THE collapse of Enron was so complex that even the energy giant's top bosses didn't understand what was going on.
The company dealt in industries as diverse as energy, water, advertising and newsprint. It conducted secret business with its own top executives, and its trading strategies were mud to anybody who didn't simultaneously understand stochastic calculus and the market for the relevant product.
Last August, a reporter asked about Enron's ties to partnerships controlled by Chief Financial Officer Andrew S. Fastow, and Enron Chairman Kenneth L. Lay replied, "You're getting way over my head."
Post-game discussion has focused on the quality of Enron's accounting and disclosure. Chagrined Wall Street analysts have been leafing through old Enron documents, certain that some footnote in a 1999 filing could have foreshadowed the blowup.
But this is tree-and-forest stuff.
If analysts had climbed out of the financial underbrush and looked down from 5,000 feet, the warning beacons might have been easier to see. Houston-based Enron violated more than a few fundamental rules of business, and you didn't have to be an accountant to figure that out.
Businesses that ignore one or two of these rules often succeed as the exception that proves the principle. Companies that flout all of them at once - and with Texas-scale gusto - are asking for a shotgun date with a bankruptcy judge.
Here's what Enron forgot:
Stick to your knitting. Good companies do what they know and avoid what they don't know. Enron knew about delivering natural gas and electricity to American customers, and it learned a sufficient amount about brokering those items for other producers.
But Enron's water trading, insurance, forest products and telecommunications ventures had nothing to do with its core skills. Neither did its Puerto Rico power plant or its Brazilian gas pipeline.
Fast growth is risky. Enron's revenue swelled from $20 billion in 1997 to $100 billion in 2000, and employment went up by half. But it's tricky to pull that off profitably even in a focused business that you understand. It's even harder if your list of products looks like the menu at Hunan House. (See Rule 1.)
Trading is dicey. Enron changed itself from a drab utility into something resembling Caesars Palace, and by last summer more than 95 percent of the company's revenue came from its trading and investment unit.
The division sought profits not the old-fashioned way - by making and selling a product - but by placing short-term Internet bets on commodities. Only General Mills and dentists should play commodities.
Trading with leverage is dicier. Enron borrowed billions to expand operations and magnify its wagers, allowing little margin for error. Wall Street firms that trade for their own profit try to maintain ample capital cushions in case of hard times. Enron didn't, and that's why the end came so quickly.
Just because a company has an Internet strategy doesn't mean it can mint money. 'Nuf said.
Executives shouldn't do business with their firms except as employees. Fastow and other top Enron bosses held stakes in partnerships that were wheeling and dealing with Enron, and Fastow alone made more than $30 million from these vehicles.
The Fastow partnerships, which were public knowledge as early as May, were a classic conflict of interest that should have set shareholders on edge.
Integrity and reputation matter. Enron's arrogance and secretiveness were as big as its ambitions, and when the chips were down those qualities did it in. Over the years, Enron executives had insulted Wall Street analysts, browbeaten customers and hidden financial details from the public.
More than anything in the final days, Enron needed confidence. Confidence from customers that the company would honor their trades. Confidence from shareholders that the bad-news surprises were history. Confidence from lenders and would-be merger partners that Enron's financial statements weren't lies.
On Oct. 22, Lay discussed the Fastow deals and said Enron would "look forward to the opportunity to put any concern about these transactions to rest." Enron's stock fell 20 percent that day and 40 percent over the next week.
How's that for confidence?
Yes, there were hidden problems. The immediate cause of Enron's smash-up was the Nov. 8 bombshell confession that the company had "overstated" previous earnings by more than half a billion dollars.
That was the fire in Enron's basement. But there was plenty of smoke beforehand.
