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.

• Author: Vilbig, Peter
• Position: 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...