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.

Confirming a deal noted here earlier, Lehman Brothers announced on Friday that it has agreed to pay $222.5 million to settle the the Enron class-action litigation against it in which the plaintiffs claimed that Lehman and other financial institutions helped Enron mislead investors.
The Lehman settlement is the third and the largest since the case was filed in late 2001 just before Enron went into chapter 11 during the first week of December 2001 amid public disclosure of hidden debt, inflated profits and accounting improprieties. As noted in this earlier post, Bank of America agreed to pay $69 million to settle similar allegations of liability for loss of value to securities it underwrote for Enron. The Enron class action plaintiffs also reached a $40 million settlement in July 2002 with Andersen Worldwide, the former parent company of the accounting firm Arthur Andersen.
Despite these settlements, the Enron class action plaintiffs continue to make overall settlement demands in the $30-40 billion range, so it appears that — based on the total sum of the three settlements to date — the plaintiffs’ lawyers have some work left to do with the remaining financial institution defendants in the case. Bank of America and Lehman were underwriters in just a handful of Enron-related deals, so attorneys involved in the case believe their roles (and thus their settlement payments) are small in comparison to firms like Citigroup Inc. and J.P. Morgan Chase & Co. who did more Enron-related deals. Citigroup and J.P. Morgan are among the firms that have reserved billions of dollars to cover Enron-related exposure.

Final arguments ended today in the Enron-related criminal trial of four former Merrill Lynch executives and two former mid-level Enron executives in what has become known as the Nigerian Barge trial. Earlier posts on the trial may be reviewed here, here, here, and here.
As noted in the earlier posts, this has been a mess of a trial, which likely would have never been pursued at all had not the pariah known as Enron been involved. Remarkably, all of the main prosecution witnesses had copped pleas bargains with the government, were not primary players in the transaction that was at the heart of the trial, and could not personally implicate any of the defendants in the alleged wrongdoing. In a normal case, this ledger would be a prescription for acquittal of all the defendants.
However, the extraordinary public bias against anything having to do with Enron — a bias that the Enron Task Force repeatedly appeals to in its public statements — makes this a much tougher case to call. Add to that mix that three (former Merrill execs Bayly, Furst and Brown) out of the six defendants chose not to testify and there is a decent probability that the prosecution will obtain at least a few convictions out of the trial.
My bet is that Sheila Kahanek, the mid-level Enron accountant who testified, and William Fuhs, the lowest-level Merrill executive of the defendants and the only one to testify, will be acquitted. Daniel Boyle, the other former Enron executive on trial, has a decent shot at acquittal, but frankly did not do as good a job as either Kahanek or Fuhs on the witness stand. The other three Merrill execs — Messrs. Furst, Bayly, and Brown — did not testify and I believe have a higher risk of facing convictions. As Martha Stewart learned, juries in white collar criminal cases want to hear from the defendant.