Why Enron spelled the end of Houston's Roaring 90s

The collapse of the infamous company marked the true end of the decade's economic optimism and relentless growth.
Passers-by take pictures of a sign for a humor website pasted on the Enron sign at the entrance of Enron's headquarters in Houston on January 26, 2002.
AFP PHOTO/HECTOR MATA
Photo of Michael Murney

Ed Hirs remembers when Enron tried to hire him in the early 1990s—and he remembers turning them down. 

At the time, the Houston-based energy trading company was in the middle of a meteoric growth, on its way to becoming one of the largest and most profitable companies in the U.S., a feat it reached by the end of the decade. Hirs was working as an investment banker and corporate financial advisor in Houston, watching Enron's value skyrocket day after day. 

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As Enron's profits soared, Hirs followed their rise and found himself unable to shake the sense that something about the company was off, that "the math just didn't work," he said. At the same time, Hirs was a frequent target of energy trading and corporate finance recruiters, as both markets boomed on the heels of Reagan-era deregulation. "When the big headhunting firms call, you know, you put on your suit and polish your shoes, make sure you get a haircut and head downtown," Hirs recalled. "They serve you coffee in fine China, and they've got the dossier on every MBA in town."  

Hirs took the meetings, but whenever recruiters put Enron on the table as a potential employer—which they did often throughout the '90s, Hirs said—he always declined the posts. Even as Enron's value continued skyrocketing, Hirs doubled down on his position and co-authored an op-ed in the Houston Chronicle in 1993 that raised questions about the accuracy of Enron's market valuation. Nearly eight years later, as he watched the global economy seize following Enron's implosion in 2001, the phone rang. 

A contact working with the  Department of Justice was looking for financial valuation experts on the ground in Houston to serve on a task force uncovering the fraudulent practice that led to Enron's demise. Did he want to be on it? 

Irrational exuberance

In some ways, the collapse of Enron marked the true end of the economic optimism and relentless growth that defined the U.S. in the 1990s. Before the company's 2001 downfall, the American economy was riding the protracted high of the dot-com bubble; commodities markets were booming in the wake of President Ronald Reagan's laissez-faire regulatory policies; NAFTA had opened up opportunities for American businesses across borders.  

Experts saw the writing on the wall, to be sure: In 1996, then chair of the Federal Reserve Alan Greenspan even warned in a speech that the "irrational exuberance" of U.S. investors and policymakers threatened to push the economy into recession.   

The gas trading floors at the Enron Headquarters.

The gas trading floors at the Enron Headquarters.

Gregory Smith/Corbis via Getty Images

But for companies like Enron, that irrational exuberance was paying off. By 1995, the company was executing hundreds of billions of dollars in trades annually, according to SEC filings. Fortune named Enron its "Most Innovative Company" that same year—and every year after, from 1996 through 2001. 

By August 2000—as Houston's Astros were enjoying their first season at Enron Field downtown—the company's stock hit an all-time high of $90.75. But the fraudulent business practices that Hirs and the DOJ's task force would later expose were starting to wear on investors. 

"Add a kazillion dollars to the bottom line"

The schemes at the core of Enron's fraud—in which company executives artificially inflate Enron's reported value by hundreds of millions of dollars annually—were essentially accounting deceptions. 

"Keep in mind, my employment as a consultant came after we had put that piece in the Houston Chronicle," said Hirs, careful to qualify the extent of his impact on the DOJ's analysis of Enron's financial improprieties. "I was not there to help formulate any of the strategy… but we took the financial statements, looked at everything, laid it all out."

As Hirs and the rest of the team dug into the documents, "it was obvious they were hiding something, either due to incompetency or malintent," he said.

Though Enron's fraud was multifaceted and no single dubious business practice or financial impropriety accounts for the entirety of the scam, Hirs and the task force identified two areas of criminally fraudulent accounting practices. First was the company's switch from traditional accounting to so-called "mark-to-market" accounting. 

Traditional accounting follows the principle of matching, which involves comparing a business's revenues and costs over the specific period of time when the revenues were earned and costs were incurred. For example, if a company like Enron locked in a 10-year contract with a natural gas producer for $9 per MCF (a unit used in the industry to represent 1,000 cubic feet) on January 1, then the price per MCF fell to $5 per MCF over the next four months, that company would be required to report corresponding reductions in revenue as the price of the commodity dropped. 

But in 1992, just seven years after he started the company, Enron founder and chairman Kenneth Lay switched to a process called mark-to-market accounting. Mark-to-market accounting, as Enron practiced it, allowed the company to list the revenues they projected they would earn from a contract in the future on their reported revenue documents in the present. The too-good-to-be-true practice was even parodied by CEO Jeffrey Skilling in an internal company video, during which he introduced its evolution into "hypothetical future-value accounting" that could potentially "add a kazillion dollars to the bottom line."

Enron Chief Executive Jeff Skilling poses together on the trading floor in March 1999 in Houston, TX.

Enron Chief Executive Jeff Skilling poses together on the trading floor in March 1999 in Houston, TX.

Pam Francis/Getty Images

After implementing mark-to-market accounting, Enron chose to announce their revenues according to the original MCF price as soon as they secured a contract, in order to artificially inflate their reported profits and drive up their stock price. This practice "put significant pressure on their reported commodity revenues over time, as commodity prices varied either up or down," Hirs explained. The explosive profits mark-to-market accounting allowed Enron to report to investors, in turn, created demand from investors for growth on a commensurate level. 

