People are still fighting furiously over what caused the Civil War. Expect an equally enduring and acrimonious battle over the cause of

Enron's

(ENE)

dramatic decline.

At this point, there seems to be the most support for the view that Enron primarily suffered a crisis of confidence, akin to the sort of bank run that so nearly took place in the movie

It's a Wonderful Life

. This stance limits the blame on Enron because it implies that the company would've had a healthy future had its panicky customers not shunned it and deprived it of the short-term cash flows it needs to do business.

That's self-serving nonsense. That so many people still believe it indicates the continued prevalence of the la-la mindset that drove Enron to its peak

market cap of $70 billion. Instead, much suggests that Enron was fundamentally unsound for some time. When that became apparent, there was almost nothing management and its backers on Wall Street could do to shore up confidence.

The Detox view is that Enron was a recklessly run company with large amounts of phantom profits. It finally got its just desserts. The crunch was always going to come, and because of the nature of the trading business, it was going to look like a classic crisis of confidence.

Silver and Gold

The lost-confidence theory provides key actors in the Enron saga with convenient cover for their shortcomings. So far, the most extreme version of this theory has come from Enron CEO Ken Lay. The reason Enron had tried to sell itself to rival

Dynegy

(DYN)

was "the relentlessness of all the articles and the shorts," Lay was quoted as saying in

The New York Times

earlier this month ("shorts" mean short-sellers, who are investors who aim to profit from a stock's decline). "We realized that we needed to do something to stabilize the ship. A good company was badly tarnished."

Wall Street analysts who had long backed the company also fall into this camp. Almost to the end, they have insisted that Enron's core trading operations were fabulously profitable, and could remain so. As late as Nov. 5, when Enron was trading at $11.30, Credit Suisse First Boston's Curt Launer had a strong buy on the company and a $25 price target. His recommendation was chiefly based on the belief that Enron's U.S. trading business was going to increase operating earnings in 2002.

What's so wrong with the establishment view?

Let's start with the obvious. Enron is not a bank. Even the best banks are inherently insolvent; depositors can collapse a bank by turning up all at once and drawing their money out. That structural insolvency is not supposed to exist at a nonbank, where liabilities are, in theory, backed by assets and claims on future assets. Therefore, for a run to happen at a place like Enron, there has to be considerable doubts among creditors and customers about the true value of the assets and the earnings outlook. That eventually happened in the dramatic events of the past two months. But long before the doubts started, the market had overlooked a critical fact: Enron was never sufficiently creditworthy to play the huge role that it did in the deregulated energy market.

Its credit rating, even at its peak, was too low to support the enormous amounts of counterparty risk. The best rating it ever attained was Baa1 from Moody's. Compare that with

Goldman Sachs

, the nation's premier securities trading firm, which has a rating three notches higher. Enron's relatively low rating meant that if it ever had problems, the chances of hitting junk status would be much higher.

Then, there were plenty of signs that Enron's underlying profitability wasn't what it seemed. Wall Street focused narrowly and obsessively on the company's earnings per share growth, which was terrific. But return on capital, which included the company's debt load, was lackluster, indicating that it was relying on leverage to drive earnings growth. The problem was that the returns on that leverage were below Enron's cost of capital. That mismatch is unsustainable over time.

Iron and Gold

It appears that Enron resorted to something close to alchemy to hide its abysmal return on capital statistics. One alchemistic ruse was to shift underperforming assets off its balance sheet, and raise more debt off of them that wouldn't appear in core leverage numbers.

The Marlin deal had Enron placing a bunch of subpar water assets, along with accompanying debt, in a trust. It then essentially borrowed $900 million from the people who invested in that trust. The new "debt" didn't show up on the balance sheet and the weak assets no longer contaminated profitability numbers. That was fine until Enron had to find the cash to repay the obligations. This maneuver was used to raise another $2.4 billion of quasi-debt in the Osprey deal.

People overlooked the huge extent of Enron's bad investments. Water was bad enough, but

broadband was an utter failure, and even many of its power investments were duds. The true awfulness of these forays sometimes didn't show up because Enron entered into dubiously structured deals with related partnerships to hedge out the drop in these investments' value. It did this with

LJM2

, once headed by its onetime CFO Andy Fastow.

For a time, these transactions with LJM2 did protect Enron from a drop in the value of broadband and other assets. However, Enron had to

keep shoveling its own stock into these deals to keep the hedge afloat. So smart it was stupid.

Sir Henry Bessemer

Some bulls will concede that sort of stuff was crazy, but they cling to the notion that the core trading business was real. The onus is on them to prove that case because much points to it being rather less profitable than the fans have claimed. Enron never let Wall Street take even a superficial look at its trading books. In fact,

it went out of its way to hide key margins. This year,

one-time asset sales boosted returns. And energy market players say Enron was very aggressive in booking upfront profits from deals that were stretched over a number of years.

Now, it is true that Enron may not be facing extinction this week if top management had moved more quickly to correct its mistakes.

David Brail's column makes a good case for that. However, Detox's view is that Enron would have seen its stock fall below $10 even with a proper attempt to come clean. That means it would've been bought by a rival.

Deeply defective leadership from Lay and former CEO Jeff Skilling did play a big role in the company's undoing, and we may never know whether it was hubris, greed, psychological shock or just plain stupidity that led them to behave in the way they did. But one thing is clear:

Enron started running out of gas on its own long ago.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.