1 of 3
Enron claimed to be a business unlike any the nation had ever seen—the ultimate exemplar of a world where (in then-chairman Kenneth Lay's words) "the rules have changed" and "what you own is not as important as what you know." Almost every analyst on Wall Street seemed to agree.
In the wake of Enron's spectacular fall and the scandal that followed, we know that Enron wasn't as different from other American businesses as we'd been led to believe. Indeed, Enron's trajectory fits a very old pattern. All too often, the success of America's most brilliant entrepreneurs has been followed by an equally dramatic collapse. Why is this so? To answer this question, and to see what we can learn from the Enron mess, consider a few of these predecessors.
One of the most remarkable was Jay Cooke. Although largely forgotten now, Cooke achieved great fame in the nineteenth century as a financial innovator who, like the architects of Enron, was the first to recognize the potential of a new market. Cooke began his career selling U.S. war bonds to ordinary citizens during the Civil War. After the war, he realized he could use the same door-to-door strategy to raise money for railroads and other private companies. Whereas businesses had always raised money solely from banks and rich investors, Cooke showed that corporate bonds, like other products, could be sold to large numbers of ordinary Americans.
Cooke's ingenuity opened up a new source of financing for American business, and he quickly became fabulously wealthy. But he overexpanded, and within a few years numerous competitors were vying for the same markets. The end came in 1873, when the American markets were stunned by the news that the famous entrepreneur and his business had been thrown into bankruptcy by one of his creditors. Cooke's demise helped to usher in the Panic of 1873, one of the worst depressions the nation has ever seen.
The infamous robber barons emerged during the same era, and many met a similar fate. Realizing that the railroads held the key to the nation's economic future, men like Jay Gould bought up large swatches of track and built new ones. As often as not, they too overexpanded and their empires came crashing down, with claims of improper political influence or outright fraud swirling around them.
The twentieth century brought new examples of brilliant innovation that ended in shocking failure. Most eerily similar to Enron was the collapse of Samuel Insull's vast energy company, Middle West Utilities, during the Great Depression. As with Enron, Middle West's expansion had been fueled by a transformative insight. Insull realized that he could minimize the costs of generating electricity by building enormous, centralized power plants and keeping them running 24 hours a day. Insull then built up his customer base by selling the energy at astonishingly low prices. Through this process, which he referred to as "massing production" long before historians gave Henry Ford credit for the term, Insull easily outcompeted traditional suppliers, whose costs were much higher because their equipment lay idle much of the day.1
Unfortunately, Insull expanded much too far and too fast—sound familiar?—gobbling up numerous small energy companies and branching from utilities into manufacturing, construction, and other businesses. In the early 1930s, his empire collapsed amid allegations of fraud and misleading accounting. During the hearings that led to wide-ranging securities and utility reforms, Congress accused Insull of duping vulnerable investors by withholding information about the true liabilities of Middle West Utilities.
share this page
RSS Feed
