A Revisionist View of Enron and the Sudden Death of ‘May’

This chapter makes two points about the academic and regulatory reaction to Enron’s collapse. First, it argues that what emerged as the ‘conventional story’ of Enron, involving alleged fraud related to special purpose entities (SPEs), was incorrect. Instead, this chapter makes the revisionist claim that Enron was largely a story about derivatives — financial instruments such as options, futures and other contracts whose value is linked to some underlying financial instrument or index (see Box 3.1). A close analysis of the facts shows that the most prominent SPE transactions were largely irrelevant to Enron’s collapse, and that most of Enron’s deals with SPEs were arguably legal, even though disclosure of those deals was not compatible with economic reality (Partnoy, 2002).3 To the extent SPEs are relevant to understanding Enron, it is the derivatives transactions between Enron and the SPEs — not the SPEs themselves — that matter. Even more important were Enron’s derivatives trades and transactions other than those involving the SPEs. This first point about derivatives is important to the literature studying the relationship between finance and law: legal rules create incentives for parties to engage in economically equivalent unregulated transactions, and financial innovation creates incentives for parties to increase risks (to increase expected return) outside the scope of legal rules requiring disclosure.4