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Winners And Losers Of 2001 ; It was another tough year for investors. At le=
ast the turmoil in the markets flushed away some really bad ideas. Fortune Magazine=20 The Top 10 Business Stories ; Talk about a bad-news pileup. In one short ye= ar, the longest economic expansion in U.S. history screeched to a halt, the= seventh-largest company in the nation self-destructed, and our world chang= ed irrevocably when a few zealots stepped onto some airplanes. What follows= are FORTUNE's picks for the most important business stories of an unforget= tably tumultuous 2001. Fortune Magazine=20 All I Want For Christmas Fortune Magazine=20 The Geeks Who Rule The World ; There's a reason Moody's and S&P have been d= oing so well. Their customers can't say no. Fortune Magazine=20 Why Enron Went Bust ; Start with arrogance. Add greed, deceit, and financia= l chicanery. What do you get? A company that wasn't what it was cracked up = to be. Fortune Magazine=20 Enron Fortune Magazine=20 Will The Economy Get Well Soon? ; The Fed has been slashing rates with a ve= ngeance, but a credit squeeze could really hurt the recovery. Fortune Magazine=20 Enron Fallout: Wide, But Not Deep ; Enron's collapse has hurt big American = banks. But not as much as a default by Argentina would. Fortune Magazine=20 Editor's Desk Fortune Magazine=20 Best & Worst 2001 ; Honest CEOs. Harebrained ad campaigns. Appalling outfit= s. They've all earned a place on our year-end list. Fortune Magazine=20 Power Player; Chuck Watson built Dynegy at blinding speed but was overshado= wed by Enron. Now he's got the spotlight to himself. Forbes Magazine=20 THE FALL OF ENRON AFTERSHOCKS IN EUROPE Enron's collapse will hit many markets BusinessWeek=20 THE FALL OF ENRON How ex-CEO Jeff Skilling's strategy grew so complex that = even his boss couldn't get a handle on it BusinessWeek=20 ENRON: LET US COUNT THE CULPRITS BusinessWeek=20 Digging Into the Deal That Broke Enron; Behind the web of mysterious partne= rships that led to the world's biggest corporate collapse. Follow the Rapto= rs Newsweek=20 FORTUNE Advisor/Investing Winners And Losers Of 2001 ; It was another tough year for investors. At le= ast the turmoil in the markets flushed away some really bad ideas. Lee Clifford 12/24/2001 Fortune Magazine=20 Time Inc.=20 155 (Copyright 2001)=20 For an instant take on how 2001 treated investors, all you had to do was fl= ick on your TV. Gone were the frenetic performance-touting spots of years p= ast. In their place: dour Schwab ads in which founder Charles admonishes a = mock town meeting of gray-clad investors, "You have to take the ups with th= e downs."=20 Signs of new stock market sobriety were everywhere this year: CNBC viewersh= ip tumbled, ten rate cuts by Greenspan & Co. still couldn't stave off a rec= ession, and highly paid analysts were not only stripped of celebrity status= but also sued by investors (Mary Meeker) or humbled into accepting buyout = packages (Henry Blodget). By early December the Nasdaq was down 17% for the= year, the Dow had fallen 6%, and the S&P was off by 12%. Then again, "there are so many scenarios you could have written that would = have been so much worse," points out Roy Weitz, editor of FundAlarm.com. In= fact, since the unprecedented four-day market shutdown and subsequent slid= e after the Sept. 11 attacks, the Dow has rebounded 13%. Given the year we'= ve had--what with events like the Enron implosion, the Bass brothers' massi= ve margin call, and the uproar over a giant diaphragm in Denver (read on fo= r an explanation)- -it's entirely possible that the last few weeks of 2001 = will bring even more surprises. Let's hope at least some of them are happy = ones.=20 S&P 500 standout: J.C. Penney led the pack for most of 2001 but late in the= year was eclipsed by Nvidia, which makes graphics chips for Microsoft's Xb= ox, among other things. The company got an extra boost when it inherited En= ron's spot on the S&P 500 and index fund managers raced to buy the stock. G= ain for the year: 225%.=20 S&P 500 laggard: Lending can be a risky business, especially if your niche = is hawking credit cards to people with spotty credit histories just as the = economy heads into a tailspin. Such was the fate of Providian Financial, wh= ich lost a full 95% of its value amid a spectacular run of credit card defa= ults.=20 Best way to cash out: Selling your stake in a company you built is never ea= sy, but if you're Tom Bailey, the company is Janus, and you have a "look ba= ck" provision in your contract allowing you to unload your shares at the 20= 00 price, which reaps $603 million--well, it tugs at the heartstrings a lit= tle less.=20 Worst way to cash out: Margin calls are always ugly, but rarely quite as bi= g--or as publicized--as the late-September fiasco in which longtime Disney = shareholders Sid and Lee Bass (and their dad, Perry) were forced to sell 13= 5 million shares for around $2 billion. It gets worse: Their shares fetched= only $15 each in a private deal; Disney stock now trades for $22.=20 Best fund: In a year marked by--at best--middling performances, the small-c= ap Schroder Ultra gained a stellar 62% by keeping lots of cash on hand (aro= und 40%), using put options, and shorting stocks (like a hedge fund). The o= nly drawback? The fund is closed to new investors.=20 Best reason to manage your own money: Fund manager James McCall of the Merr= ill Lynch Focus Twenty. Merrill waged a bitter legal battle to lure the the= n-hot momentum manager from Pilgrim Baxter two years ago. It's no doubt reg= retting that decision now: McCall got his walking papers in November after = the Focus fund, which held tech, telecom, and Enron, lost 70%.=20 Worst reason to manage your own money: You may be a step ahead of McCall, b= ut hanging on to your day job is probably a good idea, judging from the per= formance of so-called market-participation funds. At the IPS iFund, where s= hareholders nominate stock picks on a Website, collective wisdom precipitat= ed a 37% decline for the year. The StockJungle.com Community Intelligence F= und, for its part, was put out of its misery in August after losing about 3= 6%.=20 Most awkward PR flub: When Denver fund company Invesco agreed to pay $120 m= illion over 20 years to slap its name on the Broncos stadium, it was no dou= bt angling for good press. So when a Denver Post columnist wrote that Inves= co's own employees had dubbed it the "Diaphragm," it had to hurt. Invesco t= hreatened to sue but let up when it discovered that some staffers really di= d think the stadium bore a striking likeness to a gigantic birth-control de= vice.=20 Hottest IPO: Let's just say 2001 wasn't exactly an ideal year to take your = company public. September, in fact, had the distinction of being the first = month since 1975 in which there were no IPOs whatsoever. Yet there were a f= ew success stories, including the best performer (from the date the company= went public to present): a Mountain View, Calif., company called Verisity,= which makes software to detect flaws in electronic systems. Since its Marc= h IPO, the stock has doubled.=20 Should've stayed private: Bringing up the rear in the IPO brigade was Seatt= le sandwich maker Briazz: Rattled working people shunned its pricey gourmet= sandwiches, and investors lost their appetite as well- -the stock is down = 88% since the IPO in May.=20 Nastiest boardroom battle: The acrimonious drama had more twists, turns, an= d 1980s-style backbiting than an episode of Dallas, but in the end Computer= Associates founder and chairman Charles Wang triumphed over Texas investor= Sam Wyly (who proposed a rival slate of directors, charging that Computer = Associates had floundered under Wang's stewardship).=20 Biggest boardroom upset: Lone shareholder Guy Adams got so fed up with Lone= Star Steakhouse management that he ran against CEO Jamie Coulter for his b= oard seat. Unbelievably, he won--by a reported 2.3 million votes.