i spent six years at enron after college - i was there through the bankruptcy - but i didn’t really get what happened until i looked at ge… it’s the same kind of story in many ways.
GE started as an industrial firm but shifted into a big conglomerate under a driven ceo. early wins and a high growth vibe pushed them into all kinds of stuff - healthcare - appliances - insurance - media - even finance.
the p-e ratio of the parts would have been 10x for ge capital to maybe 30x for healthcare. but ge as a whole traded at 50x at one point due to years of solid earnings growth… this high valuation only held as long as earnings kept coming in smooth. missing earnings didn’t mean a small dip - the stock would fall in half! ceo pressure on division heads was intense - hit the numbers or else.
this made aggressive accounting the norm - especially using the finance side to boost weaker units. jack welch even called this earnings management a form of excellence! ge capital - the pension - insurance guesses - and a pile of valuable real estate were all tools for smoothing profits over time.
as time went on - some parts of the business like insurance started to flop bad. after the 2000 crash - people began to ask hard questions about ge’s numbers - especially after enron’s collapse. the stock lost 60 percent by 2003 - then held steady till the great financial crisis… by then ge capital made up half of all earnings.
the crash in 2008 hit hard. ge was too exposed to market risks - too hooked on wall street lending - and didn’t have enough capital. The company almost went under! The federal reserve and fdic had to step in and backstop $200 billion in new ge debt. That saved them from becoming another enron…
Still - the damage was deep. GE had to strip back to its original parts and rebuild from there… It took over a decade for them to start doing well again.
enron’s path looked familiar but ended different. it started with pipelines - grew fast - and spread into finance - energy retail - global stuff - even broadband.
just like ge - enron mixed very different units into one package - and that got it a massive stock multiple - 30 to 40x or even 60x in the 2000 tech wave. each part alone would never be valued that high.
analysts believed in the earnings story - but inside the culture was all about hitting estimates no matter what. that meant games with accounting and hiding weak results using the finance arm. it was easier to toss traders more risk money than fix a failing utility in brazil!
then things started to crack… a few folks noticed huge gaps between enron’s reported profits and their cash flow. the company couldn’t explain it. the decline began in 2000 and kept going.
after the broadband pop - the ceo quit - 9/11 happened - more accounting issues popped up. The trading desk was the real engine and risk point. Like GE - that made them very fragile!
Then in late 2001 - enron dropped a $618 million loss for q3. That triggered an SEC probe… they had a lot of short-term debt and wall street was now very nervous. without a government safety net - there was no cushion. The credit rating fell - margin calls hit - money dried up - and just days later in december - enron filed for bankruptcy.
the parallels were shocking: high stock valuations - culture obsessed with growth - unclear financial stuff - use of leverage - playing games with numbers - and being praised by media and analysts who didn’t ask too many questions… GE lived only because the government bailed it out!