May/June 2002 Current Issues Features

ARTICLE TOOLS

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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 ...