=20 Most embarrassing Enron call: There was lots of competition here: bad calls= , late calls, and gutless calls by analysts (not to mention the conference = call in which CEO Jeffrey Skilling labeled one money manager an a--hole), b= ut special distinction goes to Ron Barone of UBS Warburg, who lowered his r= ating on the stock from a strong buy to a hold--on Nov. 28, just days befor= e Enron declared bankruptcy. Uh, thanks.=20 Best makeover: The urge to merge raged this year as fund companies attempte= d to save face by folding hideous specialty funds into slightly less hideou= s tech funds. Strong Internet was merged into the Strong Technology 100 fun= d, and Merrill Lynch Internet Strategies was bled into the Merrill Lynch Gl= obal Technology fund. But proving yet again that it really is what's on the= inside that counts, the Strong fund has so far lost 39%, and the Merrill f= und is down 42%.=20 Greatest career gamble: With a middling investing record on his resume, Jam= es Oberweis, dairy magnate and founder of the eponymous asset-management fi= rm, announced he would vie for a U.S. Senate seat in Illinois. Perhaps in l= ight of the markets' turbulence, anything looks easier than facing the Nasd= aq.=20 Best prediction for 2002: Finally, we wondered what investors could look fo= rward to next year. Fund watchdog Weitz predicts that mutual fund marketing= gurus are already dreaming up a spate of "new reality" funds filled with d= efense and biotech stocks. Not the most tasteful proposition, perhaps, but = given this year's exploits, probably not far off the mark. Let's just hope = it doesn't land them in the loser's circle next year.=20 Feedback? investing@fortunemail.com COLOR PHOTO: JOHN MUGGENBORG COLOR PHOTO: ANTHONY SAVIGNANO No Disney magic= for the Basses, who got a margin call and had to sell COLOR PHOTO: PHOTOFE= ST [See caption above] COLOR PHOTO: WALTER P. CALLAHAN [See caption above] = COLOR PHOTO: MARK ASNIN--CORBIS SABA Tom Bailey COLOR PHOTO: ED ANDRIESKI--= AP Does this look like a diaphragm? Invesco employees think so. COLOR PHOTO= COLOR PHOTO: REUTERS--TIMEPIX Charles Wang COLOR PHOTO: YVONNE BRANDWIJK G= uy Adams COLOR PHOTO: SETH PERLMAN--AP James Oberweis=20 ...........................................................................= ..........................................................=20 Features/The Year In Business The Top 10 Business Stories ; Talk about a bad-news pileup. In one short ye= ar, the longest economic expansion in U.S. history screeched to a halt, the= seventh-largest company in the nation self-destructed, and our world chang= ed irrevocably when a few zealots stepped onto some airplanes. What follows= are FORTUNE's picks for the most important business stories of an unforget= tably tumultuous 2001. Alynda Wheat 12/24/2001 Fortune Magazine=20 Time Inc.=20 113 (Copyright 2001)=20 1. 9.11 That the World Trade Center attacks could leave New York City $100 = billion in the red seems oddly beside the point. They destroyed thousands o= f lives and livelihoods, shattered our nation's sense of security, and plun= ged us into war.=20 2. The Recession With the market melting down, consumer confidence evaporat= ing, and joblessness rising, not even Alan Greenspan's ten rate cuts--and a= nother expected this month--could stave off recession. At least you lived t= o see the biggest boom ever. Now wave bye-bye. 3. The Enron Implosion Thanks to the energy trader's dubious bookkeeping, K= en Lay went from running a $101 billion company to presiding over the bigge= st bankruptcy in history.=20 4. California's Energy Crisis As energy became scarce, the state instituted= rolling blackouts and spent $11 billion to bail out PG&E and SoCal Edison.= While conservation stabilized soaring prices, the crisis--plus the Enron c= ollapse--left the deregulation movement in tatters.=20 5. Wall Street Analysts Henry Blodget and Mary Meeker were the poster child= ren for Wall Street hype. But this was the year investors, burned by analys= ts' stock picks, stopped believing and started suing and booing.=20 6. Team Bush No one expected much from the President and his advisors on fo= reign policy. The focus was supposed to be domestic policy, like the tax cu= t. Sept. 11 turned that around. Bush has emerged as a strong war leader, bu= t his legacy could still depend upon reviving the economy.=20 7. Telecom Meltdown If you think this Lucent office looks empty, ask one of= the company's employees about his 401(k). The entire industry suffered stu= pefying losses thanks to bad investments and wishful thinking.=20 8. China Being selected to host the 2008 Summer Olympics wasn't the country= 's only big win. After years of tense negotiation, China gained entry to th= e World Trade Organization.=20 9. Microsoft Why is Bill Gates smiling? Maybe because his Teflon tech firm = slipped a Justice Department noose, shook an avalanche of bad press, launch= ed the XP operating system, and unveiled the coveted Xbox game console.=20 10.Ford Chairman Bill Ford ousted bare-knuckled CEO Jacques Nasser after a = year of nightmarish PR, pricey foreign investments that left the company sc= rounging for cash, and lawsuits that ended the nearly century-old relations= hip between Ford and Firestone. The scion has a tough road ahead. COLOR PHOTO: MIKE KEPKA--SFC/CORBIS SABA California's energy crisis--one of= the top ten business stories of 2001--inspired Rick and Karen Dorantes to = cut their energy use in half by running appliances off car batteries. [T of= C] COLOR PHOTO: PHOTOGRAPH BY JAMES NACHTWEY--VII ELEVEN COLOR PHOTOS: MAR= TIN SIMON--CORBIS SABA COLOR PHOTO: GREG SMITH--CORBIS SABA B/W PHOTO: MICH= AEL LLEWELLYN COLOR PHOTO: ANNE KATRINE SENSTAD COLOR PHOTO: MICHELE ASSELI= N COLOR PHOTO: J. SCOTT APPLEWHITE--AP COLOR PHOTO: SERGIO FERNANDEZ COLOR = PHOTO: PHOTOGRAPH BY CHIEN-MIN CHUNG--REUTERS-TIMEPIX COLOR PHOTO: JEFF CHR= ISTENSEN--REUTERS-TIMEPIX COLOR PHOTO: JOHN HILLERY--REUTERS-TIMEPIX=20 ...........................................................................= ..........................................................=20 First; While You Were Out All I Want For Christmas Stanley Bing 12/24/2001 Fortune Magazine=20 Time Inc.=20 55 (Copyright 2001)=20 Dear Santa,=20 I can't believe it's that time of year again. I hope this letter finds you = in the best of health. I think I speak for everybody when I tell you that w= e've been very, very good this time around, so this is going to be a rather= long list. Grab something wet, pull up a Barcalounger, and pay attention. At the outset, let me say I consider it a miracle that this letter reached = you at all. I figure you have security up the wazoo, what with all the wack= os sending stuff through the snail mail. That whole drill has to make your = job a lot tougher. Be patient, Santa, and don't cut corners. Don't get comp= lacent. There's more than one evildoer who would love to take the blush out= of the cheeks of a symbol of Western hedonism like you. But don't worry ab= out this letter, of course! If there's any white powder on the envelope, it= came from one of the freshly baked doughnuts I have waiting on the mantle = for your upcoming visit!=20 Anyhow, this year it's clear that many, many people are a lot more needy th= an I am, so in the spirit of the season I'm gonna ask for their presents fi= rst.=20 I should start, I guess, with the poor folks at Andersen, the accounting an= d consulting firm. Boy, Santa, do those guys need some new calculators! Ple= ase get a whole bunch for them. They approved the books for the fellows ove= r at Enron, whose earnings didn't turn out to really be what they said they= were at first. Then they had to restate them. Was their collective face re= d! I'm sure if the Andersen people had better equipment, they wouldn't have= screwed up like that with Enron, or with all the other corporations they s= eemingly permitted to wank around with their numbers in exchange for hefty = consulting fees.