Only a year ago, Ken Lay might have been excused for feeling on top of the world.

The company he founded 15 years before on the foundation of a sleepy Houston gas pipeline company had grown into a $100 billion-a-year behemoth, No. 7 on Fortune's list of the 500 largest corporations, passing the likes of International Business Machines Corp. and AT&T Corp. The stock market valued Enron Corp.'s shares at nearly $48 billion, and it would add another $15 billion before year-end.

Enron owned power companies in India, China and the Philippines, a water company in Britain, pulp mills in Canada and gas pipelines across North America and South America. But those things were ancillary to the high-powered trading rooms in a gleaming seven-story building in Houston that made it the leading middleman in nationwide sales of electricity and natural gas. It was primed to do the same for fiber-optic cable, TV advertising time, wood pulp and steel. Enron's rise coincided with a stock market boom that made everyone less likely to question a company if it had "Internet" and "new" in its business plan.

And, to top it off, Lay's good friend, Texas Gov. George W. Bush, on whom he and his family had lavished $2 million in political contributions, had just been elected president of the United States.

Enron intended to become "the World's Greatest Company," announced a sign in the lobby of its Houston headquarters. Lay was widely hailed as a visionary.

A year later, Lay's empire, and his reputation, are a shambles. Enron's stock is now virtually worthless. Many of its most prized assets have been pledged to banks and other creditors to pay some of its estimated $40 billion debt. Company lawyers are preparing a bankruptcy court filing that is expected to come as soon as this week and may be the biggest and most complex ever. Most of Enron's trading customers have gone elsewhere.

Retirement Losses

The company's 21,000 employees have lost much of their retirement savings because their pension accounts were stuffed with now-worthless Enron stock, and many expect to lose their jobs as well this coming week. Some of the nation's biggest mutual-fund companies, including Alliance Capital, Janus, Putnam and Fidelity, have lost billions of dollars in value.

Meanwhile, the Securities and Exchange Commission, headed by a Bush appointee, is investigating the company and its outside auditors at Arthur Andersen, while the House and Senate energy committees plan hearings.

It will take months or years to definitively answer the myriad questions raised by Enron's implosion. Why did it happen, and why so quickly? What did Enron's blue-chip board of directors and auditors know of the financial shenanigans that triggered the company's fall when hints of them became public six weeks ago? Should government regulators have been more vigilant?

Even now, however, it is clear that Enron was ruined by bad luck, poor investment decisions, negligible government oversight and an arrogance that led many in the company to believe that they were unstoppable.

By this fall, a recession, the dot-com crash and depressed energy prices had taken a heavy toll on the company's financial strength. The decline finally forced the company to reveal that it had simply made too many bad investments, taken on too much debt, assumed too much risk from its trading partners and hidden much of it from the public.

Such sudden falls from great heights recur in financial markets. In the late 1980s, its was junk-bond king Drexel Burnham Lambert. In the 1990s, it was Long Term Capital Management, the giant hedge fund. Like Enron, Drexel and Long Term Capital helped create and dominate new markets designed to help businesses and investors better manage their financial risks. And, like Enron, both were done in by failing to see the risks that they themselves had taken on.

It was in the trading rooms where Enron's big profits were made and the full extent of its ambitions were revealed.

Early on, the contracts were relatively simple and related to its original pipeline business: a promise to deliver so many cubic feet of gas to a fertilizer factory on a particular day at a particular price. But it saw the possibilities for far more in the deregulation of electric power markets, which would allow new generating plants running on cheap natural gas to compete with utilities. Lay and Enron lobbied aggressively to make it happen. After deregulation, independent power plants and utilities and industries turned to Enron for contracts to deliver the new electricity.

The essential idea was hardly new. But unlike traditional commodity exchanges, such as the Chicago Board of Trade and the New York Mercantile Exchange, Enron was not merely a broker for the deals, putting together buyers and sellers and taking transaction fees. In many cases, Enron entered the contract with the seller and signed a contract with the buyer. Enron made its money on the difference in the two prices, which were never posted in any newspaper or on any Web site, or even made available to the buyers and sellers. Enron alone set them.