The second among Enron's key frauds—and the deception at the core of the company's scheme, as Hirs explains it—was how they leveraged their ever-increasing control of the natural gas and electricity trading markets to reduce the spread between the prices producers asked for and the bids traders would offer. "Back in the early 80s, the buyer and the seller of natural gas might have a spread of as much as twenty-five cents per 1000 cubic feet," Hirs said. "But by the time Enron was done transforming the market, the bid and ask difference on contracts for natural gas came out to maybe a penny or two—if, if, if you were lucky." 

The only way to book ever-increasing profits under these market conditions was to report ever-increasing trade volumes, which eventually couldn't be sustained. As Enron reached the ceiling of feasible trade volume, they came up with a simple scheme to keep their reported trade numbers up: They started "trading" assets with themselves and reporting those falsified transactions to investors alongside genuine trades.  

The fake trades worked so well that Lay, alongside Skilling, made plans in 1998 to apply their model to the data and internet services markets, which were still riding the high of the dot-com bubble. However, as the company tried to make inroads into new markets at the turn of the millennium, investors started getting suspicious.  

The beginning of the end 

It would still be a few years before DOJ consultants called Ed Hirs to help exhume Enron's financial corpse, before suspicions morphed into investigations and indictments, even as Enron's numbers began to raise eyebrows at the close of the 1990s.

The company's move into broadband and other internet services initially seemed to pay off: By the end of  2000, the company's total market valuation exceeded $60 billion—about 70 times more than their actual cumulative earnings at the time.  

Other 90s-era tech-boom companies were also still riding that previously mentioned irrational exuberance of the dot-com bubble's bullish market: WorldCom, then the second-largest telecommunications company in the U.S., hit a peak market cap north of $180 billion in 1999. 

But by 2001, years of fraud began to catch up with Enron. In Aug. 2001, its broadband division reported a $137 million loss—the first of several catastrophic hemorrhages to come during the next several months: In October that same year, Enron reported another $618 million in losses; by then, its stock had dropped more than $60 in value since its peak price in 2000. When the company filed for Chapter 11 bankruptcy in December 2001, its stock was listed at just $0.26 per share.  

In early January 2002, the Department of Justice launched a criminal investigation, eventually pulling in Ed Hirs and the rest of the task force. 

WorldCom went bust soon after Enron's descent began in 2001 and maintains the unseemly title of the biggest accounting scandal in U.S. history over Enron. But it was news of Enron's fraud that may have first wrinkled WorldCom investors' noses to the company's fraud; it was Enron's collapse that ushered in the true end of the roaring 90s. 

Where they are now

When the case came to trial in 2006, Hirs remembers sitting in the back of the courtroom, watching the government lay out a complex case detailing the intricacies of Skilling and Lay's yearslong deceptions. "The jury was clearly confused by what the government's case was and how it was represented. But Skilling and Lay both went on the stand, and Lay, in particular, started arguing with his own defense counsel," Hirs said. "And the jury just hardened. Their demeanor just absolutely flipped. They still couldn't tell what had happened with Enron, but they knew these guys were assholes."  

Enron CEO Ken Lay poses for portraits at a pipeline facility in Feburary 1993 in Houston, TX.

Enron CEO Ken Lay poses for portraits at a pipeline facility in Feburary 1993 in Houston, TX.

Pam Francis/Getty Images
Former Enron CEO Kenneth Lay is led into Federal Court by a law enforcment officer in Houston Thursday July 8, 2004.

Former Enron CEO Kenneth Lay is led into Federal Court by a law enforcment officer in Houston Thursday July 8, 2004.

MICHAEL STRAVATO/AP
Enron CEO Ken Lay at a pipeline facility in Feburary 1993 in Houston, TX. / Lay is led into Federal Court by a law enforcement officer in Houston July 8, 2004.

The jury verdicts for the disgraced executives, who were talking down to their own defense attorneys on the stand at the biggest fraud trial in American history? Skilling was convicted on 19 of 28 fraud charges and sentenced to 24 years in prison. Lay was convicted of all six fraud charges against him and would have faced up to 45 years in prison if he had not died of a heart attack before sentencing in 2006.  

Skilling served only 13 of his 24-year sentence. When he was released from prison in 2019, he immediately got busy seeking investors for a new Houston-based energy venture that he designed while in prison. 

Former Enron CEO Jeffrey Skilling testifying before the Senate Committee on Commerce, Science and Transportation 26 February 2002 on Capitol Hill in Washington, DC.

Former Enron CEO Jeffrey Skilling testifying before the Senate Committee on Commerce, Science and Transportation 26 February 2002 on Capitol Hill in Washington, DC.

STEPHEN JAFFE/AFP via Getty Images

The idea? According to the New York Post, which reported on the quiet launch of the business in June last year, it involves creating a digital marketplace to sell oil- and gas-based securities to investors using an analytical software program designed by Skilling to optimize potential returns.  

Now a lecturer at the University of Houston, Hirs says he is not convinced things have changed all that much since he first turned down Enron more than 30 years ago. "Today, we've supposedly increased transparency because of the different legislative initiatives over time," he said. "But it's really difficult to legislate against this kind of behavior. There's always a new fraud hiding someplace in plain sight."

Chron Special
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