=20 While we're at it, I suppose we can't ignore the senior management that use= d to run Enron either. What a bunch of boneheads! But this is the holiday t= ime of year, Santa, the season of forgiveness and giving, so why not make t= heir executive homes your first stop? They need a lot, Santa. To start with= , they're gonna want, like, thousands of hours of legal time from expensive= firms, so give them that. And why not throw in a couple of files they can = bake into cakes for later on?=20 On your way out of town, forget about toys and games and stuff like that an= d just please leave a ton of money under the tree of every Enron employee, = particularly the fired ones, and of course the older ones who thought they = were going to have something to retire on. And as for the financial planner= s who allowed employees' 401(k)s to hold solely the company's stock, I supp= ose you should bring very special presents for them too...I can't think of = what, though...How about we let the Enron work force figure that one out?= =20 There are so many business executives to think about this year too. Most of= them you could make happy with fractional growth in Ebitda for the quarter= . That would be a huge surprise, and you know how much executives like plea= sant surprises!=20 Bill Gates? You don't need to bring anything for him, Santa. He has just ab= out everything, you know, and what he doesn't have, he can certainly take o= ver and repackage as part of his operating system. But I guess you should t= ry to make sure that there's an Xbox under every American child's tree this= year, and a couple of games too, particularly the one where those buff gir= ls in tiny Spandex outfits throw each other around. Just knowing he was mak= ing so many children happy would bring a seasonal smile to Bill's Microface= .=20 Oh. Make a very special trip to Carly Fiorina too. She's the woman who runs= Hewlett-Packard, you know. She worked so hard this year and had so much ag= gravation, Santa, so...could you please make Walter Hewlett go away? He's t= he son of the founder, and he's being a real party pooper! He thinks that t= he merger is bad for a lot of stupid reasons...like something about how it = will draw the company away from its core competencies in printing and focus= it on the low-margin computer-manufacturing side of the business, but when= you get right down to it, he's simply being a bummer, that's all. Please, = Santa. Bring Carly her merger. She's staked her whole reputation--and her b= onus next year--on the outcome, and, you know, any CEO who is willing to ri= sk compensation on something must want it really, really bad.=20 While you're at it, please bring John Chambers, the head of Cisco, a good s= tock price right away. The poor fellow has six million options riding on it= . Four million of them are underwater, but more recently the company gave h= im two million more at a strike price of $18.50, and they should be worth s= omething, don't you think? If you don't, Mr. Chambers will really feel that= $268,131 he gave up in salary to show he knows that corporations should pa= y for performance and nothing less.=20 Gee, this is getting kind of long, and I haven't even gotten to myself yet!= So, just briefly, bring Alan Greenspan something nice but healthy, Santa--= very, very healthy, no cigars or liquor. Vitamins! Yeah! And let's see...oh= , yes, bring the Internet some genuine advertising revenue, will you? It co= uld really use it. And don't forget to leave the folks over at the New York= Times business section some Prozac. Or Viagra, maybe. Anything to cheer th= em up.=20 For myself, now...well, I guess I have just about everything a man could wa= nt, so I'll just mention a few of the things I could do without. Bring me n= o cutbacks in my stocking, Santa, for me or my friends, and no smallpox, an= d no anthrax, and no particular reasons to travel anywhere by plane, at lea= st for a while. And most of all please do not bring a suitcase with a nucle= ar weapon in it for anybody I know, and even the people I don't. Other than= that, I could always use a new car. Anything will do, as long as the top g= oes down. And a phone even tinier than the one I have, to show I'm getting = more powerful. And hey, keep this global warming going on. It's great!=20 Now get busy, my man! You're gonna need plenty of time before takeoff this = year, you know, to interview all the reindeer twice after conducting extens= ive background checks on all of them, especially Rudolph, whose nose always= looked a little red to me, and to X-ray all those packages, no matter how = small they might be, while making sure nothing has been placed in the bagga= ge compartments underneath your sleigh by the grinches who want to steal a = whole lot more than Christmas. Fly safe, Santa! We need you more than ever = this year!=20 Oh--and while you're over Iraq, if you happen to spot a suspicious factory = or laboratory of any sort, don't forget to pop a nice little present down i= ts chimney, from--and for--all of us.=20 Feliz Navidad, baby!=20 By day, STANLEY BING is a real executive at a real FORTUNE 500 company he'd= rather not name. He can be reached at stanleybing@aol.com. COLOR ILLUSTRATION: MILAN TRENC=20 ...........................................................................= ..........................................................=20 Features/The Credit Watchers The Geeks Who Rule The World ; There's a reason Moody's and S&P have been d= oing so well. Their customers can't say no. Bethany McLean; Reporter Associate Doris Burke 12/24/2001 Fortune Magazine=20 Time Inc.=20 93 (Copyright 2001)=20 On Nov. 28, when Standard & Poor's and then Moody's downgraded Enron's debt= below the all-important status "investment grade," the company's bankruptc= y became a foregone conclusion. The downgrades confirmed that Enron would n= o longer be able to support its trading operations by accessing the capital= markets, and they triggered the repayment of billions of dollars of debt.= =20 But the one-two credit punches pointed not just to a TKO of Enron. They wer= e also a reminder of the immense and seemingly ever- increasing power of th= e agencies themselves. A much-coveted triple-A rating (the highest grade) i= s the grease in an otherwise squeaky engine. It makes every aspect of doing= business easier, from raising money to convincing customers that operation= s are solid. In contrast, an S&P or Moody's downgrade is a fearsome event t= hat can dramatically increase a company's cost of capital, perhaps even des= troy its ability to raise money. As one critic put it decades ago, they ret= ain an "almost biblical authority." That's because the rating agencies--private, for-profit companies that are = privy to insider information--have come to play a quasi- regulatory role in= the market. Many big investors, from pension funds to insur-ance companies= to money market funds, are prohibited from owning more than a set amount o= f lower-rated debt, for instance.=20 But while the Enron debacle is evidence of the agencies' power, it also bri= ngs some long-simmering criticism--think back to 1975, when the agencies fa= iled to downgrade New York City's debt until the city's fiscal crisis was o= bvious--to a frothy boil. Critics say that the credit czars, for all their = inside access, didn't identify this borrower's woes any earlier than the re= st of us did--and they didn't downgrade the debt even after the severity of= the problems was well known. Indeed, prior to the downgrades, Enron's debt= was trading at around 50 cents on the dollar, a sign that the market had a= lready dismissed the company's investment-grade status as farce. "The ratin= g agencies are always late," grouses one portfolio manager.=20 Of course, neither John Rutherfurd, the CEO of Moody's, nor Leo O'Neill, S&= P's president, see things that way. "We communicated our view [that Enron's= rating was dependent on its merger with Dynegy] clearly and frequently," s= ays O'Neill. Adds Rutherford: "We do not want to rush to judgment nor do we= delay in informing investors when we believe fundamentals have changed."