R. Preston McAfee is the J. Stanley Johnson Professor at the California Institute of Technology and formerly held the Murray S. Johnson Chair at the University of Texas at Austin. In this concise and insightful article for The Economists? Voice entitled The Real Lesson of Enron?s Implosion: Market Makers Are In the Trust Business, Professor McAfee explains in plain terms that, in the end, Enron’s demise was caused by a loss of trust:

How did Enron, a firm worth $60 billion, collapse over the discovery of a billion or so in hidden debt and fraudulent accounting? It didn?t. Or, at least, not directly. Market makers like Enron and Ebay are in the ?trust? business, just as banks and insurance companies are. Once trust was lost, the rest of Enron?s value quickly disappeared. The maintenance of customer trust is an important, and frequently mismanaged, aspect of business strategy.

Professor McAfee begins by pointing out that the disclosures of financial problems at Enron were insufficient along to bring Enron down:

At the time of its collapse, Enron?s market capitalization exceeded $60
billion, after growing at over 50% per year for a decade. The company collapsed after the revelation of $1.2 billion in hidden debt. This represented the visible portion of something over $8 billion in total hidden debts, a fraction of the value of the enterprise.
Moreover, the Enron business model provided real value to its customers, permitting them to contract over longer time horizons and to improve risk
management. So why did a company that was making a profit and providing real value to customers vanish so abruptly? Why aren?t the profitable lines of
business operated by Enron thriving today?

After pointing out that Enron was hardly along among major corporations in engaging in questionable accounting practices, Professor McAfee addresses why Enron’s irregularities caused a meltdown when others did not:

So why did Enron collapse, when other firms with questionable accounting survive? The answer is that Enron?s business-model was hostage to the trust that customers placed in Enron?s financial integrity. Once confidence in Enron waned, as I will explain, participants in Enron?s innovative markets were unwilling to engage in the purchasing or selling of a long-term contract that might not be fulfilled. Bid-ask spreads diverged, and Enron?s markets unraveled.

Read the entire piece. Inasmuch as the mainstream media struggles to keep something as seemingly broad as Enron’s demise in perspective, analysis such as this is quite helpful to a proper understanding of Enron’s failure.