By keeping its trading book secret, Enron was able to develop a feel for the market. And virtually none of its activity came under federal regulation because Enron and other power marketers were exempted from oversight in 1992 by the Commodity Futures Trading Commission -- then headed by Wendy Gramm, who is now an Enron board member.

Because it was first in the marketplace and had more products than anyone else, "Enron was the seller to every buyer and the buyer to every seller," said Philip K. Verleger Jr., a California energy economist.

The contracts became increasingly varied and complex. Enron allowed customers to insure themselves against all sorts of eventualities -- a rise and fall in prices or interest rates, a change in the weather, the inability of a customer to pay. By the end, the volume in the financial contracts reached 15 to 20 times the volume of the contracts to actually deliver gas or electricity. And Enron was employing a small army of PhDs in mathematics, physics and economics -- even a former astronaut -- to help manage its risk, backed by computer systems that executives once claimed would take $100 million to replicate.

Dominant Energy Supplier

Enron was so dominant -- it was responsible for one-quarter of the gas and electricity traded in the United States -- that it became a prime target for California officials seeking culprits for the energy price shocks last year and this. It was an image Enron didn't improve by publicly rebuffing a state legislative subpoena for its trading records.

How much risk Enron was taking on itself, and how much it was laying off on other parties, was never revealed. Verleger said last week that Enron once had one of the best risk-disclosure statements in the energy industry. But once the financial contracts began to outpace the basic energy contracts, the statements, he said, suddenly became more opaque. "It was, 'Trust us. We know what we're doing,' " he said.

None of that, however, was of much concern to investors and lenders, who saw Enron as the vanguard of a new industry. New sales and earnings justified an even higher stock price, still more borrowing and more investment.

By 1997, however, after lenders began to express concern about the extent of Enron's indebtedness, chief financial officer Andrew Fastow developed a strategy to move some of the company's assets and debts to separate private partnerships, which would engage in trades with Enron. Fastow became the manager of some of the largest partnerships, with approval of the audit committee of Enron's board.

Enron's description of the partnerships were, at best, baffling: "share settled costless collar arrangements," and "derivative instruments which eliminate the contingent nature of existing restricted forward contracts." More significantly, Enron's financial obligations to the partnerships if things turned sour were not explained.

When Enron released its year-end financial statements for 2000, questions about the partnerships were raised by James Chanos, an investor who had placed a large bet that Enron stock would decline in the ensuing months. Such investors, known as short sellers, often try to "talk down" a stock, and Enron executives dismissed Chanos's questions as nothing more than that.

On Oct. 16, however, it became clear that Chanos was onto something. On that day, Enron reported a $638 million loss for the third quarter and reduced the value of the company's equity by $1.2 billion. Some of that was related to losses suffered by the partnerships, in which Enron had hidden investment losses in a troubled water-management division, a fiber-optic network and a bankrupt telecommunications firm. The statement also revealed that the promises made to the partnerships to guarantee the value of their assets could wind up costing $3 billion.

Within a week, as Enron stock plummeted, Fastow was ousted and the Securities and Exchange Commission began an inquiry. Then, on Nov. 8, bad turned to worse when Enron announced it was revising financial statements to reduce earnings by $586 million over the past four years, in large part to reflect losses at the partnerships. It was also disclosed that Fastow made $30 million in fees and profits from his involvement with the outside partnerships.

The last straw was Enron's admission that it faced an immediate payment of $690 million in debt -- catching credit analysts by surprise -- with $6 billion more due within a year. Fearful that they wouldn't get paid for electricity and gas they sold to Enron, energy companies began scaling back their trading.

Desperate to salvage some future for the company, Lay agreed to sell Enron to crosstown rival Dynegy Inc. for $10 billion in stock. Perhaps more important, Dynegy agreed to assume $13 billion of Enron's debts and to inject $1.5 billion in cash to reassure customers and lenders and to keep its operations going. But when Dynegy officials got a closer look at Enron's books during Thanksgiving week, it found that the problems were far worse than they had imagined. They decided the best deal was no deal.

"The story of Enron is the story of unmitigated pride and arrogance," said Jeffrey Pfeffer, a professor of organized behavior at Stanford Business School who has followed the company in recent months. "My impression is that they thought they knew everything, which [is] always the fatal flaw. No one knows everything."