= =20 How can the same entities be all-powerful and strangely after-the- fact at = the same time? That is one of the more puzzling conundrums in today's capit= al markets. The nearly regulatory function of the agencies and the weight t= heir opinions carry make their judgments critical--but also complicated. Th= e agencies can be not just observers but active participants in the course = of events. That's because a downgrade can become a self-fulfilling prophecy= : If the rating agencies act too rashly, they could be accused of causing a= bankruptcy. Yet if they deliberate too long, they'll simply be stating wha= t everyone already knows--especially since today, unlike in the '70s, there= is an army of outside fixed-income analysts that both challenge the rating= agencies' judgments and profit from anticipating their actions.=20 True, this debate rarely reaches Enron-esque proportions. And it's worth em= phasizing that corporate debt is just a small part of these agencies' purvi= ews. They analyze almost every fixed-income instrument out there, from the = debt of China to the complex bonds backed by cash flows from, say, the Miss= issippi tobacco settlement. Their power, in fact, is very much entwined wit= h that omnipresence. Moody's alone claims that it rates more than $30 trill= ion of the world's debt from over 100 countries, 4,200 corporations, and 68= ,000 public finance obligations.=20 What's more, the agencies appear, in the wide lens of history, to be fairly= accurate in their judgments: As both O'Neill and Rutherfurd note, it's rar= e that investment- grade credits go kaput. Both agencies have statistics sh= owing that less than 1% of bonds rated A- or better default over a five-yea= r period. In addition, around 85% of the credits in the domestic A class st= ill hold the rating at year- end, implying stability in higher-rated bonds.= =20 But by its sheer size the Enron implosion challenges that perception of sta= bility. And it draws attention to the agencies at a particularly interestin= g time--for Moody's especially. Until recently the actual businesses of Moo= dy's and S&P were hidden away inside much larger companies. S&P is still bu= ried within McGraw-Hill. But in October 2000, Dun & Bradstreet spun Moody's= out as a separate company. For the first time ever, outsiders can perform = a credit check on a rating agency.=20 Combing through Moody's financials makes one thing perfectly clear: Credit = rating is a fabulous business. Since its spinoff, Moody's stock has climbed= --yes, climbed--some 40%, giving Moody's the same market value as Bear Stea= rns. This year the rating agency is expected to generate about $770 million= in revenues (less than a tenth of Bear's revenues) and an astounding $382 = million in operating income. And Moody's does this with just 1,600 employee= s. Perhaps it's not surprising that Warren Buffett's Berkshire Hathaway is = the company's largest shareholder, owning just about 15% of the stock. Henr= y Berghoef of Harris Associates, another large Moody's holder, says that th= e biggest challenge facing CEO Rutherfurd is the proper management of the c= ompany's immense free cash flow. Rutherfurd himself, a scholarly, white-hai= red 62-year-old, has few complaints. "It's a big thrill," he says.=20 Indeed, what's not to like? For one thing, Moody's potential customers almo= st can't say no. As Merrill analyst Joanne Park wrote in a recent report, "= In many cases, a Moody's rating is practically a prerequisite for coming to= market with a new issue of fixed-income securities." Like an investment ba= nk, Moody's is a big beneficiary of the long-term growth in the capital mar= kets--without even having to risk its own capital. Kevin Gruneich, an analy= st at Bear Stearns, calculates that over the past 20 years Moody's revenue = and profits grew at compound annual rates of 16% and 15%, respectively--a g= rowth trend he terms "incredible." (Rutherfurd adds that in the past 20 yea= rs, profits have fallen only once, in 1994.) In recent years Moody's has st= abilized its revenue still further, basically creating an annuity stream by= instituting what it calls "relationship pricing." Instead of hiring Moody'= s on a transactional basis, some of its customers now pay an annual fee; in= return, Moody's rates every bond issue they do. "Relationship pricing" now= accounts for 36% of Moody's revenues.=20 Both Moody's and S&P have also done a remarkable job of keeping pace with i= nnovations in the capital markets. Witness the explosion of a new type of d= ebt known as "structured finance"--a bond, for instance, backed by the cash= flow from residential mortgages. Here the rating is everything: It measure= s the level of risk in an extremely complicated security and determines the= yield that must be paid to attract investors. "The rating agencies play an= integral role in distributing paper into the marketplace," says Kevin Rigb= y, head of Deutsche Bank's rating advisory business, which helps Deutsche's= clients argue their cases to the rating agencies. (In yet another indicati= on of the agencies' power, many of the major investment banks have entire d= epartments that do this.) Structured finance is now Moody's largest busines= s, accounting for one-third of its revenues, up from almost nothing in the = late 1980s.=20 As Moody's pushes aggressively into new markets, it has expanded its power = base as well. Rutherfurd is especially excited about Europe, which currentl= y accounts for about 20% of the company's sales. He notes happily that ther= e are about 1,500 unrated companies with revenues greater than one billion = euros. "Money coming out of banking and into the capital markets should pro= pel growth in ratings for the next decade," he says, quickly adding, "But w= e love banks too." Indeed. Recently the Basel Committee on Banking Supervis= ion proposed that ratings be used globally to determine banks' capital adeq= uacy. (The proposal seems to be on hold for now.)=20 This is certainly not a state of affairs that John Moody would have imagine= d when he began providing statistics on railroad bonds back in 1909. In the= beginning it was all very simple: Investors paid for Moody's research, whi= ch helped disseminate important information to the market. Some two decades= later the government was mandating that banks use ratings to determine the= values of their investment portfolios. Then, in the second half of the cen= tury, the SEC began to rely on ratings to determine what sort of securities= insurance companies, pension plans, broker-dealers, and money market funds= could own. Both Moody's and S&P resisted those developments for a number o= f reasons--but they didn't say no. "I don't think that ratings should be us= ed to determine investment policy," O'Neill maintains today; Moody's has wr= itten a number of letters protesting the use of ratings in regulatory polic= y.=20 Another substantial change occurred around 1970. Prior to that time Moody's= and S&P had always earned their keep from investor subscriptions. Given th= e growing volume of work, however, those economics no longer made sense. So= first Moody's and then S&P began to charge issuers instead. There's a cons= tant worry that this poses a conflict of interest. But unlike equity analys= ts, the credit analysts don't have to worry about buying business with favo= rable ratings. Companies simply don't have a lot of choice.=20 The most controversial development came in 1975 when the SEC, worried that = fly-by-night rating agencies could wreak havoc on the market, initiated a m= outhful of a designation, the "nationally recognized statistical rating org= anization," or NSRSO. To comply with various SEC regulations, a company's r= ating had to come from an NSRSO- -essentially, Moody's, S&P, or Fitch, a sm= aller competitor that is a subsidiary of French concern Fimalac. The design= ation has become the subject of intense debate. "The SEC has enveloped [the= agencies] in a very protective webbing that keeps anyone else from challen= ging them," says Lawrence White, an economics professor at NYU. "There they= are, a 2 1/2-firm industry, sitting pretty." But no one has a better idea.