Republican Party
Chairman; former
Governor of Montana

Lawrence B. Lindsay
White House
National Economic
Policy Adviser

Robert B. Zoellick
Administration's top
trade negotiator

Thomas E. White
Secretary
of the Army

As government official, supported some legislation favored by Enron

George W. Bush
President

Dick Cheney
Vice President

Karl Rove
Senior Adviser to
the President

Lawrence B. Lindsay
White House
National Economic
Policy Adviser

Senator Kay Bailey
Hutchison
(R-Tex.)

Senator Phil Gramm
(R-Tex.)

Wendy L. Gramm
Enron board member;
former head of U.S.
Commodity Futures
Trading Commission;
wife of Senator Gramm

RELATED ARTICLE: Enron for dummies.

BY BILL KELLER

I saw that President Bush Is "outraged" by the Enron scandal, and I know I should be too, but there's a lot I still don't get. For starters, what kind of company Is Enron, exactly? I mean, what does Enron do?

"Do?" Enron does a lot of things, but mainly It buys and sells energy.

What's so innovative about that?

When Enron got started, natural gas and electricity were produced, transmitted, and sold by state-regulated monopolies. They were often plodding and inefficient. Enron used Wall Street techniques to transform energy supplies Into financial contracts that could be traded online like stocks and bends.

So where did Enron go wrong?

It figured if It could trade energy, It could trade anything, anywhere, in the new virtual marketplace: newsprint, television advertising time, insurance risk, or high-speed data transmission. All of these were converted into contracts--called derivatives--that were sold to investors. Enron poured billions of dollars into these trading ventures, and some failed. It turned out that Enron was good at inventing businesses, but terrible at the tedious work of running them.

How did Enron hide its mistakes?

To keep its stock price growing, It set up partnerships where It could hide its looses, or generate imaginary revenues. Here's one of the more audacious examples, pieced together by The Wall Street Journal: Enron invested a bunch of money in a Joint venture with Blockbuster to rent out movies online. The deal flopped eight months later. But in the meantime, Enron had secretly set up a partnership with a Canadian bank. The bank essentially lent Enron $115 million in exchange for Enron's profits from the movie venture over its first 10 years. The Blockbuster deal never made a penny, but Enron counted the Canadian loan as a nice, fat profit.

Um, I'm not sure I follow that ...

Neither did the Canadian bank, which now holds a lot of worthless Enron IOUs.

Did Enron break the rules?

Whether It broke the law hi yet to be determined. Various prosecutors are undoutedly reviewing the statutes on accounting fraud, insider trading, and Illegal destruction of documents, among other crimes.

Did Enron buy political influence?

Enron bought access. Money Just got It in the door to make its case. (The case It made probably went something like this: If the government does things Enron's way, a lot of people will got very rich and they will be very, very grateful to the wise leaders who made It all possible.) if you're asking whether the Bush administration did favors for Enron, sure It did-and so, by the way, did the Clinton administration, and both parties in Congress.

With reporting by RICHARD STEVENSON, JEFF GERTH, KURT EICHENWALD, and DIANA B. HENRIQUES of The New York Times.