As harsh as it is, that view is shared by many in the energy industry: customers and competitors, stock analysts who cover the company and politicians and regulators in Washington and state capitals. In their telling, Enron officials were bombastic, secretive, boastful, inflexible, lacking in candor and contemptuous of anyone who didn't agree with their philosophy and acknowledge their preeminence.

Last month, sitting in the lobby of New York's Waldorf-Astoria hotel, Lay seemed to acknowledge that pride may have been a factor in the company's fall. "I just want to say it was only a few people at Enron that were cocky," he said.

Lay declined to name them, but most would put Jeffrey Skilling at the top of the list. Lay tapped Skilling, a whiz kid with the blue-chip consulting firm of McKinsey & Co. and the architect of Enron's trading business, to succeed him as chief executive in February.

Shortly after taking over the top spot, Skilling appeared at a conference of analysts and investors in San Francisco and lectured the assembled on how Enron's stock, then at record levels, was undervalued nonetheless because it did not recognize the company's broadband network, worth $29 billion, or an extra $37 a share.

Skilling loved nothing more than to mock executives from old-line gas and electric utilities or companies that still bought paper from golf-playing salesmen rather than on EnronOnline.

Skilling once called a stock analyst an expletive for questioning Enron's policy of refusing to release an update of its balance sheet with its quarterly earnings announcement, as nearly every other public corporation does.

Skilling Resigns

In August, after Enron's stock had fallen by half, Skilling resigned as chief executive after six months on the job, citing personal reasons.

As for Lay, some question how much he really understood about the accounting ins and out. When asked about the partnerships by a reporter in August, he begged off, saying, "You're getting way over my head."

Lynn Turner, who recently resigned as chief accountant at the Securities and Exchange Commission, said Enron's original financial statements for the past three years involve clear-cut errors under SEC rules that had to have been known to Enron's auditors at Arthur Andersen.

Turner, now director of the Center for Quality Financial Reporting at Colorado State University, said that based on information now reported by the company, he believes the auditors knew the real story about the partnerships but declined to force the company to account for them correctly.

Why? "One has to wonder if a million bucks a week didn't play a role," Turner said. He was referring to the $52 million a year in fees Andersen received last year from Enron, its second-largest account, divided almost equally between auditing work and consulting services.

Anderson spokesman David Talbot recently described the problems with Enron's books as "an unfortunate situation."

If Enron's auditors failed investors, the same might be said for its board of directors -- and, in particular, the members of the audit committee that is charged with reviewing the company's financial statements. The committee is headed by Robert Jaedicke, a former dean of the Stanford University business school and the author of several accounting textbooks. Members include Paulo Ferrz Pereira, former president of the State Bank of Rio de Janeiro; John Wakeham, former head of the British House of Lords who headed a British accounting firm; and Gramm, the former Commodity Futures Trading Commission chairman.

Wakeham received $72,000 last year from Enron, in addition to his director's fee, for consulting advice to the company's European trading office, according to Enron's annual proxy statement. And Enron has contributed to the center at George Mason University, where Gramm heads the regulatory studies program.

Charles O'Reilly, a Stanford University business school professor, said that while such donations rarely "buy" the cooperation of directors, they do indicate the problem when chief executives and directors develop a "pattern of reciprocity" in which they do favors for each other and gradually become reluctant to rock the boat, particularly on complex accounting matters.

"Boards of directors want to give favorable interpretation to events, so even when they are nervous about something, they are reluctant to make a stink," O'Reilly said.

Stock analysts were equally easy on Enron, despite the company's insistence on putting out financial statements that, even in Lay's words, were "opaque and difficult to understand."

Many analysts admit now that they really didn't know what was going on at the company even as they continued to recommend the stock to investors. They were rewarded for it by an ever-rising stock price that seemed to confirm their good judgment.

"It's so complicated everybody is afraid to raise their hands and say, 'I don't understand it,' " said Louis B. Gagliardi, an analyst with John S. Herold Inc. in Norwalk, Conn.

"It wasn't well understood. At the same time, it should have been. There's a burden on the analysts. . . . There's guilt to be borne all around here."

Ken Lay, above, picked Jeffrey Skilling to succeed him at Enron, but his protege quit after six months.