= Says Rick Roberts, a former SEC commissioner who is now an attorney at The= len Reid & Priest: "It's a very uncomfortable situation, but it's impractic= al to take out what is already there."=20 There have been other complaints about the clout the agencies have- -Moody'= s in particular. In the early 1990s allegations began to swirl that Moody's= bullied municipalities into hiring it by issuing unsolicited (and negative= ) ratings to those that declined the offer. One Colorado school district su= ed the rater after it made negative comments about a pending bond sale, cla= iming that investors used the pan to demand a higher interest rate, resulti= ng in a net loss of $769,000. The court ruled that Moody's ratings were opi= nions, not facts--and therefore the company was protected under the First A= mendment.=20 But that hardly settles the broader issue: In the capital markets the ratin= gs can function as facts even if they aren't. That's because of the numerou= s regulations that are built around them. The Continental Divide is between= investment-grade securities and non- investment-grade securities, because = many investors, like pension funds and insurance companies, are permitted t= o own only a certain quantity of lower-quality bonds. And many money market= funds are allowed to have just 5% of their assets in commercial paper that= doesn't carry a top rating. So when Moody's and S&P downgraded Ford Motor'= s debt in October, Gary Zeltzer, head of investment-grade fixed income at J= .W. Seligman, had no choice but to sell. (While Ford's debt sold off on the= downgrade, it now trades at a better price than it did before.)=20 And that brings us back to the Enron question: How much should credit ratin= gs anticipate the verdict of the stock market? O'Neill insists that his fir= m cannot afford to rush to judgment; it doesn't bother him at all, he says,= if a bond trades at a different level than its rating implies: "The market= tends to be much more near-term focused. We need to be diligent and make s= ure we do our work." Richard Waugh, an analyst at the Principal Financial G= roup, agrees. "What [the agencies] do moves markets and affects the flow of= capital. So they have to make very sure that they're right, and they lean = over backward to accomplish that."=20 But Moody's Rutherfurd has a different point of view. "If a credit is deter= iorating, we want to be the first to spot it," he says. He jumps up to an e= asel, looking very professorial, to talk about the "Merton model"--basicall= y, a way of incorporating the judgment of the equity market into ratings. I= n his view, that's important, because the equity market is forward-looking,= whereas accounting data are reflective of the past. "We think we're way ah= ead of S&P in doing this," he boasts. Nor does Rutherfurd seem to bristle a= t the recent criticism. "I hate the word 'optimal,' " he says. "But we do t= he best we can, and we think it's pretty good."=20 That "pretty good" is likely to be as good as it gets--barring a few more E= nron-caliber events, the credit-rating system isn't likely to change. As Fi= rst Union analyst Asa Graves says of Moody's, "They would have to really sh= oot themselves in the foot to lose serious market position."=20 REPORTER ASSOCIATE Doris Burke=20 FEEDBACK: bmclean@fortunemail.com COLOR PHOTO: PHOTOGRAPH BY MATTHEW SALACUSE Creditworthy John Rutherfurd, M= oody's CEO, in his New York office COLOR CHART: FORTUNE CHART Moody's Big M= ove Stock price index Nov. 30, 2000 =3D 100 Moody's S&P 500 B/W PHOTO John = Moody, the founding father COLOR PHOTO: MICHELE ASSELIN Leo O'Neill is cont= ent with S&P's role.=20 ...........................................................................= ..........................................................=20 Features/Cover Stories Why Enron Went Bust ; Start with arrogance. Add greed, deceit, and financia= l chicanery. What do you get? A company that wasn't what it was cracked up = to be. Bethany McLean; Additional Reporting by Nicholas Varchaver, John Helyar, ; = Janice Revell, and Jessica Sung 12/24/2001 Fortune Magazine=20 Time Inc.=20 58 (Copyright 2001)=20 "Our business is not a black box. It's very simple to model. People who rai= se questions are people who have not gone through it in detail. We have exp= licit answers, but people want to throw rocks at us."=20 So said Enron's then-CEO, Jeff Skilling, in an interview I had with him las= t February. At the time--less than ten months ago, let's recall--Enron's ma= rket capitalization was around $60 billion, just a shade below its all-time= high, and its status as a Wall Street darling had not yet begun to crumble= . I was working on a story that would ultimately raise questions about Enro= n's valuation, and I'd called with what I considered fairly standard querie= s in an effort to understand its nearly incomprehensible financial statemen= ts. The response from Enron was anything but standard. Skilling quickly bec= ame frustrated, said that the line of inquiry was "unethical," and hung up = the phone. A short time later Enron spokesperson Mark Palmer called and off= ered to come to FORTUNE's New York City office with then-CFO Andy Fastow an= d investor-relations head Mark Koenig. "We want to make sure we've answered= your questions completely and accurately," he said. Now, in the wake of Enron's stunning collapse, it looks as if the company's= critics didn't throw enough rocks. The world is clamoring for those "expli= cit answers," but Skilling, long gone from Enron-- and avoiding the press o= n the advice of his lawyers--is in no position to provide them. As for "com= pletely and accurately," many would argue that the men running Enron never = understood either concept. "One way to hide a log is to put it in the woods= ," says Michigan Democrat John Dingell, who is calling for a congressional = investigation. "What we're looking at here is an example of superbly comple= x financial reports. They didn't have to lie. All they had to do was to obf= uscate it with sheer complexity--although they probably lied too."=20 Until recently Enron would kick and scream at the notion that its business = or financial statements were complicated; its attitude, expressed with bare= ly concealed disdain, was that anyone who couldn't understand its business = just didn't "get it." Many Wall Street analysts who followed the company we= re content to go along. Bulls, including David Fleischer of Goldman Sachs, = admitted that they had to take the company's word on its numbers--but it wa= sn't a problem, you see, because Enron delivered what the Street most cared= about: smoothly growing earnings. Of course, now that it's clear that thos= e earnings weren't what they appeared, the new cliche is that Enron's busin= ess was incredibly complicated--perhaps even too complicated for founder Ke= n Lay to understand (something Lay has implied since retaking the CEO title= from Skilling last summer). Which leads to a basic question: Why were so m= any people willing to believe in something that so few actually understood?= =20 Of course, since the Enron collapse, there are other basic questions as wel= l--questions for which there are still no adequate answers. Even today, wit= h creditors wrangling over Enron's skeletal remains while the company tries= desperately to find a backer willing to keep its trading operations in bus= iness, outsiders still don't know what went wrong. Neither do Enron's emplo= yees, many of whom expressed complete shock as their world cratered. Was En= ron's ultimate collapse caused by a crisis of confidence in an otherwise so= lid company? Or were the sleazy financial dealings that precipitated that c= risis--including mysterious off-balance-sheet partnerships run by Enron exe= cutives--the company's method of covering up even deeper issues in an effor= t to keep the stock price rising? And then there's the question that's been= swirling around the business community and in Enron's hometown of Houston:= Given the extent to which financial chicanery appears to have take place, = is someone going to jail?