Blame Enron?

There are plenty of management shortcomings to blame for K Mart's bankruptcy. But the discount chain got a good shove from the Sept. 11 attacks--and from Enron. Here's how:

Most states require large companies like K Mart to buy commercial surety bonds, which guarantee, among other things, worker's compensation payments to employees hurt on the job. During the roaring '90s, when risk wasn't a four-letter word, sureties were relatively inexpensive and were used for many purposes. But as the economy slowed, especially after Sept. 11, more and more companies defaulted, leaving insurers the bill.

Enron, which insured future gas deliveries with surety bonds, left J.P. Morgan Chase the task of claiming $2.5 billion from insurers that are fighting the bank in court.

Many insurers in December decided to reduce their exposure to the surety-bond market. That helped create a supply shortfall, and insurers asked credit-starved companies like K Mart and United Airlines to pony up cash collateral for their sureties--cash that K Mart did not have.

Wal-Mart and Target have good credit--and no surety problems. While there is no indication that surety will tip another company into bankruptcy--as K Mart claims--their cost is rising and scarcity increasing.