=20 A CULTURE OF ARROGANCE=20 If you believe the old saying that "those whom the gods would destroy they = first make proud," perhaps this saga isn't so surprising. "Arrogant" is the= word everyone uses to describe Enron. It was an attitude epitomized by the= banner in Enron's lobby: THE WORLD'S LEADING COMPANY. There was the compan= y's powerful belief that older, stodgier competitors had no chance against = the sleek, modern Enron juggernaut. "These big companies will topple over f= rom their own weight," Skilling said last year, referring to old-economy be= hemoths like Exxon Mobil. A few years ago at a conference of utility execut= ives, "Skilling told all the folks he was going to eat their lunch," recall= s Southern Co. executive Dwight Evans. ("People find that amusing today," a= dds Evans.) Or how about Skilling's insistence last winter that the company= 's stock--then about $80 a share--should sell for $126 a share? Jim Alexand= er, the former CFO of Enron Global Power & Pipelines, which was spun off in= 1994, once worked at Drexel Burnham Lambert and sees similarities. "The co= mmon theme is hubris, an overweening pride, which led people to believe the= y can handle increasingly exotic risk without danger."=20 To be sure, for a long time it seemed as though Enron had much to be arroga= nt about. The company, which Ken Lay helped create in 1985 from the merger = of two gas pipelines, really was a pioneer in trading natural gas and elect= ricity. It really did build new markets for the trading of, say, weather fu= tures. For six years running, it was voted Most Innovative among FORTUNE's = Most Admired Companies. Led by Skilling, who had joined the company in 1990= from consulting firm McKinsey (he succeeded Lay as CEO in February 2001), = Enron operated under the belief that it could commoditize and monetize anyt= hing, from electrons to advertising space. By the end of the decade, Enron,= which had once made its money from hard assets like pipelines, generated m= ore than 80% of its earnings from a vaguer business known as "wholesale ene= rgy operations and services." From 1998 to 2000, Enron's revenues shot from= $31 billion to more than $100 billion, making it the seventh-largest compa= ny on the FORTUNE 500. And in early 2000, just as broadband was becoming a = buzzword worth billions in market value, Enron announced plans to trade tha= t too.=20 But that culture had a negative side beyond the inbred arrogance. Greed was= evident, even in the early days. "More than anywhere else, they talked abo= ut how much money we would make," says someone who worked for Skilling. Com= pensation plans often seemed oriented toward enriching executives rather th= an generating profits for shareholders. For instance, in Enron's energy ser= vices division, which managed the energy needs of large companies like Eli = Lilly, executives were compensated based on a market valuation formula that= relied on internal estimates. As a result, says one former executive, ther= e was pressure to, in effect, inflate the value of the contracts--even thou= gh it had no impact on the actual cash that was generated.=20 Because Enron believed it was leading a revolution, it encouraged flouting = the rules. There was constant gossip that this rule breaking extended to ex= ecutives' personal lives--rumors of sexual high jinks in the executive rank= s ran rampant. Enron also developed a reputation for ruthlessness, both ext= ernal and internal. Skilling is usually credited with creating a system of = forced rankings for employees, in which those rated in the bottom 20% would= leave the company. Thus, employees attempted to crush not just outsiders b= ut each other. "Enron was built to maximize value by maximizing the individ= ual parts," says an executive at a competing energy firm. Enron traders, he= adds, were afraid to go to the bathroom because the guy sitting next to th= em might use information off their screen to trade against them. And becaus= e delivering bad news had career-wrecking potential, problems got papered o= ver--especially, says one former employee, in the trading operation. "Peopl= e perpetuated this myth that there were never any mistakes. It was astoundi= ng to me."=20 TRADING SECRETS=20 "We're not a trading company," said Fastow during that February visit. "We = are not in the business of making money by speculating." He also pointed ou= t that over the past five years, Enron had reported 20 straight quarters of= increasing income. "There's not a trading company in the world that has th= at kind of consistency," he said. "That's the check at the end of the day."= =20 In fact, it's next to impossible to find someone outside Enron who agrees w= ith Fastow's contention. "They were not an energy company that used trading= as a part of their strategy, but a company that traded for trading's sake,= " says Austin Ramzy, research director of Principal Capital Income Investor= s. "Enron is dominated by pure trading," says one competitor. Indeed, Enron= had a reputation for taking more risk than other companies, especially in = longer-term contracts, in which there is far less liquidity. "Enron swung f= or the fences," says another trader. And it's no secret that among non- inv= estment banks, Enron was an active and extremely aggressive player in compl= ex financial instruments such as credit derivatives. Because Enron didn't h= ave as strong a balance sheet as the investment banks that dominate that wo= rld, it had to offer better prices to get business. "Funky" is a word that = is used to describe its trades.=20 But there's an obvious explanation for why Enron didn't want to disclose th= e extent to which it was a trading company. For Enron, it was all about the= price of the stock, and trading companies, with their inherently volatile = earnings, simply aren't rewarded with rich valuations. Look at Goldman Sach= s: One of the best trading outfits in the world, its stock rarely sells for= more than 20 times earnings, vs. the 70 or so multiple that Enron shares c= ommanded at their peak. You'll never hear Goldman's management predicting t= he precise amount it will earn next year--yet Enron's management predicted = earnings practically to the penny. The odd mismatch between what Enron's ma= nagement said and what others say isn't just an academic debate. The questi= on goes to the heart of Enron's valuation, which was based on its ability t= o generate predictable earnings.=20 Why didn't that disconnect seem to matter? Because like Enron's management,= investors cared only about the stock price too. And as long as Enron poste= d the earnings it promised (and talked up big ideas like broadband), the st= ock price was supposed to keep on rising- -as, indeed, it did for a while. = Institutions like Janus, Fidelity, and Alliance Capital piled in. Of course= , earnings growth isn't the entire explanation for Wall Street's attitude. = There were also the enormous investment-banking fees Enron generated. Nor w= as asking questions easy. Wall Streeters find it hard to admit that they do= n't understand something. And Skilling was notoriously short with those who= didn't immediately concur with the Enron world-view. "If you didn't act li= ke a light bulb came on pretty quick, Skilling would dismiss you," says one= portfolio manager. "They had Wall Street beaten into submission," he adds.= =20 WHERE ARE THE PROFITS?=20 Although it's hard to pinpoint the exact moment the tide began to turn agai= nst Enron, it's not hard to find the person who first said that the emperor= had no clothes. In early 2001, Jim Chanos, who runs Kynikos Associates, a = highly regarded firm that specializes in short- selling, said publicly what= now seems obvious: No one could explain how Enron actually made money. Cha= nos also pointed out that while Enron's business seemed to resemble nothing= so much as a hedge fund-- "a giant hedge fund sitting on top of a pipeline= ," in the memorable words of Doug Millett, Kynikos' chief operating officer= --it simply didn't make very much money. Enron's operating margin had plung= ed from around 5% in early 2000 to under 2% by early 2001, and its return o= n invested capital hovered at 7%--a figure that does not include Enron's of= f-balance-sheet debt, which, as we now know, was substantial. "I wouldn't p= ut my money in a hedge fund earning a 7% return," scoffed Chanos, who also = pointed out that Skilling was aggressively selling shares--hardly the behav= ior of someone who believed his $80 stock was really worth $126.=20 Not only was Enron surprisingly unprofitable, but its cash flow from operat= ions seemed to bear little relationship to reported earnings. Because much = of Enron's business was booked on a "mark to market" basis, in which a comp= any estimates the fair value of a contract and runs quarterly fluctuations = through the income statement, reported earnings didn't correspond to the ac= tual cash coming in the door. That isn't necessarily bad--as long as the ca= sh shows up at some point. But over time Enron's operations seemed to consu= me a lot of cash; on-balance-sheet debt climbed from $3.5 billion in 1996 t= o $13 billion at last report.=20 Skilling and Fastow had a simple explanation for Enron's low returns. The "= distorting factor," in Fastow's words, was Enron's huge investments in inte= rnational pipelines and plants reaching from India to Brazil. Skilling told= analysts that Enron was shedding those underperforming old-line assets as = quickly as it could and that the returns in Enron's newer businesses were m= uch, much higher. It's undeniable that Enron did make a number of big, bad = bets on overseas projects--in fact, India and Brazil are two good examples.= But in truth, no one on the outside (and few people inside Enron) can inde= pendently measure how profitable--or more to the point, how consistently pr= ofitable--Enron's trading operations really were. A former employee says th= at Skilling and his circle refused to detail the return on capital that the= trading business generated, instead pointing to reported earnings, just as= Fastow did. By the late 1990s much of Enron's asset portfolio had been lum= ped in with its trading operations for reporting purposes. Chanos noted tha= t Enron was selling those assets and booking them as recurring revenue. In = addition, Enron took equity stakes in all kinds of companies and included r= esults from those investments in the figures it reported.=20 Chanos was also the first person to pay attention to the infamous partnersh= ips. In poring over Enron documents, he took note of an odd and opaque ment= ion of transactions that Enron and other "Entities" had done with a "Relate= d Party" that was run by "a senior officer of Enron." Not only was it impos= sible to understand what that meant, but it also raised a conflict-of-inter= est issue, given that an Enron senior executive--CFO Fastow, as it turns ou= t--ran the "Related Party" entities. These, we now know, refer to the LJM p= artnerships.=20 When it came to the "Related Party" transactions, Enron didn't even pretend= to be willing to answer questions. Back in February, Fastow (who at the ti= me didn't admit his involvement) said that the details were "confidential" = because Enron "didn't want information to get into the market." Then he exp= lained that the partnerships were used for "unbundling and reassembling" th= e various components of a contract. "We strip out price risk, we strip out = interest rate risk, we strip out all the risks," he said. "What's left may = not be something that we want." The obvious question is, Why would anyone e= lse want whatever was left either? But perhaps that didn't matter, because = the partnerships were supported with Enron stock--which, you remember, wasn= 't supposed to decline in value.=20 SKILLING SENDS A SIGNAL=20 By mid-August enough questions had been raised about Enron's credibility th= at the stock had begun falling; it had dropped from $80 at the beginning of= the year to the low 40s. And then came what should have been the clearest = signal yet of serious problems: Jeff Skilling's shocking announcement that = he was leaving the company. Though Skilling never gave a plausible reason f= or his departure, Enron dismissed any suggestion that his departure was rel= ated to possible problems with the company. Now, however, there are those w= ho speculate that Skilling knew the falling stock price would wreak havoc o= n the partnerships--and cause their exposure. "He saw what was coming, and = he didn't have the emotional fortitude to deal with it," says a former empl= oyee.=20 What's astonishing is that even in the face of this dramatic--and largely i= nexplicable--event, people were still willing to take Enron at its word. Ke= n Lay, who stepped back into his former role as CEO, retained immense credi= bility on Wall Street and with Enron's older employees, who gave him a stan= ding ovation at a meeting announcing his return. He said there were no "acc= ounting issues, trading issues, or reserve issues" at Enron, and people bel= ieved him. Lay promised to restore Enron's credibility by improving its dis= closure practices, which he finally admitted had been less than adequate.= =20 Did Lay have any idea of what he was talking about? Or was he as clueless a= s Enron's shareholders? Most people believe the latter. But even when Lay c= learly did know an important piece of information, he seemed to be more inc= lined to bury it, Enron-style, than to divulge it. After all, Enron's now i= nfamous Oct. 16 press release--the one that really marked the beginning of = the end, in which it announced a $618 million loss but failed to mention th= at it had written down shareholders' equity by a stunning $1.2 billion--wen= t out under Lay's watch. And Lay failed to mention a critical fact on the s= ubsequent conference call: that Moody's was considering a downgrade of Enro= n's debt. (Although Skilling said last February that Enron's off-balance- s= heet debt was "non-recourse" to Enron, it turns out that that wasn't quite = true either. Under certain circumstances, including a downgrade of Enron's = on-balance-sheet debt below investment grade, Enron could be forced to repa= y it.)=20 Indeed, facing a now nearly constant barrage of criticism, Enron seemed to = retreat further and further from Lay's promises of full disclosure. The rat= her vague reason that Enron first gave for that huge reduction in sharehold= ers' equity was the "early termination" of the LJM partnerships. That was f= ar from enough to satisfy investors, especially as the Wall Street Journal = began to ferret out pieces of information related to the partnerships, incl= uding the fact that Fastow had been paid millions for his role at the LJMs.= As recently as Oct. 23, Lay insisted that Enron had access to cash, that t= he business was "performing very well," and that Fastow was a standup guy w= ho was being unnecessarily smeared. The very next day Enron announced that = Fastow would take a leave of absence.=20 We now know, of course, that Enron's dealings with its various related part= ies had a huge impact on the earnings it reported. On Nov. 8, an eye-poppin= g document told investors that Enron was restating its earnings for the pas= t 4 3/4 years because "three unconsolidated entities should have been conso= lidated in the financial statements pursuant to generally accepted accounti= ng principles." The restatement reduced earnings by almost $600 million, or= about 15%, and contained a warning that Enron could still find "additional= or different information."=20 And sophisticated investors who have scrutinized the list of selected trans= actions between Enron and its various partnerships are still left with more= questions than answers. The speculation is that the partnerships were used= to even out Enron's earnings. Which leads to another set of questions: If = Enron had ceased its game playing and come completely clean, would the comp= any have survived? Or did Enron fail to come clean precisely because the re= al story would have been even more scandalous?=20 THE LAST GASP=20 On the surface, the facts that led to Enron's Dec. 2 bankruptcy filing are = quite straightforward. For a few weeks it looked as if Dynegy (which had lo= ng prided itself on being the anti-Enron) would bail out its flailing rival= by injecting it with an immediate $1.5 billion in cash, secured by an opti= on on Enron's key pipeline, Northern Natural Gas, and then purchasing all o= f Enron for roughly $10 billion (not including debt). But by Nov. 28 the de= al had fallen apart. On that day Standard & Poor's downgraded Enron's debt = below investment grade, triggering the immediate repayment of almost $4 bil= lion in off-balance-sheet debt--which Enron couldn't pay.=20 But even this denouement comes with its own set of plot twists. Both compan= ies are suing each other: Enron claims that Dynegy wrongfully terminated th= e deal, "consistently took advantage of Enron's precarious state to further= its own business goals," and as a result has no right to Enron's Northern = Natural pipeline. Dynegy calls Enron's suit "one more example of Enron's fa= ilure to take responsibility for its demise." No one can predict how the su= its will pan out, but one irony is clear: Enron, that new-economy superstar= , is battling to hang on to its very old-economy pipeline.=20 To hear Dynegy tell it, a central rationale for abandoning the deal was wha= t might be called the mystery of the missing cash. General counsel Ken Rand= olph says that Dynegy expected Enron to have some $3 billion in cash--but a= n Enron filing revealed just over $1 billion. "We went back to Enron and we= asked, 'Where did the cash go? Where did the cash go?' " says CEO Chuck Wa= tson. "Perhaps their core business was not as strong as they had led us to = believe," speculates Randolph. Dynegy also claims that Enron tried to keep = secrets to the last. Enron's lack of cash was revealed to the world in a fi= ling on the afternoon of Monday, Nov. 19. Watson says he got the document o= nly a few hours earlier--but that Lay had a copy on Friday. "I was not happ= y," says Watson. "It's not good form to surprise your partner."=20 Sagas like this one inevitably wind up in the courts--and Enron's is no exc= eption. Given that credit-rating agency Fitch estimates that even senior un= secured-debt holders will get only 20% to 40% of their money back, the batt= les among Enron's various creditors are likely to be fierce. Nor has Enron = itself conceded yet. The company's biggest lenders, J.P. Morgan Chase and C= itigroup, have extended $1.5 billion of "debtor in possession" financing to= Enron, which will enable it to continue to operate at least for a while. A= nd Enron is still searching for a bank that will back it in restarting its = trading business.=20 In the meantime, the courts will also be trying to answer a key question: W= ho should pay? Enron's Chapter 11 filing automatically freezes all suits ag= ainst the company itself while the bankruptcy is resolved. But while Enron = may seek the same protection for its executives, lawyers predict that the a= ttempt will fail and that the individuals will have to fend off a raft of s= uits. Some think that criminal charges are a possibility for former executi= ves like Skilling and Fastow. But such cases require proof of "knowing, wil= lful, intentional misconduct," says well-known defense attorney Ira Sorkin.= And a criminal case requires a much higher standard of proof than a civil = case: proof beyond a reasonable doubt rather than a preponderance of the ev= idence. That's a high bar, especially since Enron executives will probably = claim that they had Enron's auditor, Arthur Andersen, approving their every= move. With Enron in bankruptcy, Arthur Andersen is now the deepest availab= le pocket, and the shareholder suits are already piling up.=20 In any conversation about Enron, the comparison with Long-Term Capital Mana= gement invariably crops up. In some ways, it looks as if the cost of the En= ron debacle is far less than that of LTCM--far less than anyone would have = thought possible, in fact (see next story). But in other ways the cost is f= ar greater. Enron was a public company with employees and shareholders who = counted on management, the board, and the auditors to protect them. That's = why one senior Wall Streeter says of the Enron saga, "It disgusts me, and i= t frightens me." And that's why, regardless of how the litigation plays out= , it feels as though a crime has been committed.=20 FEEDBACK: bmclean@fortunemail.com=20 Additional reporting by Nicholas Varchaver, John Helyar, Janice Revell, and= Jessica Sung=20 Quote: Among the still unanswered questions swirling around Enron is this o= ne: Is someone going to wind up in jail? A Wall Street exec says of the Enr= on saga: "It disgusts me, and it frightens me." COLOR PHOTO: PHOTOGRAPH BY PAUL HOWELL--GETTY IMAGES COVER The Enron Disast= er Lies. Arrogance. Betrayal. How Ken Lay and his team destroyed America's = seventh-largest corporation COLOR PHOTO: PHOTOGRAPH BY GREG SMITH--CORBIS S= ABA After the collapse: Stunned employees leave Enron's Houston headquarter= s. COLOR PHOTO: GREG SMITH--CORBIS SABA When Dynegy's Chuck Watson (right) = abandoned the deal he'd struck with Ken Lay, Enron's bankruptcy was assured= . COLOR PHOTO: JENNIFER BINDER When Jeff Skilling bailed out in August, it = was a clear signal that something was wrong. COLOR CHART: FORTUNE CHART It = took Enron four years to add $50 billion in market cap... ...and only ten m= onths to destroy it all COLOR PHOTO: DERON NEBLETT Lay insisted that CFO Fa= stow was being smeared. The next day he was gone.=20 ...........................................................................= ..........................................................=20 First Enron Jason Tanz 12/24/2001 Fortune Magazine=20 Time Inc.=20 28 (Copyright 2001)=20 Maybe Enron's downfall shouldn't have come as such a big surprise after all= . In September the bankrupt energy concern paid $10,000 to sponsor this scu= lpture as part of CowParade Houston 2001, the latest iteration of the fundr= aiser-cum-public-art-project. The cow--called Moost Imoovative and created = by Jason C. Alkire--sat in front of Enron headquarters through early Novemb= er. In retrospect it could be seen as a warning: The bovine, like its spons= or, is a house of mirrors, reflecting the viewer but offering no insight in= to its content. On Dec. 6 the cow was sold at a charity auction for $8,000.= Heck, is the whole company even worth that much?=20 --Jason Tanz COLOR PHOTO=20 ...........................................................................= ..........................................................=20 Features/The Recovery Will The Economy Get Well Soon? ; The Fed has been slashing rates with a ve= ngeance, but a credit squeeze could really hurt the recovery. Anna Bernasek 12/24/2001 Fortune Magazine=20 Time Inc.=20 89 (Copyright 2001)=20 When it comes to recessions, economists believe in a simple rule of thumb: = Pump money and credit into an ailing economy, and before long you have a re= covery. The bigger the injection, the stronger the rebound. So between Alan= Greenspan's yearlong campaign to slash interest rates and the government's= latest stimulus package, totaling $75 billion, we should get one mind-blow= ing recovery, right? After all, the last time we pumped so much money into = the economy was in the early 1960s, and things turned out pretty groovy bac= k then.=20 Unfortunately, it may not be so simple this time. Eight months into
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